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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MI 48334-2564
-----------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (248) 737-7300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
PREFERRED STOCK
PURCHASE RIGHTS
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2002, the last business day of the registrant's
most recently completed second fiscal quarter, was $903,217,194, based upon
the closing sales price of the common stock on that date of $3.05 as reported on
the Nasdaq Stock Market. For purposes of this computation, all officers,
directors and 10% beneficial owners of the registrant are assumed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors and beneficial owners are, in fact, affiliates of the
registrant.
There were 382,561,037 shares of $.01 par value common stock outstanding as of
June 2, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2003 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
1
COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Item
Number Page
- ------ ----
PART I
1. Business 3
Executive Officers of the Registrant 12
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 15
6. Selected Consolidated Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosure about Market Risk 28
8. Consolidated Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 54
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
14. Controls and Procedures 55
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 56
2
PART I
ITEM 1
BUSINESS
We provide software products and professional services designed to increase the
productivity of the information technology departments of businesses worldwide.
In the early years of our company, we focused on offering professional services
and mainframe products in the testing and implementation environment where we
gained extensive experience and established long-term customer relationships.
Over the past several years, we have expanded our presence into the distributed
and web systems markets, offering products and professional services in the
application development and integration, quality assurance, production readiness
and production availability areas of the application life cycle.
We were incorporated in Michigan in 1973. Our executive offices are currently
located at 31440 Northwestern Highway, Farmington Hills, Michigan 48334-2564,
and our telephone number is (248) 737-7300. Our executive offices are expected
to move to our new headquarters during the next two months. The new executive
offices will be at One Campus Martius, Detroit, Michigan 48226, and our new
telephone number will be (313) 227-7300.
We operate in two business segments in the software industry: products and
services. See Note 13 of Notes to Consolidated Financial Statements.
The following discussion may contain certain forward-looking statements within
the meaning of the federal securities laws. Numerous important factors,
including those discussed under Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations under the caption Forward-Looking
Statements could cause actual results to differ materially from those indicated
by such forward-looking statements.
Our Internet address is www.compuware.com. We make available, free of charge on
the web site, copies of reports we file with the Securities and Exchange
Commission as soon as reasonably practicable after we electronically file such
reports. The information contained on our web site should not be considered part
of this report.
OUR BUSINESS STRATEGY
Our focus is to provide products and professional services to improve the
productivity of mainframe, distributed and web developers, testers and
operations staff in businesses worldwide. Companies with information technology
departments invest substantial resources to build and maintain large, complex,
mission-critical applications. As a result, this target market can benefit most
from our products and services offerings.
From our perspective, the application life cycle includes four primary phases:
1) the application development phase in which software source code is created,
integrated with existing applications and modified over time; 2) the testing
phase, in which application software is executed, debugged, tested and
maintained in a series of repetitive, ongoing cycles for the life of the
application; 3) the performance testing phase, when an application is tested
under simulated production conditions to ensure it will function well once
implemented; and 4) the production phase in which the performance and
availability of operating systems, databases, servers, applications and networks
is monitored and managed.
3
On March 31, 2002, we began to operate under a geography-based organizational
structure. Our products and professional services organizations are now combined
under one geographic leadership structure that spans seven regions, three in
North America and four internationally.
PRODUCTS
The following table sets forth, for the periods indicated, a breakdown of
revenue by product line and the percentage of total revenues for each line (in
thousands):
YEAR ENDED MARCH 31, PERCENTAGE OF TOTAL REVENUES
------------------------------ ----------------------------
PRODUCT REVENUE 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
File-AID $182,224 $230,820 $259,835 13.2% 13.3% 12.8%
Abend-AID 155,769 186,827 211,375 11.3 10.7 10.4
XPEDITER 110,880 136,848 142,123 8.1 7.9 7.0
QA Center Mainframe 24,527 30,880 45,969 1.8 1.8 2.2
STROBE 80,080 101,911 103,476 5.8 5.8 5.1
-------- -------- -------- ---- ---- ----
Total Mainframe Revenue 553,480 687,286 762,778 40.2 39.5 37.5
-------- -------- -------- ---- ---- ----
UNIFACE and Optimal 42,283 43,353 43,083 3.1 2.5 2.1
File-AID/Client Server 4,400 5,303 8,911 0.3 0.3 0.4
DevPartner 24,290 26,722 35,944 1.8 1.5 1.8
QA Center Distributed 30,291 31,221 37,389 2.2 1.8 1.8
Vantage 53,152 57,497 64,001 3.9 3.3 3.2
-------- -------- -------- ---- ---- ----
Total Distributed Product Revenue 154,416 164,096 189,328 11.3 9.4 9.3
-------- -------- -------- ---- ---- ----
Total Product Revenue $707,896 $851,382 $952,106 51.5% 48.9% 46.8%
======== ======== ======== ==== ==== ====
COMPUWARE SOFTWARE PRODUCTS AND THE APPLICATION LIFE CYCLE
Our software products enhance every step in the application life cycle, from
application development and quality assurance to production readiness and
availability, for mainframe and distributed platforms.
