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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, 2002
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 8, 2002, there were outstanding 377,918,089 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 26 pages
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2002 and March 31, 2002 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements 6
Independent Accountants' Report 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
ASSETS 2002 2002
------ ------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 301,707 $ 233,305
Investments 127,754 133,503
Accounts receivable, net 538,841 609,579
Deferred tax asset, net 32,995 41,811
Income taxes refundable, net 27,687
Prepaid expenses and other current assets 15,278 16,954
------------ ------------
Total current assets 1,016,575 1,062,839
------------ ------------
INVESTMENTS 72,682 55,566
------------ ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 263,393 199,365
------------ ------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 61,956 68,998
------------ ------------
OTHER:
Accounts receivable 281,749 306,751
Deferred tax asset, net 44,611 44,884
Goodwill, net 212,050 211,792
Other 42,775 43,743
------------ ------------
Total other assets 581,185 607,170
------------ ------------
TOTAL ASSETS $ 1,995,791 $ 1,993,938
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 24,138 $ 28,646
Accrued expenses 153,337 186,477
Income taxes payable, net 534
Deferred revenue 289,979 341,024
------------ ------------
Total current liabilities 467,988 556,147
DEFERRED REVENUE 247,509 218,624
ACCRUED EXPENSES 25,620 29,316
------------ ------------
Total liabilities 741,117 804,087
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 3,760 3,758
Additional paid-in capital 680,946 676,617
Retained earnings 585,099 528,804
Accumulated other comprehensive loss (15,131) (19,328)
------------ ------------
Total shareholders' equity 1,254,674 1,189,851
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,995,791 $ 1,993,938
============ ============
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
REVENUES:
Software license fees $ 87,019 $ 86,838 $ 144,172 $ 182,423
Maintenance fees 103,037 109,707 208,731 220,534
Professional services fees 167,938 231,216 351,690 475,279
--------- --------- ---------- ---------
Total revenues 357,994 427,761 704,593 878,236
--------- --------- ---------- ---------
OPERATING EXPENSES:
Cost of software license fees 7,676 8,438 15,303 17,101
Cost of professional services 152,365 212,519 319,734 428,605
Technology development and support 38,795 41,016 70,594 82,747
Sales and marketing 64,841 69,055 131,017 140,527
Administrative and general 46,919 49,969 91,687 101,662
Goodwill amortization 9,803 19,607
--------- --------- ---------- ---------
Total operating expenses 310,596 390,800 628,335 790,249
--------- --------- ---------- ---------
INCOME FROM OPERATIONS 47,398 36,961 76,258 87,987
--------- --------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest and investment income 7,078 7,228 13,772 14,152
Interest and other expense (3,218) (1,439) (4,734) (3,976)
--------- --------- ---------- ---------
Total other income 3,860 5,789 9,038 10,176
--------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 51,258 42,750 85,296 98,163
INCOME TAX PROVISION 17,428 16,245 29,001 37,302
--------- --------- ---------- ---------
NET INCOME $ 33,830 $ 26,505 $ 56,295 $ 60,861
========= ========= ========== =========
Basic earnings per share $ 0.09 $ 0.07 $ 0.15 $ 0.16
========= ========= ========== =========
Diluted earnings per share $ 0.09 $ 0.07 $ 0.15 $ 0.16
========= ========= ========== =========
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 56,295 $ 60,861
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 27,402 30,464
Amortization of goodwill 19,607
Tax benefit from exercise of stock options 171 2,792
Acquisition tax benefits 3,537 3,574
Deferred income taxes 9,089 (1,291)
Other 7,934 743
Net change in assets and liabilities
Accounts receivable 95,740 78,452
Prepaid expenses and other current assets (433) 1,536
Other assets 128 955
Accounts payable and accrued expenses (36,656) (42,058)
Deferred revenue (22,160) 6,143
Income taxes 28,221 9,366
--------- ---------
Net cash provided by operating activities 169,268 171,144
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment:
Headquarters building (86,817) (28,704)
Other (2,094) (3,705)
Capitalized software (5,578) (6,065)
Investments:
Proceeds from maturity 77,300 152,340
Purchases (89,962) (121,895)
--------- ---------
Net cash used in investing activities (107,151) (8,029)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 565 5,331
Contribution to stock purchase plans 5,720 22
Payments on long term debt (140,000)
--------- ---------
Net cash provided by (used in) financing activities 6,285 (134,647)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 68,402 28,468
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 233,305 53,340
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 301,707 $ 81,808
========= =========
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, contingencies and results of operations. While management
has based their assumptions and estimates on the facts and circumstances known
at September 30, 2002, final amounts may differ from estimates.
