<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 JUNE 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 August 7, 2000, there were outstanding 364,876,804 shares of Common Stock,
par value $.01, of the registrant.
Page 1 of 20 pages
<PAGE> 2
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
ASSETS 2000 2000
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 48,644 $ 30,480
Investments 152,536 157,030
Accounts receivable, net 708,375 728,629
Deferred tax asset 22,445 24,346
Income taxes refundable 29,274 22,125
Prepaid expenses and other current assets 23,728 25,248
----------- -----------
Total current assets 985,002 987,858
----------- -----------
INVESTMENTS 62,987 78,944
----------- -----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 117,038 114,409
----------- -----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 94,975 98,464
----------- -----------
OTHER:
Accounts receivable 392,971 399,911
Excess of cost over fair value of net assets acquired,
less accumulated amortization 657,822 659,391
Other 72,648 76,930
----------- -----------
Total other assets 1,123,441 1,136,232
----------- -----------
TOTAL ASSETS $ 2,383,443 $ 2,415,907
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 51,496 $ 67,173
Accrued expenses 180,945 199,282
Deferred revenue 332,242 329,602
----------- -----------
Total current liabilities 564,683 596,057
LONG TERM DEBT 419,000 450,000
DEFERRED REVENUE 148,934 152,947
DEFERRED INCOME TAXES 6,565 13,031
----------- -----------
Total liabilities 1,139,182 1,212,035
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 3,631 3,616
Additional paid-in capital 573,600 556,150
Retained earnings 678,608 654,976
Accumulated other comprehensive loss (11,578) (10,870)
----------- -----------
Total shareholders' equity 1,244,261 1,203,872
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,383,443 $ 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
JUNE 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES:
Software license fees $ 130,704 $ 160,952
Maintenance fees 116,090 97,740
Professional services fees 267,080 184,359
----------- -----------
Total revenues 513,874 443,051
----------- -----------
OPERATING EXPENSES:
Cost of software license fees 10,513 5,946
Cost of maintenance 13,091 10,380
Cost of professional services 273,807 158,480
Software product development 24,606 17,325
Sales and marketing 116,205 100,315
Administrative and general 34,720 14,690
----------- -----------
Total operating expenses 472,942 307,136
----------- -----------
INCOME FROM OPERATIONS 40,932 135,915
OTHER INCOME (EXPENSE):
Interest and investment income 6,586 6,010
Interest expense (9,402) (164)
----------- -----------
Total other income (expense) (2,816) 5,846
----------- -----------
INCOME BEFORE INCOME TAXES 38,116 141,761
INCOME TAX PROVISION 14,484 51,034
----------- -----------
NET INCOME $ 23,632 $ 90,727
=========== ===========
Basic earnings per share $ 0.07 $ 0.25
=========== ===========
Diluted earnings per share $ 0.06 $ 0.24
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 23,632 $ 90,727
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 24,050 10,560
Tax benefit from exercise of stock options 11,639 14,326
Acquisition tax benefits 1,863 1,805
Deferred income taxes (4,565) 1,198
Other 416 2,060
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 27,456 (29,464)
Prepaid expenses and other current assets 2,090 (2,569)
Other assets 3,240 (3,133)
Accounts payable and accrued expenses (34,514) (52,620)
Deferred revenue (1,373) 31,450
Income taxes (7,162) (18,423)
-------------- ---------------
Net cash provided by operating activities 46,772 45,917
-------------- ---------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchase of:
Businesses (8,887) (11,003)
Property and equipment (9,228) (5,467)
Capitalized software (2,954) (3,215)
Investments:
Proceeds from maturity 83,406 262,903
Purchases (63,908) (50,102)
-------------- ---------------
Net cash (used in) provided by investing activities (1,571) 193,116
-------------- ---------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from long term debt 18,000
Payments on long term debt (49,000)
Repurchase of common stock (348,373)
Net proceeds from exercise of stock options 3,963 11,125
-------------- ---------------
Net cash used in financing activities (27,037) (337,248)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,164 (98,215)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,480 193,128
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,644 $ 94,913
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 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
June 30,
-------------- ---------------
2000 1999
-------------- ---------------
<S> <C> <C>
BASIC EPS:
Numerator: Net Income $ 23,632 $ 90,727
-------------- ---------------
Denominator:
Weighted-average common shares outstanding 362,685 357,899
-------------- ---------------
Basic EPS $ 0.07 $ 0.25
============== ===============
DILUTED EPS:
Numerator: Net Income $ 23,632 $ 90,727
-------------- ---------------
Denominator:
Weighted-average common shares outstanding 362,685 357,899
Dilutive effect of stock options 10,916 27,524
-------------- ---------------
Total shares 373,601 385,423
-------------- ---------------
Diluted EPS $ 0.06 $ 0.24
============== ===============
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 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
June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 23,632 $ 90,727
Foreign currency translation
adjustment, net of tax (708) (60)
----------- -----------
Total comprehensive income $ 22,924 $ 90,667
=========== ===========
</TABLE>
NOTE 4 - ACQUISITION
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
THREE MONTHS ENDED JUNE 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
June 30,
----------------------
2000 1999
---- ----
<S> <C> <C>
Revenue:
Products:
Mainframe $ 206,682 $ 219,331
Distributed systems 40,112 39,361
Services 267,080 184,359
--------- ---------
Total revenues $ 513,874 $ 443,051
========= =========
Operating Expenses:
Products $ 164,415 $ 133,966
Services 273,807 158,480
Corporate staff 24,931 12,996
Goodwill amortization 9,789 1,694
--------- ---------
Total operating expenses $ 472,942 $ 307,136
========= =========
Income from operations, before other income (expenses):
Products $ 82,379 $ 124,726
Services (6,727) 25,879
Corporate staff (24,931) (12,996)
Goodwill amortization (9,789) (1,694)
--------- ---------
Income from operations, before other income
(expenses) 40,932 135,915
Other income (expense) (2,816) 5,846
--------- ---------
Income before income taxes $ 38,116 $ 141,761
========= =========
</TABLE>
Financial information regarding geographic operations are presented in the table
below (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue:
United States $410,184 $346,664
European subsidiaries 73,835 73,355
Other international operations 29,855 23,032
-------- --------
Total revenue $513,874 $443,051
======== ========
</TABLE>
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2000
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 June 30,
2000, the average interest rate was 7.80% 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 June 30,
2000, the Company had $419 million outstanding under the credit arrangement.
