<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 DECEMBER 31, 1999
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 February 9, 2000, there were outstanding 360,472,031 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 22 pages
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended 4
December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1999 and 1998 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 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,178 $ 193,128
Investments 145,282 309,787
Accounts receivable, net 691,421 526,469
Deferred tax asset 25,168 16,727
Prepaid expenses and other current assets 25,456 25,979
------------ ------------
Total current assets 931,505 1,072,090
------------ ------------
INVESTMENTS 84,349 175,689
------------ ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 112,650 94,786
------------ ------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 100,155 48,095
------------ ------------
OTHER:
Accounts receivable 380,666 145,793
Excess of cost over fair value of net assets acquired,
less accumulated amortization 641,332 87,713
Other 80,479 52,517
------------ ------------
Total other assets 1,102,477 286,023
------------ ------------
TOTAL ASSETS $ 2,331,136 $ 1,676,683
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 57,465 $ 71,129
Accrued expenses 185,317 168,254
Income taxes payable 4,262 27,153
Deferred revenue 282,146 254,968
------------ ------------
Total current liabilities 529,190 521,504
DEFERRED REVENUE 143,002 75,657
LONG TERM DEBT 523,476
------------ ------------
Total liabilities 1,195,668 597,161
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 3,599 3,679
Additional paid-in capital 530,854 304,825
Retained earnings 608,444 777,318
Accumulated other comprehensive income (7,429) (6,300)
------------ ------------
Total shareholders' equity 1,135,468 1,079,522
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,331,136 $ 1,676,683
============ ============
</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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 250,532 $ 187,313 $ 623,118 $ 450,986
Maintenance fees 113,793 87,516 314,503 242,158
Professional services fees 273,043 158,289 710,947 445,166
------------ ------------ ------------ ------------
Total revenues 637,368 433,118 1,648,568 1,138,310
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of software license fees 8,290 6,992 21,152 20,892
Cost of maintenance 11,732 9,452 32,991 27,761
Cost of professional services 267,471 127,358 656,417 363,767
Software product development 22,644 16,803 58,305 48,121
Sales and marketing 111,799 111,456 325,910 298,594
Administrative and general 24,817 19,737 62,485 52,888
Purchased research and development 1,600 17,900 4,350
------------ ------------ ------------ ------------
Total operating expenses 446,753 293,398 1,175,160 816,373
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 190,615 139,720 473,408 321,937
OTHER INCOME (EXPENSE):
Interest and investment income 16,347 7,814 27,911 20,715
Interest expense (9,316) (170) (14,353) (441)
------------ ------------ ------------ ------------
Total other income 7,031 7,644 13,558 20,274
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 197,646 147,364 486,966 342,211
INCOME TAX PROVISION 74,710 50,104 181,521 116,316
------------ ------------ ------------ ------------
NET INCOME $ 122,936 $ 97,260 $ 305,445 $ 225,895
============ ============ ============ ============
Basic earnings per share $ 0.34 $ 0.26 $ 0.85 $ 0.62
============ ============ ============ ============
Diluted earnings per share $ 0.32 $ 0.24 $ 0.79 $ 0.56
============ ============ ============ ============
</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>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 305,445 $ 225,895
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 17,900 4,350
Depreciation and amortization 47,990 30,661
Tax benefit from exercise of stock options 48,363 77,102
Deferred income taxes 2,833 466
Gain on sale of marketable securities (10,918)
Other 8,164 559
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (326,036) (108,873)
Prepaid expenses and other current assets 2,266 (8,468)
Other assets (30,224) 2,453
Accounts payable and accrued expenses (39,009) 36,401
Deferred revenue 80,553 53,330
Income taxes (24,915) 25,068
---------- ----------
Net cash provided by operating activities 82,412 338,944
---------- ----------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (678,301) (12,797)
Property and equipment (26,957) (19,304)
Capitalized software (10,373) (9,351)
Investments:
Proceeds from maturity 423,179 217,479
Proceeds from sales of securities 14,194
Purchases (174,433) (585,038)
---------- ----------
Net cash used in investing activities (452,691) (409,011)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 31,933 13,948
Net proceeds from sale of common stock 14,293 9,512
Repurchase of common stock (348,373)
Proceeds from (payment of) long term debt 523,476 (2,607)
---------- ----------
Net cash provided by financing activities 221,329 20,853