In the opinion of management of the Company, the accompanying unaudited
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, 2002 included in the
Company's Annual Report to Shareholders and the Company's Form 10-K filed with
the Securities and Exchange Commission. The consolidated balance sheet at March
31, 2002 has been derived from the audited financial statements at that date but
does not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The results of
operations for interim periods are not necessarily indicative of actual results
achieved for full fiscal years.
Certain amounts in the fiscal 2002 financial statements have been reclassified
to conform to the fiscal 2003 presentation.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
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):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
BASIC EPS:
- ----------
Numerator: Net Income $ 33,830 $ 26,505 $ 56,295 $ 60,861
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 375,931 371,139 375,907 370,675
-------- -------- -------- --------
Basic EPS $ 0.09 $ 0.07 $ 0.15 $ 0.16
======== ======== ======== ========
DILUTED EPS:
- ------------
Numerator: Net Income $ 33,830 $ 26,505 $ 56,295 $ 60,861
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 375,931 371,139 375,907 370,675
Dilutive effect of stock options 757 15,561 1,785 13,790
-------- -------- -------- --------
Total shares 376,688 386,700 377,692 384,465
-------- -------- -------- --------
Diluted EPS $ 0.09 $ 0.07 $ 0.15 $ 0.16
======== ======== ======== ========
During the three months ended September 30, 2002 and 2001, stock options and
a warrant to purchase approximately 65,673,000 and 21,089,000 shares,
respectively, were excluded from the diluted EPS calculation because they were
anti-dilutive. During the six months ended September 30, 2002 and 2001, stock
options and a warrant to purchase approximately 64,757,000 and 23,126,000
shares, respectively, were excluded from the diluted EPS calculation because
they were anti-dilutive.
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):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Income $ 33,830 $ 26,505 $ 56,295 $ 60,861
Foreign currency translation
adjustment, net of tax (2,126) 269 4,197 1,423
-------- -------- -------- --------
Total comprehensive income $ 31,704 $ 26,774 $ 60,492 $ 62,284
======== ======== ======== ========
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
NOTE 4 -- SEGMENTS
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to IT organizations that help IT 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):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Products:
Mainframe $ 154,079 $ 155,737 $ 282,136 $ 322,653
Distributed systems 35,977 40,808 70,767 80,304
--------- --------- --------- ---------
Total products revenue 190,056 196,545 352,903 402,957
Services 167,938 231,216 351,690 475,279
--------- --------- --------- ---------
Total revenues $ 357,994 $ 427,761 $ 704,593 $ 878,236
========= ========= ========= =========
Operating Expenses:
Products $ 111,312 $ 118,509 $ 216,914 $ 240,375
Services 152,365 212,519 319,734 428,605
Corporate staff 46,919 49,969 91,687 101,662
Goodwill amortization 9,803 19,607
--------- --------- --------- ---------
Total operating expenses $ 310,596 $ 390,800 $ 628,335 $ 790,249
========= ========= ========= =========
Income from operations before other income (expenses):
Products $ 78,744 $ 78,036 $ 135,989 $ 162,582
Services 15,573 18,697 31,956 46,674
Corporate staff (46,919) (49,969) (91,687) (101,662)
Goodwill amortization (9,803) (19,607)
--------- --------- --------- ---------
Income from operations before other income 47,398 36,961 76,258 87,987
Other income 3,860 5,789 9,038 10,176
--------- --------- --------- ---------
Income before income taxes $ 51,258 $ 42,750 $ 85,296 $ 98,163
========= ========= ========= =========
Financial information regarding geographic operations are presented in the
table below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
United States $263,517 $332,305 $528,505 $676,899
Europe and Africa 73,021 74,500 137,916 155,061
Other international operations 21,456 20,956 38,172 46,276
-------- -------- -------- --------
Total revenues $357,994 $427,761 $704,593 $878,236
======== ======== ======== ========
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
NOTE 5 -- RESTRUCTURING CHARGE
In the fourth quarter of fiscal 2002, Compuware adopted a restructuring plan to
reorganize its operating divisions, primarily the professional services segment.
These changes were designed to increase profitability by better aligning cost
structures with current market conditions.
The restructuring plan includes a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide will be terminated
as a result of the reorganization. As of October 31, 2002, 1,528 of the affected
employees had been terminated.