NOTE 7 - SUBSEQUENT EVENTS
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 in cash. This acquisition will strengthen the Company's existing
EcoSystems product lines.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REPORT
Compuware Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Compuware Corporation and subsidiaries (the "Company") as of June 30, 2000, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended June 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 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 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
August 7, 2000
10
<PAGE> 11
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
Total Revenues
----------------------------
Three Months Ended
June 30, Period-
---------------------------- to-Period
2000 1999 Change
------------- ------------ -------------
<S> <C> <C> <C>
REVENUE:
Software license fees 25.4% 36.3% (18.8%)
Maintenance fees 22.6% 22.1% 18.8%
Professional services fees 52.0% 41.6% 44.9%
------------- ------------
Total revenue 100.0% 100.0% 16.0%
------------- ------------
OPERATING EXPENSES:
Cost of license fees 2.0% 1.3% 76.8%
Cost of maintenance 2.5% 2.4% 26.1%
Cost of services 53.3% 35.8% 72.8%
Software product development 4.8% 3.9% 42.0%
Sales and marketing 22.6% 22.6% 15.8%
Administrative & general 6.8% 3.3% 136.4%
------------- ------------
Total operating expenses 92.0% 69.3% 54.0%
------------- ------------
Income from operations 8.0% 30.7% (69.9%)
------------- ------------
Other Income (Expense):
Interest and investment income 1.2% 1.3% 9.6%
Interest expense (1.8%) 0.0% *
------------- ------------
Total other income (expense) (0.6%) 1.3% (148.2%)
------------- ------------
Income before taxes 7.4% 32.0% (73.1%)
Income tax provision 2.8% 11.5% (71.6%)
------------- ------------
Net income 4.6% 20.5% (74.0%)
============= ============
</TABLE>
*- Calculation is not meaningful.
11
<PAGE> 12
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
Total Revenues
----------------------------
Three Months Ended
June 30, Period-
---------------------------- to-Period
2000 1999 Change
------------- ------------ -------------
<S> <C> <C> <C>
Income from operations 10.7% 31.1% (60.4%)
Other income(expense) (0.6%) 1.3% (148.2%)
------------- ------------
Income before taxes 10.1% 32.4% (63.9%)
Income tax provision 3.4% 11.6% (66.0%)
------------- ------------
Net income 6.7% 20.8% (62.8%)
============= ============
</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 48.0% and 58.4% of total Company revenue
during the first quarter of fiscal years 2001 and 2000, respectively. S/390
product revenue (mainframe revenue) decreased $12.6 million or 5.8% during the
first quarter of fiscal year 2001 to $206.7 million from $219.3 million during
the first quarter of fiscal year 2000. Revenue from distributed software
products increased $0.7 million or 1.9% during the first quarter of fiscal year
2001 to $40.1 million from $39.4 million during the first quarter of fiscal year
2000. In the first quarter of fiscal year 2001, multi-year transactions greater
than $5 million represented approximately 30% 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 and the
software has been shipped to the customer. 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.