APPLICATION DEVELOPMENT AND INTEGRATION--Customers use our Abend-AID,
DevPartner, File-AID, Optimal, QACenter, STROBE, UNIFACE, Vantage and XPEDITER
products to achieve productivity gains.
QUALITY ASSURANCE--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
XPEDITER tools are used to automate the multiple, complex steps of thorough
application testing.
PRODUCTION READINESS--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
Vantage product lines are used to ready applications for production.
PRODUCTION AVAILABILITY--The Abend-AID, File-AID, QACenter, STROBE, Vantage and
XPEDITER product lines are used to find and fix application, server and/or
network performance problems before they affect end users.
4
MAINFRAME MARKET
We believe that the market for mainframe products is well defined, and that our
mainframe products will continue to be in demand as the drive to extend legacy
applications into distributed environments continues to emphasize the need for
reliable, high-volume servers.
We intend to remain focused on developing, marketing and supporting high quality
software tools both to support traditional uses of the mainframe and to enhance
the efforts of IT staff who are working to web-enable their legacy applications
portfolio. We believe that our longstanding customer relationships and brand
equity in this arena will help us continue to improve the benefits our customers
receive from our mainframe products. In addition, we continue to pursue product
integration opportunities to increase the value that our customers obtain from
the use of our products, to enhance the synergy among the functional groups
working on key application projects and to make the entire process more
streamlined, automated and repeatable.
MAINFRAME SOFTWARE PRODUCTS
Our mainframe products focus on improving the productivity of developers and
analysts in analysis, unit testing, functional testing, performance testing,
defect removal, fault management, file and data management and application
performance management in the OS/390 and z/OS series environments.
Our mainframe products are functionally rich, are focused on user needs and
require minimal user training. We strive to ensure a common look and feel across
our products and emphasize ease of use in all aspects of product design and
functionality. Most products can be used immediately without modification of
customer development practices and standards and can be quickly integrated into
day-to-day testing, debugging and maintenance activities.
Our mainframe products are grouped into the following five product lines:
FILE-AID PRODUCTS
File-AID products provide a consistent, familiar and secure method for IT
professionals to access, analyze, edit, compare, move and transform data across
all strategic environments. File-AID is used to quickly resolve production data
problems and manage ongoing changes to data and databases at any stage of the
application life cycle.
ABEND-AID PRODUCTS
Abend-AID products assist IT professionals to quickly diagnose and resolve
application and system failures. The products automatically collect program and
environmental information, analyze the information and present diagnostic and
supporting data in a way that can be easily understood by all levels of IT
staff.
XPEDITER PRODUCTS
XPEDITER interactive debugging products help developers integrate enterprise
applications, build new applications and web-enable legacy ones, satisfying
corporate scalability, reliability and security requirements. XPEDITER tools
deliver powerful analysis and testing capabilities across multiple environments,
helping developers test more accurately and reliably, in less time.
QACENTER MAINFRAME PRODUCTS
QACenter Mainframe products deliver complete testing functionality for
automating test creation and execution, test results analysis and documentation.
The products simulate the on-line systems environment, allowing programmers to
test these applications under production conditions without requiring actual
users at terminals. Its powerful functions and features enhance unit,
concurrency, integration, migration, capacity and stress testing.
5
STROBE PRODUCTS
Our STROBE MVS Application Performance Management and iSTROBE Application
Performance Analysis System product lines work together to help clients locate
and eliminate sources of excessive resource demands during every phase of an
application's life cycle. Features in both product lines support an extensive
array of subsystems, databases and languages.
DISTRIBUTED SYSTEMS MARKET
In contrast to the mainframe market, the distributed systems market is
characterized by multiple hardware, software and network configurations.
Combined with the more recent push to web-enable applications, IT organizations
find themselves under increasing pressure to rapidly create reliable,
top-performing applications, despite an exponential increase in environment
complexity. We believe our distributed and web products address these challenges
and that we are well positioned to market distributed development, integration,
functional and performance testing and application management software to our
target markets.
DISTRIBUTED SOFTWARE PRODUCTS
Our distributed products focus on improving the productivity of the entire
development team, including architects, developers, testers and operating
analysts. These products support requirements management, application
development, unit and functional testing and application performance analysis.
Our distributed products also help the development team in application profiling
and rapid new application rollout, as well as in managing server and network
application availability on multiple platforms including Microsoft Windows and
Microsoft .NET, J2EE, AIX, Solaris and DC2000.
Our distributed systems software products are grouped into six product lines:
UNIFACE, Optimal, File-AID/CS, DevPartner, QACenter and Vantage.
UNIFACE AND OPTIMAL PRODUCTS
UNIFACE, our distributed systems application development product, is designed to
assist software developers in the creation, integration, deployment and
maintenance of complex distributed applications. UNIFACE enables software
developers to create applications that are not tied to any specific hardware
platform, operating system, database management system or graphical user
interface. Application objects are captured in a central repository, which
permits their reuse in the development of technology-independent applications
and allows for easier management and maintenance of applications. In addition,
UNIFACE insulates application development and deployment from the individual
technical components that comprise a computing environment. This reduces
development and maintenance costs and allows applications to be developed
rapidly using existing, proven legacy code.