The following table summarizes the restructuring charge taken in fiscal 2002,
and charges against the accrual during the first six months of fiscal 2003 (in
thousands):
Charges against Charges against
Balance at the accrual during the accrual during Balance at
March 31, the quarter ended the quarter ended September 30,
2002 June 30, 2002 September 30, 2002 2002
---------- ------------------ ------------------ ----------
Employee termination benefits $ 18,459 $ 11,259 $ 3,877 $ 3,323
Facilities costs (primarily lease
abandonments) 25,665 2,774 2,264 20,627
Legal, consulting and
outplacement costs 1,299 521 51 727
Other 278 195 20 63
---------- ------------------ ------------------ ----------
Total restructuring accrual $ 45,701 $ 14,749 $ 6,212 $ 24,740
========== ================== ================== ==========
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
NOTE 6 -- GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
At September 30, 2002
--------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------- ------------
Amortized intangible assets:
Capitalized software (1) $ 215,813 $ (153,857) $ 61,956
Other (2) 6,200 (3,890) 2,310
-------------- ------------- ------------
Total $ 222,013 $ (157,747) $ 64,266
============== ============= ============
At March 31, 2002
--------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------- ------------
Amortized intangible assets:
Capitalized software (1) $ 209,017 $ (140,019) $ 68,998
Other (2) 6,200 (3,725) 2,475
-------------- ------------- ------------
Total $ 215,217 $ (143,744) $ 71,473
============== ============= ============
1) The amortization expense is reported in cost of software license fees
expense on the income statement.
2) Other amortized intangible assets include trademarks associated with past
product acquisitions. The amortization expense is reported in general and
administrative expense on the income statement.
Aggregate amortization expense on intangible assets was $6,487,000 and
$7,623,000 for the three months ended September 30, 2002 and 2001, respectively.
Amortization expense on intangible assets for the six months ended September 30,
2002 and 2001 was $12,785,000 and $15,392,000, respectively. Annual amortization
expense, based on identified intangible assets recorded through September 30,
2002 is expected to be as follows (in thousands):
Year Ended March 31,
--------------------------------------------------------------------------
2003 2004 2005 2006 Thereafter
-------- -------- -------- ------- ----------
Capitalized software $ 24,498 $ 23,223 $ 15,050 $ 5,683 $ 3,191
Other 330 330 330 330 330
-------- -------- -------- ------- ----------
Total $ 24,828 $ 23,553 $ 15,380 $ 6,013 $ 3,521
======== ======== ======== ======= ==========
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. Changes in the carrying amounts of goodwill for the six
months ended September 30, 2002 were as follows (in thousands):
Goodwill: Products Services Total
-------- --------- ---------
Balance at March 31, 2002, net $ 72,182 $ 139,610 $ 211,792
Effect of foreign currency translation 258 258
-------- --------- ---------
Balance as of September 30, 2002, net $ 72,182 $ 139,868 $ 212,050
======== ========= =========
The Company's reported net income and diluted earnings per share exclusive of
amortization of goodwill in the prior year on an after-tax basis were as follows
(in thousands except per share data):
Three Months Ended September 30, Six Months Ended September 30,
---------------------------------- ------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Reported net income $ 33,830 $ 26,505 $ 56,295 $ 60,861
Add goodwill amortization, net of tax 8,273 16,547
-------- -------- -------- --------
Adjusted net income $ 33,830 $ 34,778 $ 56,295 $ 77,408
======== ======== ======== ========
Diluted earnings per share $ 0.09 $ 0.09 $ 0.15 $ 0.20
======== ======== ======== ========
NOTE 7 -- SUBSEQUENT EVENT
The Company did not anticipate utilizing its unsecured Senior Credit Facility
before its expiration in August 2003. Therefore, the agreement was terminated
effective November 4, 2002.
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, 2002,
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, 2002 and 2001. These financial statements are the responsibility
of the Company's management.
We conducted our reviews 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 reviews, 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, 2002, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated May 6, 2002, 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, 2002 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
November 4, 2002
12
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws 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 operating results, including, without limitation,
those contained in this report and in our 2002 Form 10-K filing with the
Securities and Exchange Commission, and could cause actual results to differ
materially from the results implied by these or any other forward-looking
statements made by us, or on our behalf. There can be no assurance that
future results will meet expectations. While we believe that our forward-looking
statements are reasonable, you should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. Except as
required by applicable law, we do not undertake any obligation to publicly
release any revisions which may be made to any forward-looking statements to
reflect events or circumstances occurring after the date of this report.
- - Our quarterly financial results vary and may be adversely affected by
certain relatively fixed costs. Our product revenues vary from quarter to
quarter. Net income may be disproportionately affected by a fluctuation in
revenues because only a small portion of our expenses varies with revenues.
- - Historical seasonality in license revenue cannot be relied on as an
indicator of future performance due to the current economic conditions
affecting the IT industry.
- - Our success depends in part on our ability to develop product enhancements
and new products which keep pace with continuing changes in technology and
customer preferences.
- - Approximately 24% of our revenue is derived from foreign sources. This
exposes us to exchange rate risks on foreign currencies and to other
international risks such as the need to comply with foreign and U.S. export
laws, and the uncertainty of certain foreign economies.