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (148,950) (49,214)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 193,128 206,278
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,178 $ 157,064
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1999
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, 1999 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 1999 financial statements have been reclassified
to conform to the fiscal 2000 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 Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Numerator: Net Income $ 122,936 $ 97,260 $ 305,445 $ 225,895
---------- ---------- ---------- ----------
Denominator: Weighted-average
common shares outstanding 358,666 368,341 357,841 365,212
---------- ---------- ---------- ----------
Basic EPS $ 0.34 $ 0.26 $ 0.85 $ 0.62
========== ========== ========== ==========
DILUTED EPS:
Numerator: Net Income $ 122,936 $ 97,260 $ 305,445 $ 225,895
---------- ---------- ---------- ----------
Denominator: Weighted-average
common shares outstanding 358,666 368,341 357,841 365,212
Dilutive effect of stock options 27,870 34,788 27,926 36,263
---------- ---------- ---------- ----------
Total shares 386,536 403,129 385,767 401,475
---------- ---------- ---------- ----------
Diluted EPS $ 0.32 $ 0.24 $ 0.79 $ 0.56
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1999
NOTE 3 - COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation gains and
losses. Unrealized gain on marketable securities that was previously included in
other comprehensive income has been realized during the current quarter and
included in net income. Total comprehensive income is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 122,936 $ 97,260 $ 305,445 $ 225,895
Foreign currency translation
adjustment, net of tax (2,116) 353 (1,129) 353
Realized gain on sale of
marketable securities (5,019)
---------- ---------- ---------- ----------
Total comprehensive income $ 115,801 $ 97,613 $ 304,316 $ 226,248
========== ========== ========== ==========
</TABLE>
NOTE 4 - ACQUISITIONS
In December 1999, the Company acquired certain assets of CACI Products Company
(CACI), specializing in application capacity planning software, for
approximately $40 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 $24.1
million and is being amortized over a twenty-year period on a straight-line
basis.
In September 1999, the Company acquired Livernois Staffing Services, LLC
(Livernois), a privately held provider of engineering and information technology
services, for approximately $1.5 million in cash, notes payable that are due
within one year and assumed liabilities of approximately $0.1 million. 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 $1.6 million and is being amortized
over a ten-year period on a straight-line basis.
In September 1999, the Company acquired certain assets of Programart Corporation
(Programart), a privately held developer of application performance management
software, for approximately $125 million in cash. Of the total purchase price,
$17.9 million was allocated to in-process research and development based upon
independent valuations of the expected future cash flows, less costs to complete
the development. In accordance with SFAS No. 2, this amount was expensed as of
the purchase date. 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 $62.2 million and is
being amortized over a twenty-year period on a straight-line basis.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1999
In August 1999, the Company acquired all outstanding common shares of Data
Processing Resources Corporation ("DPRC"), a professional services company, for
approximately $518 million in cash. This amount includes $115 million of DPRC
subordinated debt and third party expenses of approximately $7 million. The
acquisition has been accounted for under the purchase method of accounting, 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 $464.8 million and
is being amortized over a twenty-year period on a straight-line basis.
In May 1999, the Company acquired Reliant Data Systems, a privately held
developer of data migration software, for approximately $10.4 million in cash
and assumed liablilities of approximately $3.0 million. 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 $13.4 million and is being amortized over a fifteen-year
period on a straight-line basis.
The pro forma unaudited consolidated results of operations assume the
acquisitions occurred as of the beginning of each of the periods presented (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 638,933 $ 543,508 $1,805,739 $1,424,102
Net Income 122,089 96,426 295,618 211,877
Diluted earnings per share 0.32 0.24 0.77 0.53
</TABLE>
The pro forma results include the amortization of the goodwill and interest
expense on debt assumed to finance these purchases. These amounts do not reflect
any benefit from the anticipated reduction in costs for certain corporate
functions from combined operations. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had been
completed as of the beginning of each of the fiscal periods presented, nor are
they necessarily indicative of future consolidated results.
