<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
COMMISSION FILE NUMBER 0-20900
COMPUWARE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334-2564
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (248) 737-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 10, 2000, there were outstanding 365,160,667 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 23 pages
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Report 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
----------
</TABLE>
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, MARCH 31,
------ 2000 2000
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 26,813 $ 30,480
Investments 166,276 157,030
Accounts receivable, net 712,447 728,629
Deferred tax asset 25,136 24,346
Income taxes refundable 25,976 22,125
Prepaid expenses and other current assets 22,322 25,248
------------- -------------
Total current assets 978,970 987,858
------------- -------------
INVESTMENTS 51,464 78,944
------------- -------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 116,893 114,409
------------- -------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 95,459 98,464
------------- -------------
OTHER:
Accounts receivable 383,733 399,911
Excess of cost over fair value of net assets acquired,
less accumulated amortization 650,012 659,391
Other 65,549 76,930
------------- -------------
Total other assets 1,099,294 1,136,232
------------- -------------
TOTAL ASSETS $ 2,342,080 $ 2,415,907
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 56,273 $ 67,173
Accrued expenses 191,622 199,282
Deferred revenue 327,873 329,602
------------- -------------
Total current liabilities 575,768 596,057
LONG TERM DEBT 329,000 450,000
DEFERRED REVENUE 162,743 152,947
DEFERRED INCOME TAXES 4,862 13,031
------------- -------------
Total liabilities 1,072,373 1,212,035
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 3,648 3,616
Additional paid-in capital 590,271 556,150
Retained earnings 691,499 654,976
Accumulated other comprehensive loss (15,711) (10,870)
------------- -------------
Total shareholders' equity 1,269,707 1,203,872
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,342,080 $ 2,415,907
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 103,475 $ 211,634 $ 234,179 $ 372,586
Maintenance fees 114,321 102,970 230,411 200,710
Professional services fees 268,527 253,545 535,607 437,904
------------- ------------- ------------- -------------
Total revenues 486,323 568,149 1,000,197 1,011,200
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of software license fees 9,430 6,916 19,943 12,862
Cost of maintenance 13,299 10,879 26,390 21,259
Cost of professional services 267,443 230,466 541,250 388,946
Software product development 23,885 18,336 48,491 35,661
Sales and marketing 114,130 113,796 230,335 214,111
Administrative and general 36,246 22,978 70,966 37,668
Purchased research and development 17,900 17,900
------------- ------------- ------------- -------------
Total operating expenses 464,433 421,271 937,375 728,407
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 21,890 146,878 62,822 282,793
OTHER INCOME (EXPENSE):
Interest and investment income 7,479 5,554 14,065 11,564
Interest expense (8,577) (4,873) (17,979) (5,037)
------------- ------------- ------------- -------------
Total other income (expense) (1,098) 681 (3,914) 6,527
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 20,792 147,559 58,908 289,320
INCOME TAX PROVISION 7,901 55,777 22,385 106,811
------------- ------------- ------------- -------------
NET INCOME $ 12,891 $ 91,782 $ 36,523 $ 182,509
============= ============= ============= =============
Basic earnings per share $ 0.04 $ 0.26 $ 0.10 $ 0.51
============= ============= ============= =============
Diluted earnings per share $ 0.03 $ 0.24 $ 0.10 $ 0.47
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 36,523 $ 182,509
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 17,900
Depreciation and amortization 48,381 25,661
Tax benefit from exercise of stock options 11,829 25,491
Acquisition tax benefits 3,727 3,610
Deferred income taxes (8,959) 7,474
Other (789) 2,490
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 33,596 (166,396)
Prepaid expenses and other current assets 3,161 666
Other assets 9,294 (34,806)
Accounts payable and accrued expenses (20,910) (46,425)
Deferred revenue 6,242 67,637
Income taxes (3,864) (9,933)
------------ -------------
Net cash provided by operating activities 118,231 75,878
------------ -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (13,190) (623,642)
Property and equipment (16,458) (15,846)
Capitalized software (6,362) (6,019)
Investments:
Proceeds from maturity 184,510 360,269
Purchases (167,995) (130,064)
Other (3,270)
------------ -------------
Net cash used in investing activities (19,495) (418,572)
------------ -------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from long term debt 18,000 515,237
Payments on long term debt (139,000)
Net proceeds from sale of common stock 14,301 14,293
Repurchase of common stock (348,373)
Net proceeds from exercise of stock options 4,296 20,617
------------ -------------
Net cash (used in) provided by financing activities (102,403) 201,774
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,667) (140,920)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,480 193,128
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,813 $ 52,208
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
results for the interim periods presented. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto for the year ended March 31, 2000 included in the Company's
Annual Report to Shareholders and the Company's Form 10-K filed with the
Securities and Exchange Commission.