- - While we are expanding our focus on distributed software products, a
majority of our revenue from software products is dependent on our
customers' continued use of IBM and IBM-compatible mainframe products and
on the acceptance of our pricing structure for software licenses and
maintenance. The pricing of our software licenses and maintenance is under
constant pressure from customers and competitive vendors.
- - We regard our software as proprietary and attempt to protect it with
copyrights, trademarks, trade secret laws and restrictions on disclosure,
copying and transferring title. Despite these precautions, it may be
possible for unauthorized third parties to copy certain portions of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States.
- - Although we have not received any material claims that our products
infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against us
in the future with respect to current and future products or that any such
assertion may not require us to enter into royalty arrangements or result
in costly litigation.
- - We depend on key employees and technical personnel. The loss of certain key
employees or our inability to attract and retain other qualified employees
could have a material adverse effect on our business.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
- - Our operating margins may decline. We do not compile margin analysis other
than on a segment basis. However, we are aware that operating expenses
associated with our distributed systems products are higher than those
associated with our traditional mainframe products. Since we believe the
best opportunities for revenue growth are in the distributed systems
market, products operating margins could experience more pressure. In
addition, operating margins in the professional services business are
significantly impacted by small fluctuations in revenue since most costs
are fixed during any short term period.
- - The slowdown in the world economy could continue for an extended period and
could cause customers to further delay or forego decisions to license new
products or upgrades to their existing environments and this could
adversely affect our operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of income as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of Percentage of
Total Revenues Total Revenues
------------------ ------------------
Three Months Ended Six Months Ended
September 30, Period- September 30, Period-
------------------ to-Period ------------------ to-Period
2002 2001* Change 2002 2001* Change
------ ------ ------ ------ ------ ------
REVENUE:
Software license fees 24.3% 20.3% 0.2% 20.5% 20.8% (21.0)%
Maintenance fees 28.8 25.6 (6.1) 29.6 25.1 (5.4)
Professional services fees 46.9 54.1 (27.4) 49.9 54.1 (26.0)
------ ------ ------ ------
Total revenues 100.0 100.0 (16.3) 100.0 100.0 (19.8)
------ ------ ------ ------
OPERATING EXPENSES:
Cost of software license fees 2.2 2.0 (9.0) 2.2 2.0 (10.5)
Cost of professional services 42.6 49.7 (28.3) 45.4 48.8 (25.4)
Technology development and support 10.8 9.6 (5.4) 10.0 9.4 (14.7)
Sales and marketing 18.1 16.1 (6.1) 18.6 16.0 (6.8)
Administrative and general 13.1 11.7 (6.1) 13.0 11.6 (9.8)
Goodwill amortization 2.3 (100.0) 2.2 (100.0)
------ ------ ------ ------
Total operating expenses 86.8 91.4 (20.5) 89.2 90.0 (20.5)
------ ------ ------ ------
Income from operations 13.2 8.6 28.2 10.8 10.0 (13.3)
------ ------ ------ ------
Other income (expense):
Interest and investment income 2.0 1.7 (2.1) 2.0 1.6 (2.7)
Interest and other expense (0.9) (0.3) (123.6) (0.7) (0.4) (19.1)
------ ------ ------ ------
Total other income 1.1 1.4 (33.3) 1.3 1.2 (11.2)
------ ------ ------ ------
Income before income taxes 14.3 10.0 19.9 12.1 11.2 (13.1)
Income tax provision 4.9 3.8 7.3 4.1 4.3 (22.3)
------ ------ ------ ------
Net income 9.4% 6.2% 27.6% 8.0% 6.9% (7.5)%
------ ------ ------ ------
* Reclassified to conform to the September 2002 presentation as explained below.
14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. If goodwill had not been amortized in fiscal 2002, net
income would have been $34.8 million, or 9 cents per diluted share in the second
quarter of last year and $77.4 million, or 20 cents per diluted share for the
first six months of last year.
Effective April 1, 2002, we reorganized our operations to better allow the
products and professional services organizations to focus on meeting customer
needs. We have reclassified certain expense items to better reflect our new
operating structure and are no longer allocating costs associated with the
facilities, finance and human resource departments to the various operating
groups. Instead, these costs are now included in administrative and general
expenses. All technology costs, including costs associated with internal
systems, are included in the technology development and support expense line.
This reclassification did not change total operating expenses. In accordance
with EITF No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-pocket' Expenses Incurred", we have also reclassified
travel expense reimbursements paid by customers as revenue rather than as a
reduction to the related expense. This reclassification has resulted in a slight
change to professional services fees and cost of professional services without
changing income from operations.