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1999
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 Nine Months Ended
December 31, December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Products:
Mainframe $ 301,382 $ 227,661 $ 779,488 $ 572,578
Windows and UNIX 62,943 47,168 158,133 120,566
Services 273,043 158,289 710,947 445,166
------------ ------------ ------------ ------------
Total revenues $ 637,368 $ 433,118 $ 1,648,568 $ 1,138,310
============ ============ ============ ============
Operating Expenses:
Products $ 154,465 $ 144,703 $ 438,358 $ 395,368
Services 267,471 127,358 656,417 363,767
Administrative and general 24,817 19,737 62,485 52,888
------------ ------------ ------------ ------------
Total operating expenses $ 446,753 $ 291,798 $ 1,157,260 $ 812,023
============ ============ ============ ============
Income from operations, before other
income and expense and purchased
research and development:
Products $ 209,860 $ 130,126 $ 499,263 $ 297,776
Services 5,572 30,931 54,530 81,399
Administrative and general (24,817) (19,737) (62,485) (52,888)
------------ ------------ ------------ ------------
Income from operations, before other
income and expense and purchased
research and development 190,615 141,320 491,308 326,287
Purchased research and development (1,600) (17,900) (4,350)
Other income and expense 7,031 7,644 13,558 20,274
------------ ------------ ------------ ------------
Income before income taxes $ 197,646 $ 147,364 $ 486,966 $ 342,211
============ ============ ============ ============
</TABLE>
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1999
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.
Proceeds from the credit facility were used to finance the acquisitions of DPRC,
Programart and CACI. The remaining amount under the credit facility will be
available for future acquisitions and working capital requirements. Interest may
be determined on a Eurodollar or prime rate basis at the Company's option. For
the quarter ended December 31, 1999, the average interest rate was 6.99% based
upon the Eurodollar rate. The credit agreement contains restrictive covenants
and requires commitment fees in accordance with standard banking practice. As of
December 31, 1999, the Company had $523 million outstanding under the credit
arrangement.
The Company's $30 million revolving bank credit facility was terminated
concurrently with the signing of the new credit facility.
NOTE 7 - SUBSEQUENT EVENTS
VIASOFT ACQUISITION
In July 1999, the Company and Viasoft, Inc. announced that an agreement had been
reached whereby Compuware would purchase any and all outstanding shares of
Viasoft's common stock for $9 per share, for total consideration of $168
million. At the request of Viasoft on January 18, 2000, the Agreement
and Plan of Merger was terminated.
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 December 31, 1999,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods and cash flows for the nine-month periods
ended December 31, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of March 31, 1999,
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 April 29, 1999, 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, 1999 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
February 9, 2000
11
<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 operations 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 Nine Months Ended
December 31, Period- December 31, Period-
------------------------- to-Period ------------------------ to-Period
1999 1998 Change 1999 1998 Change
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Software license fees 39.3% 43.2% 33.8% 37.8% 39.6% 38.2%
Maintenance fees 17.9% 20.2% 30.0% 19.1% 21.3% 29.9%
Professional services fees 42.8% 36.6% 72.5% 43.1% 39.1% 59.7%
---------- ---------- ---------- ----------
Total revenue 100.0% 100.0% 47.2% 100.0% 100.0% 44.8%
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of license fees 1.3% 1.6% 18.6% 1.3% 1.8% 1.2%
Cost of maintenance 1.8% 2.2% 24.1% 2.0% 2.4% 18.8%
Cost of services 42.0% 29.4% 110.0% 39.8% 32.0% 80.4%
Software product development 3.6% 3.9% 34.8% 3.5% 4.2% 21.2%
Sales and marketing 17.5% 25.7% 0.3% 19.8% 26.2% 9.1%
Administrative & general 3.9% 4.6% 25.7% 3.8% 4.7% 18.1%
Purchased research & development 0.3% (100.0%) 1.1% 0.4% 311.5%
---------- ---------- ---------- ----------
Total operating expenses 70.1% 67.7% 52.3% 71.3% 71.7% 43.9%
---------- ---------- ---------- ----------
Income from operations 29.9% 32.3% 36.4% 28.7% 28.3% 47.0%
Interest and investment income 2.6% 1.8% 109.2% 1.7% 1.8% 34.7%
Interest expense (1.5%) * (0.9%) *
---------- ---------- ---------- ----------
Other income 1.1% 1.8% (8.0%) 0.8% 1.8% (33.1%)
---------- ---------- ---------- ----------
Income before taxes 31.0% 34.1% 34.1% 29.5% 30.1% 42.3%
Income tax provision 11.7% 11.6% 49.1% 11.0% 10.2% 56.1%