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 $82.7 million or 44.9% during the first quarter
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
of fiscal year 2001 to $267.1 million from $184.4 million during the first
quarter of fiscal year 2000. The acquisition of DPRC in August 1999 contributed
significantly to this increase. The Company's North American operations
generated 91.6% and 88.8% of total professional services revenue during the
first quarter of fiscal years, 2001 and 2000, respectively. Combined
international services revenue increased $1.7 million or 8.5% during the first
quarter of fiscal year 2001 to $22.3 million from $20.6 million during the first
quarter 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 and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
------- -------
<S> <C> <C>
Revenue $246,794 $258,692
Operating expenses 164,415 133,966
------- --------
Products operating profit $ 82,379 $124,726
======== ========
</TABLE>
Products revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
-------- --------
<S> <C> <C>
United States $165,433 $182,879
European subsidiaries 53,342 55,471
Other international operations 28,019 20,342
-------- --------
Total products revenue $246,794 $258,692
======== ========
</TABLE>
The products segment generated operating margins of 33.4% and 48.2% during the
first quarter 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 licenses as well as an
increase in software product development costs, more sales representatives in
the field associated with additional product offerings and increases in cost of
software license fees.
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, increases in author royalties and increased
packaging and distribution costs. As a percentage of software license fees, cost
of software license fees were 8.0% and 3.7% in the first quarter of fiscal years
2001 and 2000, respectively.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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 11.3% and 10.6% for the first quarter 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
fiscal year. 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. While continuing to support and enhance its traditional S/390
products, the Company has significantly increased the resources allocated to
developing and enhancing its distributed software products. Before the
capitalization of internally developed software products, total research and
development expenditures for the first quarter of fiscal year 2001 increased
$7.1 million, or 34.5%, to $27.6 million from $20.5 million for the first
quarter of fiscal 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 increase
in sales and marketing costs was largely attributable to the expansion of the
worldwide sales force and increased allocations of costs of corporate systems,
offset, in part, by decreased advertising expenditures. The direct sales and
sales support staff increased by 450 to 2,762 people at the end of the first
quarter of fiscal year 2001, as compared to 2,312 at the end of the first
quarter of fiscal year 2000.
Financial information for the Company's professional services segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
Revenue $ 267,080 $ 184,359
Operating expenses 273,807 158,480
--------- ---------
Professional services operating profit (loss) $ (6,727) $ 25,879
========= =========
</TABLE>
Professional services revenue by geographic location is presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
United States $ 244,751 $ 163,785
European subsidiaries 20,493 17,884
Other international operations 1,836 2,690
--------- ---------
Total professional services revenue $ 267,080 $ 184,359
========= =========
</TABLE>
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During the first quarter of fiscal year 2001, the professional services segment
generated a negative operating margin of 2.5% compared to a positive 14.0%
during the first quarter of fiscal year 2000, and a negative 8.4% during the
fourth quarter of fiscal year 2000. The decrease in the professional services
operating margin is primarily attributable to billable staff currently off
assignment, 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 increase in these expenses was
due primarily to an increase of 2,678 professional billable staff, primarily
associated with the DPRC acquisition, to 9,156 in the first quarter of fiscal
year 2001 from 6,478 people at the end of the first quarter of fiscal year 2000.
Administrative and general expenses increased $20.0 million, or 136.4%, during
the first quarter of fiscal year 2001 to $34.7 million from $14.7 million during
the first quarter of fiscal year 2000. The increase in administrative and
general expenses was primarily attributable to goodwill amortization expense
(see Note 5) and charges against investments in joint ventures.
Net interest and investment income (expense) for the first quarter of fiscal
year 2001 was ($2.8) million as compared to $5.8 million in the first quarter 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 $14.5 million in the first quarter
of fiscal year 2001, which represents an effective tax rate of 38.0%. This
compares to a tax provision of $51.0 million in the first quarter of fiscal year
2000, which represents an effective tax rate of 36.0%. 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 June 30, 2000, the Company had approximately $264.2 million in cash and
investments, which is slightly higher than the $250 million level the Company
has committed to maintaining while utilizing the $900 million Senior Credit
Facility. During the first quarter of fiscal years 2001 and 2000, the Company
generated $46.8 million and $45.9 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 $12.2 million and $8.7 million, respectively.
As of June 30, 2000 the Company had $419.0 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 $31.0 million during the
first quarter of fiscal year 2001. As of June 30, 1999, the Company had no
long-term debt.
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In accordance with its strategic growth plans, the Company completed the
following acquisitions since the beginning of fiscal year 2001:
On May 10, 2000, the Company acquired Nomex, Inc., a privately held provider of
web design and development services located in Montreal, Canada, for $8.9
million.
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.
The Company has announced plans to build an office tower with a current
estimated cost of $350.0 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 2002, at which point, the amortization will result in an annual
expense of $11.7 million. Capital expenditures to date are approximately $4.9
million. Cash outlays for the remainder of fiscal year 2001 are expected to be
$60.0 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 the
Company'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.
16
<PAGE> 17
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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- ----------------------------
<S> <C>
15 Independent Accountants' Awareness Letter
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None
17
<PAGE> 18
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: August 11, 2000 By:/s/ Joseph A. Nathan
--------------- -------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: August 11, 2000 By: /s/ Eliot R. Stark
--------------- -------------------
Eliot R. Stark
Executive Vice President, Finance
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
15 Independent Accountant's Awareness Letter
27 Financial Data Schedule
</TABLE>