We operate in two business segments in the technology industry: products and
professional services. We evaluate the performance of our segments based
primarily on segment contribution before corporate expenses. References to years
are to fiscal years ended March 31.
SOFTWARE PRODUCTS
REVENUE
Our 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 53.1% and 45.9% of total Company revenue during
the second quarter of 2003 and 2002, respectively, and 50.1% and 45.9% of total
Company revenue during the first six months of 2003 and 2002, respectively.
OS/390 product revenue (mainframe revenue) decreased $1.6 million or 1.1% during
the second quarter of 2003 to $154.1 million from $155.7 million during the
second quarter of 2002 and decreased $40.6 million or 12.6% during the first six
months of 2003 to $282.1 million from $322.7 million during the first six months
of 2002. Revenue from distributed software products decreased $4.8 million or
11.8% during the second quarter of 2003 to $36.0 million from $40.8 million
during the second quarter of 2002 and decreased $9.5 million or 11.9% during the
first six months of 2003 to $70.8 million from $80.3 million during the first
six months of 2002.
License revenue increased $0.2 million or 0.2% during the second quarter of 2003
to $87.0 million from $86.8 million during the second quarter of 2002 and
decreased $38.2 million or 21.0% during the first six months of 2003 to $144.2
million from $182.4 million during the first six months of 2002. During the
second quarter of 2003, 15% of license revenue was related to multi-year
contracts with license fees greater than $5 million compared to 10% during the
second quarter of 2002. During the first six months of 2003, 9% of license
revenue was related
15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
to multi-year contracts with license fees greater than $5 million compared to 5%
during the first six months of 2002. The decrease in license revenue for the
first six months of 2003 was due to a decrease in customer demand for our
products due in part to the continued softness in the economy as a whole and the
IT industry in particular. Considering recent sales trends, we do not anticipate
our historical fluctuation in license fees during the third quarter. Maintenance
fees decreased $6.7 million or 6.1% to $103.0 million during the second quarter
of 2003 from $109.7 million during the second quarter of 2002 and decreased
$11.8 million or 5.4% during the first six months of 2003 to $208.7 million from
$220.5 million during the first six months of 2002. The decrease in maintenance
fees was primarily attributable to lower license fees during both 2003 and 2002
and to market pressure on pricing.
We license our software to our clients using two types of software licenses,
perpetual and term. Generally, perpetual software licenses allow our customers a
perpetual right to run our software on hardware up to a licensed aggregate MIPS
(Millions of Instructions Per Second) capacity. Term licenses allow our
customers a right to run our software for a limited period of time on hardware
up to a licensed aggregate MIPS capacity. Also, our customers purchase
maintenance services that provide technical support and advice, including
problem resolution services and assistance in product installation, error
corrections and any product enhancements released during the maintenance period.
Furthermore, based on client needs, we allow our clients the option to license
additional software and purchase multiple years of maintenance in a single
transaction (multi-year transactions). In support of these multi-year
transactions, we allow extended payment terms to qualifying customers.
To recognize revenue for these multi-year transactions the contract price is
allocated between maintenance revenue and license revenue. All license revenue
associated with perpetual license agreements 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 and there are no
known problems with respect to payment. License revenue associated with term
transactions or with transactions that include an option to exchange or select
products in the future is deferred and recognized over the term of the
agreement. 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 revenue associated
with all sales is deferred and is recognized over the applicable maintenance
period.
16
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):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- -----------------------------
2002 2001* 2002 2001*
------------- ------------- ------------- -------------
United States $ 112,725 $ 124,992 $ 210,913 $ 250,291
Europe and Africa 56,471 51,395 105,066 108,137
Other international operations 20,860 20,158 36,924 44,529
------------- ------------- ------------- -------------
Total products revenue $ 190,056 $ 196,545 $ 352,903 $ 402,957
============= ============= ============== =============
* Reclassified to conform to the September 2002 presentation.
PRODUCTS CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- -----------------------------
2002 2001* 2002 2001*
------------- ------------- ------------- -------------
Revenue $ 190,056 $ 196,545 $ 352,903 $ 402,957
Expenses 111,312 118,509 216,914 240,375
------------- ------------- ------------- -------------
Products contribution $ 78,744 $ 78,036 $ 135,989 $ 162,582
============= ============= ============== =============
* Reclassified to conform to the September 2002 presentation as described in
the Results of Operations section of Item 2.
The products segment generated contribution margins of 41.4% and 39.7% during
the second quarter of 2003 and 2002, respectively, and 38.5% and 40.3% during
the first six months of 2003 and 2002, respectively. Products expenses include
cost of software license fees, technology development and support costs, and
sales and marketing expenses. The increase in contribution margin during the
second quarter of 2003 was primarily a result of the increase in software
license revenue and decreases in costs of products as described below. The
decrease in contribution margin for the first six months of 2003 was primarily a
result of the decrease in software product revenue.