OptimalJ is our Java development product. OptimalJ accelerates application
delivery by simplifying Java development, allowing developers of varying
experience levels to rapidly produce reliable J2EE business applications.
OptimalJ generates complete, working applications directly from a visual model,
using sophisticated patterns to implement accepted best practices for coding to
J2EE specifications.
OptimalView is our business integration portal product. As a packaged, web-based
portal application, OptimalView enables customers to quickly implement an
integrating platform to help bring together the diverse array of custom-built
and packaged applications and web services that many companies have assembled
over a period of time. OptimalView brings these applications together in a
single desktop portal with powerful integration and administrative functions,
making it possible for a customer's IT department to effectively manage the
"home-base" desktop of every employee in its organization.
OptimalFlow is our business process automation and business process modeling
product that automates the execution of business tasks running within and across
an organization. OptimalFlow helps solution architects model and automate
business processes and tasks by aligning and
6
connecting the process to the application environment for improved workflow
execution. This creates a more efficient and effective organization that
benefits from faster process-cycle times, improved time-to-market, greater cost
effectiveness and better customer service through improved response times.
FILE-AID/CLIENT SERVER
File-AID/Client Server is a comprehensive test data management tool designed to
help developers, QA teams and DBAs work efficiently with data as they develop,
test and support distributed applications. With File-AID/CS application
developers can extract, load, copy, convert, transform, compare and edit all
their data without having to be an expert in each database environment. All data
related tasks are performed through an easy to use interface eliminating the
need to write programs or scripts, code SQL or use multiple utilities.
DEVPARTNER PRODUCTS
DevPartner Studio helps developers build reliable, high-performance applications
and components for Microsoft .NET and for native Windows by quickly solving
problems with .NET migration, legacy integration, locating errors in application
code and memory, tuning runtime performance across distributed applications, and
assuring thorough testing.
DevPartner Studio Enterprise Edition combines powerful error detection,
performance, memory, coverage and requirements management with comprehensive
project tracking, defect management, task management and workflow automation.
DevPartner Studio Enterprise Edition supports development of high-performing
applications and components for Microsoft .NET and for native Windows.
DevPartner Java Edition pinpoints runtime errors, memory problems and
performance bottlenecks and identifies code coverage/stability across all tiers
of a Java application environment. Using DevPartner Java Edition, developers and
testers can quickly prioritize and focus on solving the complexity, quality and
performance problems associated with Java development.
DriverStudio products help developers create code that enables operating systems
to communicate with peripheral devices such as printers, scanners and the
Internet. The DriverStudio product line includes DriverStudio and SoftICE Driver
Suite.
DevPartnerDB simplifies rapid, high-quality development by helping developers
debug stored procedures and tune SQL statements. DevPartnerDB has specific
editions that support Oracle, Microsoft SQL Server and Sybase.
QACENTER DISTRIBUTED PRODUCTS
QACenter delivers a unique offering of automated testing products and solutions
designed to validate applications running in the full spectrum of environments,
isolate and correct problems and ensure that systems can handle anticipated load
before applications go live. The QACenter products include:
QARun and TestPartner--Functional test automation tools that allow organizations
to validate business-critical applications whether distributed, e-commerce
(web/Java) or CRM/ERP.
QADirector--Provides the framework for managing the entire testing process from
design through execution to analysis.
TrackRecord--A defect management solution that serves as a central repository
and communication hub for all development-related activities and test-related
activities and data.
Reconcile--An enterprise-wide requirements management system. Reconcile allows
project teams to create, change, track, evaluate and report project
requirements.
QALoad--An automated load testing solution for distributed, ERP and e-commerce
applications.
7
VANTAGE PRODUCTS
Vantage products allow IT professionals to manage, analyze and improve the
performance of distributed applications in a variety of environments. The
Vantage suite also helps IT organizations plan for and manage new distributed
application rollout. Vantage products include:
ClientVantage--Monitors the performance and availability of critical business
applications at the point of delivery--the client user interface.
NetworkVantage--Shows how users and applications consume critical shared network
resources; provides the information necessary to troubleshoot problems related
to unplanned use, unauthorized use, or poor configuration of the network;
supports WAN bandwidth sizing decisions; and provides historical trending data
for use in network growth management.
ServerVantage--Provides monitoring, alerting, troubleshooting and automated
response throughout the server infrastructure.
VantageView--Provides an overall enterprise view of application performance and
availability as well as access to the underlying performance metrics.
Application Vantage--Pinpoints the source of poor transaction performance.
Provides real-time application performance troubleshooting, analyzing the
interaction between the application, the network and the supporting server
infrastructure. Application Vantage is also integrated with the ClientVantage
product for 24-hour a day, seven days a week exception-based performance
analysis.
Application Expert--Helps ensure successful deployment of new applications.
Analyzes transactions before applications are deployed and predicts how they
will perform under production conditions--helping to diagnose where potential
problems will occur. The WAN provisioning module determines the aggregate
network loading from a defined population of users and application workloads to
permit the "rightsizing" of expensive WAN links.
Predictor--Predicts enterprise network behavior based on various scenarios such
as changes in application mix, transaction volume, device outages and deployment
of additional bandwidth.