---------- ---------- ---------- ----------
Net income 19.3% 22.5% 26.4% 18.5% 19.9% 35.2%
========== ========== ========== ==========
</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 special charges for purchased
research and development and amortization of intangible assets acquired as a
result of acquisitions:
<TABLE>
<CAPTION>
Percentage of Percentage of
Total Revenues Total Revenues
------------------------- -----------------------
Three Months Ended Nine Months Ended
December 31, Period- December 31, Period-
------------------------- to-Period ------------------------ to-Period
1999 1998 Change 1999 1998 Change
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income from operations 31.8% 33.0% 42.0% 31.0% 29.0% 54.7%
Other income 1.1% 1.7% (8.0%) 0.8% 1.8% (33.1%)
---------- ---------- ---------- ----------
Income before taxes 32.9% 34.7% 39.5% 31.8% 30.8% 49.6%
Income tax provision 12.0% 11.7% 49.9% 11.5% 10.4% 60.2%
---------- ---------- ---------- ----------
Net income 20.9% 23.0% 34.1% 20.3% 20.4% 44.3%
========== ========== ========== ==========
</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 three key activities within the
application development process: building, testing and managing the application
to optimize performance in production. Products revenue consists of software
license fees and maintenance fees. Products revenue comprised 57.2% and 63.4% of
total Company revenue during the third quarters of fiscal years 2000 and 1999,
respectively, and 56.9% and 60.9% of total Company revenue during the first nine
months of fiscal years 2000 and 1999, respectively. Mainframe product revenue
increased $73.7 million or 32.4%, to $301.4 million during the third quarter of
fiscal year 2000 from $227.7 million during the third quarter of fiscal year
1999 and $206.9 million or 36.1%, to $779.5 million during the first nine months
of fiscal year 2000 from $572.6 million during the first nine months of fiscal
year 1999. Revenue from products for windows and UNIX platforms increased $15.8
million or 33.4%, to $62.9 million during the third quarter of fiscal year 2000
from $47.2 million during the third quarter of fiscal year 1999 and $37.6
million or 31.2%, to $158.1 million during the first nine months of fiscal year
2000 from $120.5 million during the first nine months of fiscal year 1999. These
increases occurred across all product lines and reflect an increase in
enterprise license agreements (ELA's) which are defined as multi-year
transactions that generally consist of existing product, new product,
maintenance, growth capacity for a three to five year term and is greater than
$500,000.
The contract price for an ELA is allocated between license fees and maintenance
revenue. All license fee revenue is recognized when the client commits
unconditionally to the transaction and the software has been shipped to the
client. Maintenance revenue is deferred and recognized over the applicable
maintenance period. The client must commit to maintenance over the entire term
of the deal. The portion of maintenance revenue that will be recognized over
the twelve months following the balance sheet date is recorded as current
deferred revenue. Maintenance that will be recognized more than one year from
the balance sheet date is recorded as long-term deferred revenue.
These ELA's generally include multi-year payment terms for our clients. When
the contract includes deferred payment terms, the license fee portion of the
payment stream is discounted to its net present value. Interest income is
recognized ratably over the payment term.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
For more than five years, the Company has been entering into ELA's with deferred
payment terms. However, during the past year, the volume of ELA's has shown
significant growth as the practice expanded internationally and as the Company
added additional sales representatives focused exclusively on these types of
transactions. This trend continued during the quarter ended December 31, 1999,
as ELA's represented a larger percentage of total revenue than in prior
quarters.
During December 1999, the Company completed the acquisition of certain assets of
CACI Products Company from CACI International Inc. for $40 million. This
acquisition introduces three new products within the ECOSystems suite of
applications performance management solutions, EcoProfiler, EcoPredictor and
COMNET III.
PROFESSIONAL SERVICES REVENUE
The Company offers a broad range of data processing professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Professional services revenue comprised
42.8% and 36.6% of total Company revenue during the third quarters of fiscal
years 2000 and 1999, respectively, and 43.1% and 39.1% of total Company revenue
during the first nine months of fiscal years 2000 and 1999, respectively.