Certain amounts in the fiscal 2000 financial statements have been reclassified
to conform to the fiscal 2001 presentation.
NOTE 2 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
BASIC EPS:
---------
Numerator: Net Income $ 12,891 $ 91,782 $ 36,523 $ 182,509
------------ ------------- ------------ ------------
Denominator: Weighted-average
common shares outstanding 364,799 356,959 363,754 357,426
------------ ------------- ------------ ------------
Basic EPS $ 0.04 $ 0.26 $ 0.10 $ 0.51
============ ============= ============ ============
DILUTED EPS:
-----------
Numerator: Net Income $ 12,891 $ 91,782 $ 36,523 $ 182,509
------------ ------------- ------------ ------------
Denominator: Weighted-average
common shares outstanding 364,799 356,959 363,754 357,426
Dilutive effect of stock options 6,522 27,976 9,118 27,845
------------ ------------ ------------ ------------
Total shares 371,321 384,935 372,872 385,271
------------ ------------- ------------ ------------
Diluted EPS $ 0.03 $ 0.24 $ 0.10 $ 0.47
============ ============= ============ ============
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000
NOTE 3 - COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation gains and
losses that have been excluded from net income and reflected instead in equity.
Total comprehensive income is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net income $ 12,891 $ 91,782 $ 36,523 $ 182,509
Foreign currency translation
adjustment, net of tax (4,133) 1,047 (4,841) 987
Unrealized gain on marketable
securities, net of tax 5,019 5,019
----------- ---------- ---------- ----------
Total comprehensive income $ 8,758 $ 97,848 $ 31,682 $ 188,515
=========== ========== ========== ==========
</TABLE>
NOTE 4 - ACQUISITIONS
In July 2000, the Company announced that it had acquired substantially all the
assets and certain liabilities of Optimal Networks Corporation (Optimal), a
developer of e-business performance measurement tools, for $5.0 million in cash
and assumed liabilities. The acquisition has been accounted for as a purchase
and, accordingly, assets and liabilities acquired have been recorded at fair
value as of the date of acquisition. The amount by which the acquisition cost
exceeded the fair value of the net assets acquired was approximately $2.3
million and is being amortized over a 10-year period on a straight-line basis.
In May 2000, the Company acquired Nomex, Inc. (Nomex), a privately held provider
of web design and development services located in Montreal, Canada, for
approximately $8.9 million in cash. The acquisition has been accounted for as a
purchase and, accordingly, assets and liabilities acquired have been recorded at
fair value as of the date of acquisition. The amount by which the acquisition
cost exceeded the fair value of the net assets acquired was approximately $8.2
million and is being amortized over a 10-year period on a straight-line basis.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000
NOTE 5 - SEGMENTS
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Products:
Mainframe $ 177,838 $ 258,775 $ 384,520 $ 478,106
Distributed systems 39,958 55,829 80,070 95,190
Services 268,527 253,545 535,607 437,904
------------ --------------- --------------- --------------
Total revenues $ 486,323 $ 568,149 $ 1,000,197 $ 1,011,200
============ =============== =============== ==============
Operating Expenses:
Products $ 160,744 $ 149,927 $ 325,159 $ 283,893
Services 267,443 230,466 541,250 388,946
Corporate staff 26,648 17,432 51,579 30,428
Goodwill amortization 9,598 5,546 19,387 7,240
------------ --------------- --------------- --------------
Total operating expenses $ 464,433 $ 403,371 $ 937,375 $ 710,507
============ =============== =============== ==============
Income from operations, before other income
(expense) and purchased research and
development:
Products $ 57,052 $ 164,677 $ 139,431 $ 289,403
Services 1,084 23,079 (5,643) 48,958
Corporate staff (26,648) (17,432) (51,579) (30,428)
Goodwill amortization (9,598) (5,546) (19,387) (7,240)
------------ --------------- --------------- --------------
Income from operations, before other
income (expense) and purchased
research and development 21,890 164,778 62,822 300,693
Purchased research and development (17,900) (17,900)
Other income (expense) (1,098) 681 (3,914) 6,527
------------ --------------- --------------- --------------
Income before income taxes $ 20,792 $ 147,559 $ 58,908 $ 289,320
============ =============== =============== ==============
</TABLE>
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000
Financial information regarding geographic operations are presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
United States $ 384,430 $ 455,253 $ 794,614 $ 801,918
European subsidiaries 73,485 80,292 147,320 153,646
Other international operations 28,408 32,604 58,263 55,636
--------------- --------------- --------------- ---------------
Total revenue $ 486,323 $ 568,149 $ 1,000,197 $ 1,011,200
=============== =============== =============== ===============
</TABLE>
NOTE 6 - SENIOR CREDIT FACILITY
In August 1999, the Company entered into a four year unsecured revolving Senior
Credit Facility with several major financial institutions for $900 million.