Cost of license fees includes amortization of capitalized software, the cost of
preparing and disseminating products to customers and the cost of author
royalties. The decrease in these costs in the second quarter and for the first
six months of 2003 was due primarily to decreased amortization of purchased
software, decreased salaries and benefits and decreased printing costs, offset
in part by increased author royalties. As a percentage of software license fees,
cost of software license fees were 8.8% and 9.7% in the second quarter of 2003
and 2002, respectively, and 10.6% and 9.4% in the first six months of 2003 and
2002, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology
17
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
initiatives are also included here. The decrease in these costs in the second
quarter of 2003 was primarily attributable to reduced travel costs, decreased
software maintenance expenses, and decreased reliance on outside consultants,
offset, in part, by increases in employee benefits, primarily health insurance.
The decrease in these costs in the first six months of 2003 was primarily
attributable to reduced salaries and benefits, reduced travel costs, decreases
in hardware and software costs and decreased reliance on outside consultants. As
a percentage of product revenue, costs of technology development and support
were 20.4% and 20.9% in the second quarter of 2003 and 2002, respectively, and
20.0% and 20.5% in the first six months of 2003 and 2002, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total research and
development expenditures for the second quarter of 2003 decreased $2.6 million,
or 5.9%, to $41.4 million from $44.0 million in the second quarter of 2002 and
for the first six months of 2003 decreased $12.6 million, or 14.2%, to $76.2
million from $88.8 million in the first six months of 2002.
Though we continue to place significant emphasis on direct sales through our own
sales force, we also market our products through indirect channels. Sales and
marketing costs consist primarily of personnel related costs associated with
products direct sales and sales support, marketing for all Company offerings,
and personnel related costs associated with new sales initiatives. The decrease
in sales and marketing costs in the second quarter and for the first six months
of 2003 was primarily attributable to decreased salaries and benefits, decreased
travel expenses and reduced costs associated with marketing events. As a
percentage of license fees, sales and marketing costs were 74.5% and 79.5% in
the second quarter of 2003 and 2002, respectively, and 90.9% and 77.0% in the
first six months of 2003 and 2002, respectively.
PROFESSIONAL SERVICES
REVENUE
We offer 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 decreased
$63.3 million or 27.4% during the second quarter of 2003 to $167.9 million
compared to $231.2 million in the second quarter of 2002, and decreased $123.6
million or 26.0% during the first six months of 2003 to $351.7 million from
$475.3 million in the first six months of 2002. The decrease in revenue for 2003
was due, primarily, to a reduction in customer demand for professional services,
the January 2002 assignment of our prime contract with a client to a company in
which we have a minority equity investment, and to a lesser extent, the transfer
of our engineering business to an unrelated third party in December 2001.
Professional services revenue was further negatively impacted by the closing of
certain underperforming branch offices associated with the restructuring
discussed below. In total, these changes reduced professional services revenue
$46.5 million during the second quarter of 2003 and $90.8 million during the
first six months of 2003 compared to the same periods in the prior year.
18
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001* 2002 2001*
-------- -------- -------- --------
United States $150,792 $207,313 $317,592 $426,608
Europe and Africa 16,550 23,105 32,850 46,924
Other international operations 596 798 1,248 1,747
-------- -------- -------- --------
Total professional services revenue $167,938 $231,216 $351,690 $475,279
======== ======== ======== ========
* Reclassified to conform to the September 2002 presentation as described in
the Results of Operations section of Item 2.
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001* 2002 2001*
-------- -------- -------- --------
Revenue $167,938 $231,216 $351,690 $475,279
Expenses 152,365 212,519 319,734 428,605
-------- -------- -------- --------
Professional services contribution $ 15,573 $ 18,697 $ 31,956 $ 46,674
======== ======== ======== ========
* Reclassified to conform to the September 2002 presentation as described in
the Results of Operations section of Item 2.
During the second quarter of 2003, the professional services segment generated a
contribution margin of 9.3%, compared to 8.1% during the second quarter of 2002.
The professional services contribution margin was 9.1% and 9.8% for the first
six months of 2003 and 2002, respectively. The increase in professional services
margin in the second quarter of 2003 is primarily a result of the restructuring
and other changes discussed in the revenue section above. The professional
services margin for the first six months of 2003 is fairly consistent with the
margin in the prior year. We expect some negative pressure on the contribution
margin during the third quarter due to the impact of client closures during the
holidays.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. The decrease in these costs in the second quarter and first six
months of 2003 is due, primarily, to reductions in staff associated with the
restructuring, resulting in lower salaries and benefits, and decreased use of
subcontractors for special services. The professional billable staff decreased
1,987 people to 5,423 people as of September 30, 2002 from 7,410 people at
September 30, 2001.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist of all other costs associated with
the operations and administration of the Company. These costs include the
corporate executive, finance, human resources, legal and corporate
communications departments. In addition, administrative and general costs
include all facility-related costs, such as rent, maintenance, utilities, etc,
associated with our local sales and professional services offices.