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
We believe that effective support of our customers and products during both the
trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide high levels of customer
support and product upgrades to assure a continuing high level of customer
satisfaction. In fiscal year 2003, we continued to experience a high customer
maintenance renewal rate.
All customers who subscribe to our maintenance and support services are entitled
to receive technical support and advice, including problem resolution services
and assistance in product installation, error corrections and any product
enhancements released by us during the maintenance period. Maintenance and
support services are provided online, through our FrontLine technical support
web site, by telephone access to technical personnel located in Detroit,
Michigan, Cambridge, Massachusetts, La Jolla, California, Nashua, New Hampshire,
and in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee based on licensed or list price of the product. They also have the
option of committing to maintenance for longer terms, generally up to five years
on a contractual basis. For fiscal years 2003, 2002 and 2001, maintenance fees
represented approximately 30.0%, 24.9% and 22.4%, respectively, of our total
revenues.
8
TECHNOLOGY DEVELOPMENT AND SUPPORT
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 initiatives are also
included here.
We have been successful in developing acquired products and technologies into
marketable software for our distribution channels. We believe that our future
growth lies in part in continuing to identify promising technologies from all
potential sources, including independent software developers, customers, small
startup companies and internal research and development.
Product development is performed primarily at our headquarters in Detroit,
Michigan; and at our offices in Amsterdam, The Netherlands; Cambridge,
Massachusetts; La Jolla, California; and Nashua, New Hampshire.
Total technology development and support costs were $154.7 million, $177.6
million and $200.7 million during fiscal 2003, 2002 and 2001, respectively, of
which $11.4 million, $13.3 million and $13.5 million, respectively, were
capitalized.
Our software products are distributed as object code on standard magnetic
cartridges, diskettes and CDs, together with printed documentation. We also
distribute product electronically. We purchase cartridges, diskettes, CDs and
documentation printing from outside vendors. The product duplication, packaging
and distribution to our customers is currently performed at our production
center in West Bloomfield, Michigan.
PROFESSIONAL SERVICES
We offer a broad range of IT staff supplementation services for distributed
systems and mainframe environments. Our offerings include IT technical staffing
and project assistance, e-business and wireless development, NearShore
development services and ERP implementation. We also provide application life
cycle management assistance for outsourcing customers' application development
and maintenance activities as well as services for Compuware-owned products that
enhance their value.
We believe that the demand for professional services will continue to be driven
by the need to control costs, the significant level of resources necessary to
support complex and rapidly changing hardware, software and communication
technologies and the need for a larger technical staff for ongoing maintenance.
Our business approach to professional services delivery emphasizes hiring
experienced staff, extensive ongoing training, high staff utilization and
immediate, productive deployment of new personnel at client accounts.
Our objective in the professional services division is to create long term
relationships with customers in which our professional staff joins with the
customer's information technology organization to plan, design, program,
implement and maintain technology-based solutions that achieve customer business
goals. Typically, the professional services staff is integrated with the
customer's development team on a specific application or project. Professional
services staff work primarily at customer sites or at our professional services
offices located throughout North America and Europe. We also have professional
services operations in other international locations. In addition, Compuware
offers a NearShore Development Center that serves customers looking for
flexible, cost-effective and high-quality application services delivered
remotely from our facility in Montreal.
9
COMPUWARE APPLICATION RELIABILITY SOLUTION (CARS)
In June 2003, we announced the availability of CARS. CARS combines our
professional service team testing professionals with a proven methodology and
our software products configured in a unique, industry-leading tools workbench
to produce a complete quality management solution. Our Application Quality
Workbench (AQW) can be used to instill discipline, automate processes and ensure
consistency and repeatability throughout the testing life cycle, resulting in
the delivery of reliable, high quality applications. CARS allows our customers'
IT organizations to leverage their core competency of developing applications.
Data gathered from the AQW can be quickly shared with developers, thereby
improving the effectiveness of their efforts.
CUSTOMERS
Our products and professional services are used by the information technology
departments of a wide variety of commercial and government organizations.
Ford Motor Company accounted for approximately 12% of our total revenues during
fiscal 2003. None of our customers accounted for 10% or more of our total
revenues during fiscal 2002 or 2001.
SALES AND MARKETING
We market software products primarily through a direct sales force in the United
States, Canada, Europe, Japan, Asia/Pacific, Brazil, Mexico and South Africa as
well as through independent distributors giving us a presence in 54 countries.
We market our professional services primarily through account managers located
in offices throughout North America, Europe, Asia/Pacific and Brazil. Senior
professional services executives support branch marketing efforts by identifying
new business opportunities and making joint sales calls. This marketing
structure enables us to keep abreast of, and respond quickly to, the changing
needs of our clients and to call on the actual users of our professional
services on a regular basis.
COMPETITION
The markets for our software products are highly competitive and characterized
by continual change and improvement in technology. We consider more than 40
firms to be directly competitive with one or more of our products. These
competitors include BMC Software, Inc., Borland, Computer Associates
International, Inc., International Business Machines Corporation (IBM) and
Mercury Interactive Corporation. Some of these competitors have substantially
greater financial, marketing, recruiting and training resources than we do. The
principal competitive factors affecting the market for our software products
include: responsiveness to customer needs, functionality, performance,
reliability, ease of use, quality of customer support, vendor reputation and
price.