Revenue from professional services increased $114.7 million, or 72.5%, to $273.0
million during the third quarter of fiscal year 2000 from $158.3 million in the
third quarter of fiscal year 1999 and revenue from professional services
increased $265.7 million, or 59.7%, to $710.9 million during the first nine
months of fiscal year 2000 from $445.2 million in the first nine months of
fiscal year 1999. The Company's North American operations generated 93.6% and
87.4% of total professional services revenue during the third quarters of fiscal
years 2000 and 1999, respectively, and 92.1% and 88.3% of total professional
services revenue during the first nine months of fiscal years 2000 and 1999,
respectively. Combined international services revenue decreased slightly during
the third quarter and increased slightly for the first nine months of fiscal
year 2000. During the second quarter of fiscal 2000, the Company completed the
acquisition of Data Processing Resources Corporation (DPRC) and Livernois
Staffing Services, LLC. The Company plans to continue the services revenue
growth naturally and through acquisitions both in North America and
internationally.
OPERATING PROFIT
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and development
expense, net interest income and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 364,325 $ 274,829 $ 937,621 $ 693,144
Operating expenses 154,465 144,703 438,358 395,368
---------- ---------- ---------- ----------
Products operating profit $ 209,860 $ 130,126 $ 499,263 $ 297,776
========== ========== ========== ==========
</TABLE>
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Products revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States $ 237,893 $ 167,606 $ 640,624 $ 432,904
European subsidiaries 81,325 73,979 201,427 180,709
Other international operations 45,107 33,244 95,570 79,531
---------- ---------- ---------- ----------
Total products revenue $ 364,325 $ 274,829 $ 937,621 $ 693,144
========== ========== ========== ==========
</TABLE>
The products segment generated operating margins of 57.6% and 47.3% during the
third quarters of fiscal years 2000 and 1999, respectively, and operating
margins of 53.2% and 43.0% during the first nine months of fiscal years 2000 and
1999, respectively. Products expenses include cost of software license fees,
cost of maintenance, software product development costs and sales and marketing
expenses. The increase in the operating margins quarter over quarter is
primarily a result of economies associated with larger sales volumes, more sales
representatives in the field with increased sales productivity, additional
product offerings, and increased market penetration of our windows and UNIX
platform products.
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. Cost of software license fees increased $1.3 million, or 18.6%, to
$8.3 million in the third quarter of fiscal year 2000 from $7.0 million in the
third quarter of fiscal year 1999 and increased $0.3 million, or 1.2%, to $21.2
million in the first nine months of fiscal year 2000 from $20.9 million in the
first nine months of fiscal year 1999. 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 and increased author
royalties, offset in part by decreased packaging and distribution costs. As a
percentage of software license fees, these costs were 3.3% and 3.7% in the third
quarters of fiscal years 2000 and 1999, respectively, and 3.4% and 4.6% in the
first nine months of fiscal years 2000 and 1999, 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. Cost of maintenance increased $2.2 million, or 24.1%, to $11.7
million in the third quarter of fiscal year 2000 from $9.5 million in the third
quarter of fiscal year 1999 and increased $5.2 million, or 18.8%, to $33.0
million in the first nine months of fiscal year 2000 from $27.8 million in the
first nine months of fiscal year 1999. 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 customer base. However, as a
percentage of maintenance fees, these costs were 10.3% and 10.8% for the third
quarters of fiscal years 2000 and 1999, respectively, and 10.5% and 11.5% for
the first nine months of fiscal years 2000 and 1999, 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. Software product development costs increased $5.8 million or 34.8%, to
$22.6 million in the third quarter of fiscal year 2000 from $16.8 million in the
third quarter of fiscal year 1999 and increased $10.2 million or 21.2%, to $58.3
million in the first nine months of fiscal year 2000 from $48.1 million in the
first nine months of fiscal year 1999. The increase in these costs was due
primarily to an increase in software development staff as a result of the
Programart
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
acquisition and depreciation of computing equipment needed to meet the demand
for new and enhanced products. While continuing to support and enhance its
traditional mainframe products, the Company has significantly increased the
resources allocated to developing and enhancing its products for windows and
UNIX platforms. Before the capitalization of internally developed software
products, total research and development expenditures for the third quarter of
fiscal year 2000 increased $6.8 million, or 34.6%, to $26.7 million from $19.9
million in the third quarter of fiscal year 1999 and for the first nine months
of fiscal year 2000 these costs increased $11.6 million, or 20.4%, to $68.6
million from $57.0 million in the first nine months of fiscal year 1999.
Capitalized research and development expenditures as a percentage of total
software product development costs remained unchanged at 15.4% in the third
quarters of fiscal years 2000 and 1999, respectively, and decreased to 15.0% in
the first nine months of fiscal year 2000 from 15.5% in the first nine months of
fiscal year 1999.