Interest may be determined on a Eurodollar or base rate (as defined in the
credit facility) basis at the Company's option. For the quarter ended September
30, 2000, the average interest rate was 8.07% based upon the Eurodollar and base
rates. The credit agreement contains restrictive covenants and requires
commitment fees in accordance with standard banking practice. As of September
30, 2000, the Company had $329 million outstanding under the credit arrangement.
NOTE 7 - SUBSEQUENT EVENTS
On October 23, 2000, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each Common Share outstanding. The dividend
was payable to shareholders of record on November 9, 2000, and is payable with
respect to certain Common Shares issued thereafter. The Company also entered
into a Rights Agreement, effective October 25, 2000, pursuant to which the
Rights are issued. Each Right, when it becomes exercisable, entitles the
registered holder to purchase from the Company one two-thousandth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $40.00,
subject to adjustment. The Company has reserved 800,000 shares of Series A
Junior Participating Preferred Stock for issuance on the exercise of the Rights.
The Rights trade with the Company's Common Shares until they become exercisable,
which occurs on (a) the date of public announcement that any person or group
(subject to certain exceptions) has acquired, or obtained the right to acquire,
or (b) 10 business days (or such later date as the Board of Directors may
determine) after the commencement of, or public announcement of an intention to
commence, a tender or exchange offer to acquire, beneficial ownership of 15% or
more of the outstanding Common Shares (subject to certain exceptions, including
an offer to buy all Common Shares that is approved by the Company's Board of
Directors). A person or group whose acquisition of Common Shares causes the
Rights to become exercisable pursuant to clause (a) above is an "Acquiring
Person". After any person or group becomes an Acquiring Person, each Right
(except those of the Acquiring Person) will entitle the holder to purchase upon
exercise of the Right, at the then current exercise price of the Right, Common
Shares (or, in certain circumstances one two-thousandths of a share of Series A
Junior Participating
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000
Preferred Stock) having an average market value of twice the current exercise
price of the Right. Alternatively, if the Company is acquired in a merger or
statutory share exchange or if more than 50% of its assets or earning power are
sold to an Acquiring Person or in a transaction in which all holders of Common
Shares are not treated alike, each Right (except those of the Acquiring Person)
will thereafter entitle the holder to purchase, upon exercise, at the then
current exercise price of the Right, common shares of the acquiring company
having an average market value of twice the current exercise price of the Right.
The Rights may be redeemed by the Company for $.001 per Right prior to the date
a person or group becomes an Acquiring Person and will expire on November 9,
2010, unless extended or earlier redeemed by the Board of Directors.
10
<PAGE> 11
INDEPENDENT ACCOUNTANTS' REPORT
Compuware Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Compuware Corporation and subsidiaries (the "Company") as of September 30, 2000,
and the related condensed consolidated statements of operations for the
three-month and six-month periods and cash flows for the six-month periods ended
September 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of March 31, 2000, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated May 1, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of March 31, 2000 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
October 19, 2000
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are identified by the use of
the words "believes," "expects," "anticipates," "will," "contemplates," "would"
and similar expressions that contemplate future events. Numerous important
factors, risks and uncertainties affect the Company's operating results,
including without limitation those contained in this report, and could cause the
Company's actual results to differ materially from the results implied by these
or any other forward looking statements made by, or on behalf of, the Company.