The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts International
Corporation, Keane, Inc. and numerous other regional and local firms in the
markets in which we have professional services offices. Several of these
competitors have substantially greater financial, marketing, recruiting and
training resources than we do. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
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We believe, based on our current market position, that we have competed
effectively in the software products and professional services marketplace.
Nevertheless, a variety of external and internal events and circumstances could
adversely affect our competitive capacity. Our ability to remain competitive
will depend, to a great extent, upon our performance in product development and
customer support. To be successful in the future, we must respond promptly and
effectively to the challenges of technological change and our competitors'
innovations by continually enhancing our own product and services offerings.
PROPRIETARY RIGHTS
We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable, perpetual licenses. Under the general
terms and conditions of our standard product license agreement, the licensed
software may be used solely for the licensee's own internal operations on
designated computers at specific sites. Under certain limited circumstances, we
may be required to make source code for our products available to our customers
under an escrow agreement, which restricts access to and use of the source code.
Although we take steps to protect our trade secrets, there can be no assurance
that misappropriation will not occur. 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.
In addition to trade secret protection, we seek to protect our software,
documentation and other written materials under copyright law, which affords
only limited protection. We also assert trademark rights in our product names.
We have been granted 21 patents and have numerous patent applications pending
for certain product technology and have plans to seek additional patents in the
future. However, because the industry is characterized by rapid technological
change, we believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more important to establishing
and maintaining a technology leadership position than the various legal
protections of our technology.
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 which could
require a partial payment to the third party upon sale of the product, or result
in costly litigation. See Item 3, Legal Proceedings, for a description of
certain pending litigation regarding proprietary rights.
11
EMPLOYEES
As of March 31, 2003, we employed 9,356 people worldwide, with 1,750 in products
sales, sales support and marketing; 1,505 in technology development and support;
5,317 in professional services and 784 in other general and administrative
functions. Only a small number of our international employees are represented by
a labor union. We have experienced no work stoppages and believe that our
relations with our employees are good. Our success will depend in part on our
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software developers,
professional services staff and sales and marketing personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers, who serve at the discretion of our Board of
Directors, are listed below:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 60 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 50 President and Chief Strategy Officer
Tommi A. White 52 Chief Operating Officer
Henry A. Jallos 54 Executive Vice President, Global Account Management
Laura L. Fournier 50 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas Costello, Jr. 49 Vice President, General Counsel and Secretary
Peter Karmanos, Jr., is a founder of the Company and has served as Chairman of
the Board since November 1978, as Chief Executive Officer since July 1987 and as
President from January 1992 through October 1994.
Joseph A. Nathan has served as President since October 1994 and as Chief
Operating Officer from October 1994 through October 2001. Mr. Nathan was
appointed Chief Strategy Officer in April 2003. From December 1990 through
October 1994, Mr. Nathan was Senior Vice President and Chief Operating Officer -
Products Division.
Tommi A. White has served as Chief Operating Officer since October 2001. Ms.
White joined Compuware in August 2001 as Executive Vice President. Before
joining Compuware, Ms. White spent nearly nine years at Kelly Services, Inc.,
most recently as Executive Vice President, Chief Administration and Technology
Officer.
Henry A. Jallos has served as Executive Vice President, Global Account
Management since October 2001 and as Executive Vice President, Products Division
from September 1998 through October 2001. From August 1994 through August 1998,
Mr. Jallos served as Senior Vice President, Worldwide Sales.
Laura L. Fournier has served as Senior Vice President, Chief Financial Officer
and Treasurer since April 1998. Ms. Fournier was Corporate Controller from June
1995 through March 1998. From February 1990 through May 1995, Ms. Fournier was
Director of Internal Audit.
12
Thomas Costello, Jr., has served as General Counsel since January 1985, Vice
President since January 1995 and Secretary since May 1995. Mr. Costello joined
Compuware in June 1984 as Assistant General Counsel.
SEGMENT INFORMATION; PAYMENT TERMS AND FOREIGN REVENUES
For a description of revenues and operating profit by segment for each of the
last three fiscal years, see Note 13 of Notes to Consolidated Financial
Statements, included in Item 8 of this report. For a description of extended
payment terms offered to some customers, see Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Software Products - Revenue. The Company's foreign operations are
subject to risks related to foreign exchange rates. For a discussion of this
risk, see Item 7A Quantitative and Qualitative Disclosure about Market Risk. For
financial information regarding geographic operations, see Note 13 of Notes to
Consolidated Financial Statements, included in Item 8 of this report.
ITEM 2. PROPERTIES
We are building a new corporate headquarters office building in the city of
Detroit which will consolidate our corporate office functions and Detroit-area
operations. As of June 2, 2003, approximately 40% of the metropolitan
Detroit-based employees have relocated to the new headquarters building. We own
the new building which is approximately 1.1 million square feet, including
approximately 60,000 square feet to be leased to third parties for retail and
related amenities. We also own a Farmington Hills, Michigan facility which is
approximately 225,000 square feet and a building in nearby West Bloomfield which
is approximately 40,000 square feet. In addition, we lease approximately 80,000
square feet in a Farmington Hills office park, as well as approximately 133,000
square feet in nearby Southfield. We intend to sell our Farmington Hills
facility once all employees have been relocated. These metropolitan Detroit
facilities house our executive offices, primary research and development lab,
principal marketing department, a professional services office, customer service
and support teams and our production and distribution facilities.