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. Sales and
marketing costs increased $0.3 million or 0.3%, to $111.8 million in the third
quarter of fiscal year 2000 from $111.5 million in the third quarter of fiscal
year 1999 and increased $27.3 million or 9.1%, to $325.9 million in the first
nine months of fiscal year 2000 from $298.6 million in the first nine months of
fiscal year 1999. As a percentage of license fees, these costs were 44.6% and
59.5% for the third quarters of fiscal years 2000 and 1999, respectively, and
52.3% and 66.2% for the first nine months of fiscal years 2000 and 1999,
respectively. Sales and marketing costs increased due to the expansion of the
worldwide sales force and increases in distributor commissions, and travel
related expenditures. These increases were offset by relatively lower commission
rates paid on ELA's compared to commission rates on smaller single product
sales. The direct sales and sales support staff increased by 486 to 2,585 people
at December 31, 1999, as compared to 2,099 at December 31, 1998.
Financial information for the Company's professional services segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 273,043 $ 158,289 $ 710,947 $ 445,166
Operating expenses 267,471 127,358 656,417 363,767
---------- ---------- ---------- ----------
Professional services operating profit $ 5,572 $ 30,931 $ 54,530 $ 81,399
========== ========== ========== ==========
</TABLE>
Professional services revenue by geographic location is presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States $ 255,451 $ 138,287 $ 654,501 $ 393,193
European subsidiaries 15,161 17,479 48,708 45,434
Other international operations 2,431 2,523 7,738 6,539
---------- ---------- ---------- ----------
Total professional services revenue $ 273,043 $ 158,289 $ 710,947 $ 445,166
========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The professional services segment generated operating margins of 2.0% and 19.5%
during the third quarters of fiscal years 2000 and 1999, respectively, and 7.7%
and 18.3% during the first nine months of fiscal years 2000 and 1999,
respectively. The decrease in the professional services margin is primarily
attributable to increased allocations of costs of corporate systems, increased
use of subcontractors for special services, and additional billable staff
currently off assignment. While off assignment, billable staff are participating
in training programs focused on e:commerce and windows and UNIX platform
applications to better meet anticipated client needs in the future. Cost of
professional services includes all direct costs of the Company's professional
services business, including the personnel costs of the professional, management
and administrative staff directly associated with the Company's services
business and the facilities and benefits costs allocated to such personnel. Cost
of professional services increased $140.1 million, or 110.0%, to $267.5 million
in the third quarter of fiscal year 2000 from $127.4 million in the third
quarter of fiscal year 1999 and increased $292.6 million, or 80.4%, to $656.4
million in the first nine months of fiscal year 2000 from $363.8 million in the
first nine months of fiscal year 1999. The increase in these expenses was due
primarily to an increase of 4,336 professional billable staff to 10,003 people
at December 31, 1999, from 5,667 people at December 31, 1998, an increase in
sub-contractor costs, and to a lesser extent, increases in employee training,
development and travel related expenditures.
Administrative and general expenses increased $5.1 million, or 25.7%, to $24.8
million in the third quarter of fiscal year 2000 from $19.7 million in the third
quarter of fiscal year 1999 and increased $9.6 million, or 18.1%, to $62.5
million in the first nine months of fiscal year 2000 from $52.9 million in the
first nine months of fiscal year 1999. The increase in administrative and
general expenses is attributable, primarily, to the costs associated with
merging recent acquisitions into existing operations including amortization of
goodwill. However, as a percentage of total revenue, these expenses decreased to
3.9% from 4.6% of total revenue during the third quarters of fiscal years 2000
and 1999, respectively, and decreased to 3.8% from 4.7% of total revenue during
the first nine months of fiscal years 2000 and 1999, respectively.
Net interest and investment income for the third quarter of fiscal year 2000 was
$7.0 million as compared to $7.6 million in the third quarter of fiscal year
1999, and for the first nine months of fiscal year 2000, net interest and
investment income was $13.6 million as compared to $20.3 million in the first
nine months of fiscal year 1999. The decrease in net interest and investment
income is primarily attributable to interest expense associated with the $900
million Senior Credit Facility discussed in the liquidity section of this
document and a reduction in interest income from investments, offset by a $10.9
million gain on sale of marketable securities during the third quarter of fiscal
year 2000.