There can be no assurance that future results will meet expectations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of income as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of Percentage of
Total Revenues Total Revenues
--------------------------- --------------------------
Three Months Ended Six Months Ended
September 30, Period- September 30, Period-
--------------------------- to-Period -------------------------- to-Period
2000 1999 Change 2000 1999 Change
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Software license fees 21.3% 37.3% (51.1%) 23.4% 36.8% (37.1%)
Maintenance fees 23.5% 18.1% 11.0% 23.0% 19.9% 14.8%
Professional services fees 55.2% 44.6% 5.9% 53.6% 43.3% 22.3%
--------------------------- --------------------------
Total revenue 100.0% 100.0% (14.4%) 100.0% 100.0% (1.1%)
--------------------------- --------------------------
OPERATING EXPENSES:
Cost of license fees 1.9% 1.2% 36.4% 2.0% 1.2% 55.1%
Cost of maintenance 2.7% 1.9% 22.2% 2.6% 2.1% 24.1%
Cost of services 55.0% 40.6% 16.0% 54.1% 38.5% 39.2%
Software product development 4.9% 3.2% 30.3% 4.9% 3.5% 36.0%
Sales and marketing 23.5% 20.0% 0.3% 23.0% 21.2% 7.6%
Administrative & general 7.5% 4.0% 57.7% 7.1% 3.7% 88.4%
Purchased research & development 3.2% (100.0%) 1.8% (100.0%)
--------------------------- --------------------------
Total operating expenses 95.5% 74.1% 10.2% 93.7% 72.0% 28.7%
--------------------------- --------------------------
Income from operations 4.5% 25.9% (85.1%) 6.3% 28.0% (77.8%)
Other income (0.2%) 0.1% * (0.4%) 0.6% *
--------------------------- --------------------------
Income before taxes 4.3% 26.0% (85.9%) 5.9% 28.6% (79.6%)
Income tax provision 1.6% 9.8% (85.8%) 2.2% 10.6% (79.0%)
--------------------------- --------------------------
Net income 2.7% 16.2% (86.0%) 3.7% 18.0% (80.0%)
=========================== ==========================
</TABLE>
*- Calculation is not meaningful.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
as compared to prior periods after excluding amortization of intangible assets
acquired as a result of acquisitions:
<TABLE>
<CAPTION>
Percentage of Percentage of
Total Revenues Total Revenues
----------------------------- ----------------------------
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- Period- ---------------------------- Period-
2000 1999 to-Period 2000 1999 to-Period
----------------------------- Change ---------------------------- Change
<S> <C> <C> <C> <C> <C> <C>
Income from operations 7.3% 30.0% (79.2%) 9.0% 30.5% (70.8%)
Other income (0.2%) 0.1% * (0.4%) 0.6% *
-------------------------- ---------------------------
Income before taxes 7.1% 30.1% (79.9%) 8.6% 31.1% (72.6%)
Income tax provision 2.2% 10.9% (82.7%) 2.8% 11.2% (75.1%)
-------------------------- ---------------------------
Net income 4.9% 19.2% (78.3%) 5.8% 19.9% (71.2%)
========================== ===========================
</TABLE>
The Company operates in two business segments in the software industry: products
and professional services.
PRODUCTS REVENUE
The Company's products are designed to support four key activities within the
application development process: development and integration, quality assurance,
production readiness and performance management of the application to optimize
performance in production. Products revenue consists of software license fees
and maintenance fees and comprised 44.8% and 55.4% of total Company revenue
during the second quarter of fiscal years 2001 and 2000, respectively, and 46.4%
and 56.7% of total Company revenue during the first six months of fiscal years
2001 and 2000, respectively. S/390 product revenue (mainframe revenue) decreased
$80.9 million or 31.3% during the second quarter of fiscal year 2001 to $177.9
million from $258.8 million during the second quarter of fiscal year 2000 and
decreased $93.6 million or 19.6% during the first six months of fiscal year 2001
to $384.5 million from $478.1 million during first six months of fiscal year
2000. Revenue from distributed software products decreased $15.9 million or
28.4% during the second quarter of fiscal year 2001 to $40.0 million from $55.8
million during the second quarter of fiscal year 2000 and $15.1 million or 15.9%
during the first six months of fiscal year 2001 to $80.1 million from $95.2
million during the first six months of fiscal year 2000. The decline in products
revenue on a year over year basis is primarily the result of a decline in the
quantity and size of Enterprise License Agreements. In the second quarter of
fiscal years 2001 and 2000, multi-year transactions greater than $5 million
represented approximately 6.5% and 34.3%, respectively, of license revenue. For
the first six months of fiscal years 2001 and 2000, multi-year transactions
greater than $5 million represented approximately 20.1% and 31.4% respectively,
of license revenue.