We lease approximately 80 professional services and sales offices in 25
countries, including four remote product research and development facilities.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 2002, we filed suit in the United States District Court for the
Eastern District of Michigan against IBM alleging, among other things,
infringement of our copyrights and misappropriation of our trade secrets with
respect to our mainframe software tools, intentional interference with
contractual relations with our employees and former employees, anti-trust law
violations, tortious interference with our economic expectancy and various state
law violations. We claim that (i) IBM has copied and misappropriated portions of
our mainframe software tools and has wrongfully used our technology to develop
competing products; (ii) IBM made false representations regarding our software
products in violation of the Lanham Act; and (iii) IBM is using its monopoly
power to engage in unlawful tying arrangements and is subverting competition on
the merits by denying critical information to us and others in an effort to
undermine our development efforts. The suit seeks injunctive relief and
unspecified monetary damages, among other things, from IBM. While we currently
believe we ultimately will benefit from this litigation, the impact of this
action on our business relationship with IBM and our liquidity, financial
position and results of operations are not determinable at the present time.
On January 21, 2003, the Company filed suit against Moody's Investors Services,
Inc. in the United States District Court in the Eastern District of Michigan
alleging breach of contract, defamation, silent fraud, and violation of the
Investment Advisors Act. The Company claims, among other things, that Moody's
failed to deal fairly and did not operate in good faith when it lowered the
Company's credit
13
rating two full levels on August 13, 2002. The suit seeks $245,000 in
compensatory damages (the total fees paid to Moody's during the course of the
business relationship), punitive damages, the costs related to the litigation
and reasonable attorney fees.
The Company is a party to a consolidated class action proceeding filed in the
United States District Court for the Eastern District of Michigan. The original
lawsuits were filed on September 20, 2002 and October 10, 2002 respectively. On
May 1, 2003, the cases were consolidated. The matter is now titled In re
Compuware Securities Litigation. The suit was 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 Peter Karmanos, Jr., Joseph A. Nathan and
Elizabeth Chappell. The plaintiffs allege that the Company failed to disclose
under the securities laws its problems with the misappropriation of its software
source code by IBM. The plaintiffs further allege that the Company omitted
and/or disseminated materially false and misleading statements concerning its
deteriorating relationship with IBM. The plaintiffs request that the court award
them monetary damages and expenses of litigation, including reasonable attorneys
fees. The Company strongly disagrees with the allegations and intends to
vigorously defend against the lawsuit. At this time, the Company's legal counsel
is preparing a responsive pleading to the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq Stock Market's National Market under
the symbol CPWR. As of June 2, 2003, there were approximately 7,222 shareholders
of record of our common stock. We have not paid any cash dividends on our common
stock since fiscal 1986. The following table sets forth the range of high and
low trading sale prices for our common stock for the periods indicated, all as
reported by Nasdaq.
FISCAL YEAR ENDED MARCH 31, 2003 HIGH LOW
Fourth quarter $ 5.06 $ 3.22
Third quarter 5.78 2.75
Second quarter 5.73 2.35
First quarter 12.49 5.50
FISCAL YEAR ENDED MARCH 31, 2002 HIGH LOW
Fourth quarter $14.00 $10.68
Third quarter 13.68 7.46
Second quarter 14.50 7.68
First quarter 14.00 8.50
The Company has several stock option plans pursuant to which it grants
performance-based stock options to employees, officers, and directors, as well
as an Employee Stock Ownership Plan (ESOP), an Employee Stock Purchase Plan, and
a Replacement Stock Option Award Program. For more information about our equity
compensation plans, see Note 15 of Notes to Consolidated Financial Statements,
included in Item 8 of this report.