The Company's provision for income taxes was $74.7 million in the third quarter
of fiscal year 2000, which represents an effective tax rate of 37.8% and $181.5
million in the first nine months of fiscal year 2000, which represents an
effective tax rate of 37.3%. This compares to a tax provision of $50.1 million
in the third quarter of fiscal year 1999, which represents an effective tax rate
of 34.0% and of $116.3 million in the first nine months of fiscal year 1999,
which represents an effective tax rate of 34.0%. The increase in the effective
tax rate was due to the growth in pre-tax earnings, which dilutes the effect of
the tax credits on the effective tax rate, 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 December 31, 1999, the Company had approximately $273.8 million in cash
and investments which resulted primarily from cash generated from operations.
During the first nine months of fiscal years
17
<PAGE> 18
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
2000 and 1999, Compuware generated $82.4 million and $338.9 million,
respectively, in operating cash flow. During these periods, the Company had
capital expenditures which included property and equipment, capitalized research
and software development and purchased software of $37.3 million and $28.7
million, respectively.
The decrease in operating cash flow primarily reflects the increase in ELA's
during the current fiscal year. These transactions often include extended
payment terms which are reflected in the increase of long-term accounts
receivable from $145.8 million at March 31, 1999 to $380.7 million at December
31, 1999. A portion of these receivables represents license fee revenue that is
recognized in the period when the transaction is completed. The remaining
portion of these receivables is related to the maintenance revenue and interest
income which is recognized ratably over the term of the contract. The Company
has had no issues with respect to the collectibility of these receivables.
In addition to the growth in long-term accounts receivable, the cash flow from
operations has been adversely affected by the decrease in utilization of
professional services staff. Professional services staff who are off assignment
are not generating revenue and cash flow, but are still paid while being
retrained.
As of December 31, 1999, the Company had $523.5 million in long term debt
representing borrowings under the $900 million Senior Credit Facility entered
into on August 3, 1999. Borrowings were used to help fund the acquisitions of
Data Processing Resources Corporation (August 1999), Programart Corporation
(September 1999) and CACI Products Company (December 1999).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
YEAR 2000
The Company believes it was adequately prepared to meet the challenges of the
coming of Year 2000 and noted no significant impact to the Company's ability to
carry on its normal business operations. The Company believes that it was 100%
complete with all Year 2000 efforts as of December 31, 1999. During the first
three weeks of the calendar year 2000, the Company experienced no significant
problems in its internal systems, or in its supply chain. However, there can be
no assurances that the Company will not experience significant unanticipated
negative consequences caused by undiscovered year 2000 problems in its internal
systems, or by future Year 2000-related interruptions in supplier or
infrastructure services.
18
<PAGE> 19
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
19
<PAGE> 20
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: February 10, 2000 By: /s/ JOSEPH A. NATHAN
----------------- -----------------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: February 10, 2000 By: /s/ LAURA L. FOURNIER
----------------- -----------------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
15 Independent Accountants' Awareness Letter
27 Financial Data Schedule
</TABLE>
<PAGE> 1
INDEPENDENT ACCOUNTANTS' AWARENESS LETTER
Compuware Corporation:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Compuware Corporation and subsidiaries for the periods ended
December 31, 1999 and 1998, as indicated in our report dated February 9, 2000;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, is
incorporated by reference in the following Registration Statements on Form S -
8: 333-79821, 333-70549, 333-43971, 333-37873, 333-17263, 33-57364, 333-4522 and
33-70852.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,178
<SECURITIES> 0
<RECEIVABLES> 704,637
<ALLOWANCES> 13,216
<INVENTORY> 0
<CURRENT-ASSETS> 931,505
<PP&E> 193,065
<DEPRECIATION> 80,415
<TOTAL-ASSETS> 2,331,136
<CURRENT-LIABILITIES> 529,190
<BONDS> 523,476
0
0
<COMMON> 3,599
<OTHER-SE> 1,139,298
<TOTAL-LIABILITY-AND-EQUITY> 2,331,136
<SALES> 1,648,568
<TOTAL-REVENUES> 1,648,568
<CGS> 1,175,160
<TOTAL-COSTS> 1,175,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,353
<INCOME-PRETAX> 486,966
<INCOME-TAX> 181,521
<INCOME-CONTINUING> 305,445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,445
<EPS-BASIC> .85
<EPS-DILUTED> .79
</TABLE>