For more than five years, the Company has supported clients with product
transactions covering multiple years and allowing deferred payment terms. The
contract price is allocated between maintenance for the term of the deal and
license revenue. All license revenue associated with these contracts is
recognized when the customer commits unconditionally to the transaction, the
software products and quantities are fixed and the software has been shipped to
the customer. License revenue associated with certain transactions that include
an option to exchange or select products in the future has been deferred and
will be recognized
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
over the term of the deal. When the license portion is paid over a number of
years, the license portion of the payment stream is discounted to its net
present value. Interest income is recognized over the payment term. The
maintenance associated with all sales is deferred and recognized over the
applicable maintenance period.
Our S/390 products (mainframe) have supported our customers through their
application development processes for years and are widely recognized in the
mainframe market. Our over 70 distributed products improve the productivity of
virtually everyone in an IT organization from application developers, to
software and performance testers, to operations professionals. Our five
distributed product families are QACenter, NuMega, Uniface, EcoSCOPE and
EcoTOOLS. QACenter product tools are widely used in customer organizations by
developers, testers and operations staff to test and scale their applications.
NuMega primarily supports developers in our customer's organizations to do
debugging on windows servers and workstations. Uniface is our distributed
development and integration product. Our EcoSCOPE product helps network
administrators manage the performance of their applications, by looking through
the application and the network to pinpoint problems. EcoTOOLS products help
operations professionals and database administrators insure that their
applications are production ready and operate efficiently.
PROFESSIONAL SERVICES REVENUE
The Company offers a broad range of information technology professional
services, including business systems analysis, design and programming, software
conversion and system planning and consulting. Revenue from professional
services increased $15.0 million or 5.9% during the second quarter of fiscal
year 2001 to $268.5 million from $253.5 million during the second quarter of
fiscal year 2000 and $97.7 million or 22.3% during the first six months of
fiscal year 2001 to $535.6 million from $437.9 million during the first six
months of fiscal year 2000. The Company's North American operations generated
91.7% and 92.8% of total professional services revenue during the second quarter
of fiscal years 2001 and 2000, respectively, and 91.7% and 91.2% of total
professional services revenue during the first six months of fiscal years 2001
and 2000, respectively. Combined international services revenue increased $4.1
million or 22.6% during the second quarter of fiscal year 2001 to $22.2 million
from $18.1 million during the second quarter of fiscal year 2000 and $5.9
million or 15.1% during the first six months of fiscal year 2001 to $44.6
million from $38.7 million during the first six months of fiscal year 2000.
OPERATING PROFIT
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and development
expense, other income (expense) and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Products revenue $ 217,796 $ 314,604 $ 464,590 $ 573,296
Operating expenses 160,744 149,927 325,159 283,893
-------------- ---------------- --------------- ---------------
Products operating profit $ 57,052 $ 164,677 $ 139,431 $ 289,403
============== ================ =============== ===============
</TABLE>
Products revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
United States $ 138,141 $ 219,850 $ 303,574 $ 402,730
European subsidiaries 53,222 64,632 106,564 120,102
Other international operations 26,433 30,122 54,452 50,464
-------------- ---------------- -------------- ---------------
Total products revenue $ 217,796 $ 314,604 $ 464,590 $ 573,296
============== ================ ============== ===============
</TABLE>
The products segment generated operating margins of 26.2% and 52.3% during the
second quarter of fiscal years 2001 and 2000, respectively, and 30.0% and 50.5%
during the first six months of fiscal years 2001 and 2000, respectively.
Products expenses include cost of software license fees, cost of maintenance,
software product development costs, and sales and marketing expenses. The
decrease in operating margin is primarily a result of a decrease in software
license revenue while software product development costs, cost of software
license fees and sales and marketing expenses have remained constant or
increased.
Cost of software license fees includes amortization of capitalized software, the
cost of preparing and disseminating products to customers and the cost of author
royalties. The increase in these costs is due primarily to an increase in
amortization of capitalized software products, the majority of which relates to
the Programart acquisition. As a percentage of software license fees, cost of
software license fees were 9.1% and 3.3% in the second quarter of fiscal years
2001 and 2000, respectively, and 8.5% and 3.5% in the first six months of fiscal
years 2001 and 2000, respectively.