Administrative and general expenses decreased $3.1 million, or 6.1% during the
second quarter of 2003 to $46.9 million
19
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
from $50.0 million during the second quarter of 2002, and decreased $10.0
million or 9.8% during the first six months of 2003 to $91.7 million from $101.7
million in the first six months of 2002. The decrease in administrative and
general expenses was primarily attributable to decreased building rent and
decreased salaries resulting from the restructuring discussed below.
Interest and investment income for the second quarter of 2003 was $7.1 million
compared to $7.2 million in the second quarter of 2002 and for the first six
months of 2003 interest and investment income was $13.8 million compared to
$14.2 million in the first six months of 2002. The decrease was due to reduced
interest related to customers' deferred installment receivable balances which
were lower in total and which yielded lower average interest rates than in the
prior year. Interest and other expense includes amortization of the initial
financing fees and fees associated with the unutilized balance of the Senior
Credit Facility (the credit facility) discussed in the Liquidity and Capital
Resources section below and was $3.2 million in the second quarter of 2003
compared to $1.4 million in the second quarter of 2002, and for the first six
months of 2003 was $4.7 million compared to $4.0 million for the first six
months of 2002. The increase in interest and other expense was primarily
attributable to accelerated amortization of the initial financing fees
associated with the cancellation of the credit facility discussed below.
We account for income taxes using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax provision was $17.4 million in the second quarter of 2003 and $29.0 million
for the first six months of 2003, which represents an effective tax rate of 34%.
This compares to an income tax provision of $16.2 million in the second quarter
of 2002 and $37.3 million for the first six months of 2002, which represents an
effective tax rate of 38%. The decrease in the effective tax rate is a result of
no longer amortizing goodwill for financial statement purposes. The majority of
the goodwill amortization in the prior year was not deductible for income tax
purposes.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability in the future by better aligning cost
structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide will be terminated
as a result of the reorganization. The restructuring is proceeding as planned.
As of October 31, 2002, 1,528 employees had been terminated as a result of the
reorganization.
20
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table summarizes the restructuring charge taken in 2002 (in
thousands):
Charges against Charges against
Balance at the accrual during the accrual during Balance at
March 31, the quarter ended the quarter ended September 30,
2002 June 30, 2002 September 30, 2002 2002
---------- ------------------ ------------------ ----------
Employee termination benefits $ 18,459 $ 11,259 $ 3,877 $ 3,323
Facilities costs (primarily lease
abandonments) (1) 25,665 2,774 2,264 20,627
Legal, consulting and
outplacement costs 1,299 521 51 727
Other 278 195 20 63
---------- ------------------ ------------------ ----------
Total restructuring accrual $ 45,701 $ 14,749 $ 6,212 $ 24,740
========== ================== ================== ==========
1) Lease obligations will end in March of 2009
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Our assumptions and
estimates were based on the facts and circumstances known at September 30, 2002;
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. The accounting policies discussed in Item 7 of our
Annual Report on Form 10-K are considered by management to be the most important
to an understanding of our financial statements, because their application
places the most significant demands on management's judgment and estimates about
the effect of matters that are inherently uncertain. These policies are also
discussed in note 1 of the Notes to Consolidated Financial Statements included
in Item 8 of that report. There have been no material changes to that
information during the second quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, cash and investments totaled approximately $502.1
million. During the first six months of 2003 and 2002, we generated $169.3
million and $171.1 million, respectively, in operating cash flow. During these
periods, we had capital expenditures that included property and equipment,
capitalized research and software development, and purchased software of $94.5
million and $38.5 million, respectively.
As of September 30, 2002 and 2001, there was no long-term debt. On August 26,
2002, our credit facility was reduced to $200 million from $500 million. Since
we did not anticipate utilizing the credit facility before its expiration in
August 2003, the agreement was terminated. The termination was effective
November 4, 2002.
21
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
We believe available cash resources together with cash flow from operations,
will be sufficient to meet our cash needs for the foreseeable future.
Although there were no acquisitions during the first six months of 2003, we
continue to evaluate business acquisition opportunities that fit our strategic
plans.
We are building a new corporate headquarters building with a current estimated
cost of $350 million for the building and an estimated $50 million for furniture
and fixtures. Cash outlays will have no impact on the results of operations
until the building is ready for occupancy. When fully occupied in calendar 2003,
the depreciation will result in an annual expense of approximately $14 to $17
million. This will be partially offset by the savings realized by the
consolidation of offices. Capital expenditures to date total $193.6 million.