The following table sets forth certain information, with respect to our equity
compensation plans at March 31, 2003 (shares in thousands):
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
--------------------- ------------------- ---------------------
Equity compensation plans
approved by security holders 39,350 $13.44 7,019
Equity compensation plans not
approved by security holders 24,883 9.07 24,577
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations and balance sheet data presented below are
derived from our audited consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements and notes thereto
and Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 295,720 $ 417,631 $ 495,572 $ 819,247 $ 683,354
Maintenance fees 412,176 433,751 456,534 432,707 334,371
Professional services fees 667,444 889,162 1,083,050 996,120 636,636
------------ ------------ ------------ ------------ ------------
Total revenues 1,375,340 1,740,544 2,035,156 2,248,074 1,654,361
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of software license fees 30,740 34,102 37,885 28,835 26,578
Cost of professional services 611,644 840,149 973,854 877,453 466,996
Technology development and support 143,289 164,280 187,155 154,086 120,951
Sales and marketing 264,012 294,496 351,214 377,920 344,214
Administrative and general 191,131 207,166 250,324 214,961 185,817
Goodwill amortization and impairment (1 and 2) 426,344 42,092 25,586 4,817
Restructuring costs (2) 46,930
Purchased research and development 17,900 4,350
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,240,816 2,013,467 1,842,524 1,696,741 1,153,723
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 134,524 (272,923) 192,632 551,333 500,638
Interest and investment income (expense), net 21,691 22,076 (563) 10,443 29,403
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 156,215 (250,847) 192,069 561,776 530,041
Income tax provision (benefit) 53,113 (5,592) 72,986 209,800 180,178
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 103,102 $ (245,255) $ 119,083 $ 351,976 $ 349,863
============ ============ ============ ============ ============
Basic earnings (loss) per share (3) $ 0.27 $ (0.66) $ 0.33 $ 0.98 $ 0.95
Diluted earnings (loss) per share (3) 0.27 (0.66) 0.32 0.91 0.87
Shares used in computing net income (loss) per
share:
Basic earnings computation 377,028 371,786 365,192 358,560 366,734
Diluted earnings computation 378,440 371,786 372,809 384,691 402,036
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 581,266 $ 506,692 $ 434,902 $ 391,801 $ 550,586
Total assets 2,122,685 1,993,938 2,279,374 2,415,907 1,676,683
Long term debt - - 140,000 450,000 -
Total shareholders' equity (4) 1,331,691 1,189,851 1,377,372 1,203,872 1,079,522
(1) Effective April 1, 2002, in accordance with SFAS No. 142, the goodwill
balance is no longer being amortized on a monthly basis. Instead it is
tested at least annually for impairment. Exclusive of amortization of
goodwill, net income (loss) and earnings (loss) per share (diluted
computation) would have been ($212.4 million) and (57 cents), $153.9
million and 41 cents, $375.9 million and 98 cents and $353.9 million and
88 cents, in fiscal 2002, 2001, 2000 and 1999, respectively.
(2) Amortization and impairment of goodwill during 2002 included impairment
charges of $342.9 million associated with restructuring, $35.2 million
associated with a change in technology related to distributed products
and $9.3 million associated with the transfer of the engineering business
discussed in the Professional Services Revenue section in Item 7 of this
report. Restructuring costs in 2002 represent costs incurred with the
reorganization of the operating divisions during the fourth quarter. See
Note 7 of Notes to Consolidated Financial Statements for more details on
these charges.
(3) See Notes 1 and 11 of Notes to Consolidated Financial Statements for the
basis of computing earnings per share.
(4) No dividends were paid during the periods presented.
All prior years have been reclassified to conform to the 2003
presentation.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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 our operating results, including, without
limitation, those discussed below and contained elsewhere in this report. These
risks and uncertainties 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 25% to 30% 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.
- - In 2002, we filed a lawsuit against IBM alleging, among other things,
copyright infringement, misappropriation of trade secrets, intentional
interference with contractual relations and economic expectancy, false
advertising and various violations of the Lanham Act, as well as various
anti-trust law violations. We claim that IBM has misappropriated portions
of our software tools, used our technology to develop competing products,
used its monopoly power to engage in unlawful tying arrangements and
subverted competition on the merits. IBM has filed a counterclaim against
us alleging violation of six of their patents. Pursuit of this litigation
will be costly, time-consuming and may divert management's time and
attention. Our legal expenses have increased substantially and our general
and administrative expenses could further increase as a result of these
factors. In addition, IBM may seek to influence our customers and potential
customers to reduce or eliminate the amount of our products and services
that they purchase, or our lawsuit against IBM may otherwise be viewed
negatively by our customers and potential customers and cause them to
refrain from buying our products and services. Any of the foregoing
developments could adversely affect our position in the marketplace and our
results of operations.
- - 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.
17
- - In addition to the IBM claims discussed above, there can be no assurance
that other 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.
- - 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.
- - Our results could be adversely affected by increased competition and
pricing pressures. We consider over 40 firms to be directly competitive
with one or more of our products. These competitors include BMC Software,
Inc., Borland, Computer Associates International, Inc., International
Business Machines Corporation (IBM) and Mercury Interactive Corporation.
Some of these competitors have substantially greater financial, marketing,
recruiting and training resources than we do.
- - The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts
International Corporation, Keane, Inc. and numerous other regional and
local firms in the markets in which we have professional services offices.
Several of these competitors have substantially greater financial,
marketing, recruiting and training resources than we do.
- - 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 or to reduce their
requirements for professional services, and this could adversely affect our
operating results.