Cost of maintenance consists of the cost of maintenance programmers and product
support personnel and the computing, facilities and benefits costs allocated to
such personnel. The increase in cost of maintenance was due primarily to the
increase in maintenance and support staff in order to support the worldwide
growth of the installed base. As a percentage of maintenance fees, these costs
were 11.6% and 10.6% for the second quarter of fiscal years 2001 and 2000,
respectively, and were 11.5% and 10.6% for the first six months of fiscal years
2001 and 2000, respectively.
Software product development costs consist of the cost of programming personnel,
the facilities, computing and benefits costs allocated to such personnel and the
costs of preparing user and installation guides for the Company's software
products, less the amount of software development costs capitalized during the
period. The increase in these costs was due primarily to an increase in software
development staff needed to meet the demand for new and enhanced products,
including staff related to the Programart acquisition in September 1999. While
continuing to support and enhance its traditional S/390 products, the Company
has increased the resources allocated to developing and enhancing its
distributed software products. Before the capitalization of internally developed
software products, total research and
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
development expenditures for the second quarter of fiscal year 2001 increased
$5.7 million, or 26.9%, to $27.1 million from $21.4 million for the second
quarter of fiscal year 2000 and for the first six months of fiscal year 2001
increased $12.8 million, or 30.6%, to $54.7 million from $41.9 million for the
first six months of fiscal year 2000.
Sales and marketing costs consist of the sales and marketing expenses associated
with the Company's products business, which include costs of direct sales, sales
support and marketing staff, the facilities and benefits costs allocated to such
personnel and the costs of marketing and sales incentive programs. The slight
increase in sales and marketing costs was largely attributable to the expansion
of the worldwide sales force, offset, in part, by decreased distributor
commissions and advertising expenditures. The direct sales and sales support
staff increased by 138 to 2,661 people at the end of the second quarter of
fiscal year 2001, as compared to 2,523 at the end of the second quarter of
fiscal year 2000.
Financial information for the Company's professional services segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Professional services revenue $ 268,527 $ 253,545 $ 535,607 $ 437,904
Operating expenses 267,443 230,466 541,250 388,946
--------------- --------------- --------------- ---------------
Services operating margin $ 1,084 $ 23,079 ($ 5,643) $ 48,958
=============== =============== =============== ===============
</TABLE>
Professional services revenue by geographic location is presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
United States $ 246,289 $ 235,403 $ 491,040 $ 399,188
European subsidiaries 20,263 15,660 40,756 33,544
Other international operations 1,975 2,482 3,811 5,172
--------------- --------------- --------------- ---------------
Total services revenue $ 268,527 $ 253,545 $ 535,607 $ 437,904
=============== =============== =============== ===============
</TABLE>
The professional services segment generated an operating margin of 0.4% during
the second quarter of fiscal year 2001 compared to 9.1% during the second
quarter of fiscal year 2000, and a negative 1.1% and a positive 11.2% during the
first six months of fiscal years 2001 and 2000, respectively. The decrease in
the professional services operating margin is primarily attributable to billable
staff currently off assignment, decline in billable rates, increased use of
subcontractors for special services and increased allocations of costs of
corporate systems. While off assignment, billable staff are participating in
training programs focused on e-commerce and distributed software systems to
better meet anticipated client needs in the future. Cost of professional
services includes all costs of the Company's professional services business,
including the personnel costs of the professional, management and administrative
staff of the Company's services business and the facilities and benefits costs
allocated to such personnel. The professional billable staff decreased 850
people to 8,793 people at the end of the second quarter of fiscal year 2001 from
9,643 people at the end of the second quarter of
16
<PAGE> 17
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
fiscal year 2000. All reported professional services revenue and expenses
include revenue and expenses associated with Data Processing Resources
Corporation since the acquisition in August 1999.
Administrative and general expenses increased $13.2 million, or 57.7%, during
the second quarter of fiscal year 2001 to $36.2 million from $23.0 million
during the second quarter of fiscal year 2000 and $33.3 million, or 88.4%,
during the first six months of fiscal year 2001 to $71.0 million from $37.7
million during the first six months of fiscal year 2000. The increase in
administrative and general expenses was primarily attributable to goodwill
amortization expense.