Cash outlays for the next twelve months are expected to be approximately $206.4
million. Currently, we intend to fund the building using cash on hand and cash
flow from operations.
22
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed primarily to market risks associated with movements in
interest rates and foreign currency exchange rates. There have been no material
changes to foreign exchange risk management strategy or marketable securities
subsequent to March 31, 2002. Therefore, the market risks remain substantially
unchanged from those described in the Company's Annual Report on Form 10-K for
the fiscal year ending March 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to cause the material information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
23
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to two class action proceedings filed in the United
States District Court in the Eastern District of Michigan. The Dinallo lawsuit,
case number 02-73793, was filed on September 20, 2002 and the Rosen lawsuit,
case number 02-74073, was filed on October 10, 2002. The suits were brought on
behalf of purchasers of the Company's common stock from January 1, 1999 to April
3, 2002. Principal defendants include the Company and Joseph A. Nathan, Henry A.
Jallos and Laura L. Fournier. The plaintiffs in both cases allege that the
Company failed to disclose under the securities laws its problems with the
misappropriation of its software source code by IBM, and that its material
omissions and the dissemination of materially false and misleading statements
concerning the Company's deteriorating relationship with IBM. The plaintiffs in
both cases request that the court award them money damages and expenses of
litigation, including reasonable attorney fees. The Company strongly disagrees
with the allegations and intends to vigorously defend the lawsuits. At this
time, the Company's legal counsel is preparing a responsive pleading to each
lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on August 27, 2002 at the Company's
headquarters. The only matter voted upon at the meeting was the election of
shareholders. Each of the nominees was elected to hold office for one year until
the 2003 Annual Meeting of Shareholders and until their successors are elected
and qualified. The results of the voting at the meeting are as follows:
Nominee for Director Total Votes For Total Votes Withheld
- --------------------------- --------------- --------------------
Dennis W. Archer 305,767,330 8,691,456
Elizabeth A. Chappell 306,737,509 7,721,277
Elaine K. Didier 306,645,049 7,813,737
Bernard M. Goldsmith 307,820,892 6,637,894
William O. Grabe 307,754,559 6,704,227
William R. Halling 306,450,684 8,008,102
Peter Karmanos, Jr. 261,193,962 53,264,824
Joseph A. Nathan 306,525,707 7,933,079
W. James Prowse 306,646,674 7,812,112
G. Scott Romney 305,802,886 8,655,900
Thomas Thewes 305,845,714 8,613,072
Lowell P. Weicker, Jr. 306,238,331 8,220,455
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 375,890,681. The total number of
shares voted at the Annual Meeting was 314,458,786 or 83.657% of the shares
outstanding and eligible to vote.
24
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 1, 2002, the Company appointed three independent board members to its
Board of Directors. Joining the board are Gurminder S. Bedi, a retired Ford
Motor Company executive; Faye Alexander Nelson, Vice President of Government and
Civic Affairs at Wayne State University; and Glenda D. Price, President of
Marygrove College. Leaving the Company's board is Bernard M. Goldsmith, Managing
Director of Updata Capital, Inc. who resigned for personal reasons. Two inside
board members, Thomas Thewes and Joseph A. Nathan, vacated their seats to
support the Company's goal of creating a more independent Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description of Document
15 Independent Accountants' Awareness Letter
99.1 Certification by the Chief Executive Officer of this
Form 10-Q of Compuware Corporation for the quarter ended
September 30, 2002 pursuant to 18 U.S.C. Section 1350
99.2 Certification by the Chief Financial Officer of this
Form 10-Q of Compuware Corporation for the quarter ended
September 30, 2002 pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
None
25
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 12, 2002 By:/s/ Joseph A. Nathan
----------------- ---------------------
Joseph A. Nathan
President
(duly authorized officer)
Date: November 12, 2002 By: /s/ Laura L. Fournier
----------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
26
CERTIFICATION
I, Peter Karmanos, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Compuware
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Peter Karmanos, Jr.
- -----------------------
Peter Karmanos, Jr.
Chief Executive Officer
CERTIFICATION
I, Laura L. Fournier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Compuware
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Laura L. Fournier
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Laura L. Fournier
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Document
15 Independent Accountants' Awareness Letter
99.1 Certification by the Chief Executive Officer of this
Form 10-Q of Compuware Corporation for the quarter
ended September 30, 2002 pursuant to 18 U.S.C. Section
1350
99.2 Certification by the Chief Financial Officer of this
Form 10-Q of Compuware Corporation for the quarter
ended September 30, 2002 pursuant to 18 U.S.C. Section
1350