Net interest and investment income (expense) for the second quarter of fiscal
year 2001 was ($1.1) million as compared to $0.7 million in the second quarter
of fiscal year 2000 and for the first six months of fiscal year 2001 was ($3.9)
million as compared to $6.5 million in the first six months of fiscal year 2000.
This decrease in net interest and investment income is primarily attributable to
interest expense associated with debt outstanding under the $900 million Senior
Credit Facility discussed in the Liquidity and Capital Resources section below.
The Company's provision for income taxes was $7.9 million in the second quarter
of fiscal year 2001 and $22.4 million in the first six months of fiscal year
2001, both of which represent an effective tax rate of 38.0%. This compares to a
tax provision of $55.8 million in the second quarter of fiscal year 2000, which
represents an effective tax rate of 37.8%, and $106.8 million in the first six
months of fiscal year 2000, which represents an effective tax rate of 36.9%. The
increase in the effective tax rate is due to nondeductible goodwill amortization
associated with certain acquisitions and a shift of our state apportionment to
states with higher corporate income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had approximately $244.6 million in cash
and investments. The Company has committed to maintaining approximately $250
million while utilizing the $900 million Senior Credit Facility. During the
first six months of fiscal years 2001 and 2000, the Company generated $118.2
million and $75.9 million, respectively, in operating cash flow. During these
periods, the Company had capital expenditures that included property and
equipment, capitalized research and software development, and purchased software
of $22.8 million and $21.9 million, respectively.
As of September 30, 2000 the Company had $329.0 million in long-term debt
representing borrowings under the $900 million Senior Credit Facility entered
into on August 31, 1999. This reflects net payments of $90.0 million during the
second quarter of fiscal year 2001. As of September 30, 1999, the Company had
$515.2 million in long-term debt.
In accordance with its strategic growth plans, on July 25, 2000, the Company
announced that it had acquired substantially all the assets and certain
liabilities of Optimal Networks Corporation for $5.0 million. This acquisition
will strengthen the Company's existing EcoSystems product lines.
The Company continues to evaluate business acquisition opportunities that fit
the Company's strategic plans.
17
<PAGE> 18
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has announced plans to build an office tower with a current
estimated cost of $350 million within the City of Detroit. These cash outlays
will have no impact on the results of operations until the building is occupied
in the fall of 2002, at which point, the amortization will result in an annual
expense of approximately $11.7 million. This will be partially offset by the
savings realized by the consolidation of offices. Capital expenditures to date
total $6.8 million. Cash outlays for the remainder of fiscal year 2001 are
expected to be approximately $33.9 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 will be effective for the Company in the third quarter of fiscal year
2001. Management does not expect SAB 101 to have a material impact on
Compuware's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt this
statement for the year ending March 31, 2002. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
determined the effect, if any, that adoption will have on its financial position
or results of operations.
18
<PAGE> 19
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on August 22, 2000 at the Company's
Headquarters, 31440 Northwestern Highway, Farmington Hills, Michigan.
1. PROPOSAL ONE - Election of directors.
The following directors were elected to hold office for one year until the 2001
Annual Meeting of Shareholders and until their successors are elected and
qualified:
<TABLE>
<CAPTION>
Nominee for Director Total Votes For Total Votes Withheld
--------------------------- --------------- --------------------
<S> <C> <C>
Elizabeth A. Chappell 296,794,141 7,636,127
Elaine K. Didier 296,962,681 7,467,587
Bernard M. Goldsmith 297,069,676 7,360,592
William O. Grabe 296,740,286 7,689,982
William R. Halling 297,024,678 7,405,590
Peter Karmanos, Jr. 296,282,662 8,147,606
Joseph A. Nathan 296,346,613 8,083,655
W. James Prowse 296,811,637 7,618,631
G. Scott Romney 296,934,117 7,496,151
Thomas Thewes 296,779,898 7,650,370
Lowell P. Weicker, Jr. 296,549,725 7,880,543
</TABLE>
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 363,149,168. The total number of
shares voted at the Annual Meeting was 304,430,268 or 83.831% of the shares
outstanding and eligible to vote.
19
<PAGE> 20
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by
reference.
Exhibit
Number Description of Document
------- -----------------------
15 Independent Accountants' Awareness Letter
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: November 14, 2000 By:/s/ Joseph A. Nathan
----------------- ----------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: November 14, 2000 By: /s/ Laura L. Fournier
----------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
21
<PAGE> 22
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
15 Independent Accountants' Awareness Letter
27 Financial Data Schedule
</TABLE>