18
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
Total Revenues Period-to-Period
----------------------------------------- Change
Fiscal Year Ended -------------------------
March 31, 2002 2001
----------------------------------------- to to
2003 2002* 2001* 2003 2002
----------- ---------- ---------- ---------- -----------
REVENUE:
Software license fees 21.5% 24.0% 24.4% (29.2)% (15.7)%
Maintenance fees 30.0 24.9 22.4 (5.0) (5.0)
Professional services fees 48.5 51.1 53.2 (24.9) (17.9)
----------- ----------- -----------
Total revenues 100.0 100.0 100.0 (21.0) (14.5)
----------- ----------- -----------
OPERATING EXPENSES:
Cost of software license fees 2.2 2.0 1.9 (9.9) (10.0)
Cost of professional services 44.5 48.3 47.9 (27.2) (13.7)
Technology development and support 10.4 9.4 9.2 (12.8) (12.2)
Sales and marketing 19.2 16.9 17.2 (10.4) (16.1)
Administrative and general 13.9 11.9 12.3 (7.7) (17.2)
Goodwill amortization 24.5 2.1 (100.0) **
Restructuring cost 2.7 (100.0) **
----------- ----------- -----------
Total operating expenses 90.2 115.7 90.6 (38.4) 9.3
----------- ----------- -----------
Income (loss) from operations 9.8 (15.7) 9.4 149.3 (241.7)
----------- ----------- -----------
Other income (expense):
Interest and investment income 2.0 1.7 1.5 (5.8) (3.9)
Interest and other expense (0.4) (0.4) (1.5) 17.9 76.2
----------- ----------- -----------
Total other income 1.6 1.3 0.0 (1.7) **
----------- ----------- -----------
Income (loss) before income taxes 11.4 (14.4) 9.4 162.3 (230.6)
Income tax provision (benefit) 3.9 (0.3) 3.5 ** (107.7)
----------- ----------- -----------
Net income (loss) 7.5% (14.1)% 5.9% 142.0% (306.0)%
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
**Not meaningful.
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. We evaluated the carrying amount of goodwill at March
31, 2003 and determined there was no impairment in 2003. See Note 8 of Notes to
Consolidated Financial Statements included in Item 8 of this report for a
discussion of net income and earnings per share excluding amortization of
goodwill.
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.
19
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 51.5%, 48.9% and 46.8% of total revenue during
2003, 2002 and 2001, respectively. OS/390 product revenue (mainframe revenue)
decreased $133.8 million or 19.5% during 2003 and decreased $75.5 million or
9.9% during 2002. Revenue from distributed software products decreased $9.7
million or 5.9% during 2003 and decreased $25.2 million or 13.3% during 2002.
The overall declines in product revenue from 2002 to 2003 and from 2001 to 2002
were primarily attributable to decreases in license fees and maintenance fees
associated with an overall decrease in technology spending and a decrease in
customer demand for large enterprise license agreements ("ELAs") which are
multi-year, and often multi-payment contracts. License revenue decreased $121.9
million or 29.2% during 2003 to $295.7 million from $417.6 million during 2002
and decreased $78.0 million or 15.7% from $495.6 million during 2001. Multi-year
contracts greater than $5 million represented approximately 4.5%, 6.9% and 12.8%
of license revenue in 2003, 2002 and 2001, respectively. The decrease in license
revenue for 2003 and 2002 was due to market and competitive pressure on pricing
attributed to the continued softness in the economy as a whole and the IT
industry in particular. Maintenance fees decreased $21.6 million or 5.0% to
$412.2 million during 2003 from $433.8 million during 2002 and decreased $22.8
million or 5.0% from $456.5 million in 2001. The decreases in maintenance fees
were primarily attributable to lower license fees during both 2003 and 2002
resulting in minimal increases to the maintenance base 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, 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.
20
Products revenue by geographic location is presented in the table below (in
thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
United States $ 409,441 $ 532,772 $ 597,290
Europe and Africa 221,272 223,636 245,431
Other international operations 77,183 94,974 109,385
----------- ----------- -----------
Total products revenue $ 707,896 $ 851,382 $ 952,106
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
PRODUCTS CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
Revenue $ 707,896 $ 851,382 $ 952,106
Expenses 438,041 492,878 576,254
----------- ----------- -----------
Products contribution $ 269,855 $ 358,504 $ 375,852
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
The products segment generated contribution margins of 38.1%, 42.1% and 39.5%
during 2003, 2002 and 2001, respectively. Products expenses include cost of
software license fees, technology development and support costs, and sales and
marketing expenses. The decrease in contribution margin during 2003 was
primarily a result of the decrease in software license revenue offset, in part,
by a decrease in products expenses. The increase in the contribution margin from
2001 to 2002 was a result of cost reductions offset, in part, by a decrease in
license and maintenance 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 2003 was due primarily to decreased
amortization of purchased software. The decrease in these costs in 2002 was due
primarily to decreased author royalties, decreased printing and distribution
costs, and decreased salary and benefits associated with lower employee
headcount. As a percentage of software license fees, cost of software license
fees were 10.4%, 8.2% and 7.6% in 2003, 2002 and 2001, 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 initiatives are also
included here. The decrease in these costs in 2003 was primarily attributable to
decreased bonus expense, decreased depreciation of computer equipment, decreased
amortization of purchased software, and reduced travel and communication costs.
The decrease in technology costs from 2001 to 2002 was primarily related to
reduced salaries and benefits and reduced travel expenditures offset, in part,
by increased amortization of purchased software. As a percentage of product
revenue, costs of technology development and support were 20.2%, 19.3% and 19.7%
in 2003, 2002 and 2001, 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 technology
development and support costs for 2003 decreased $22.9 million, or 12.9%, to
$154.7 million from $177.6 million in 2002. In 2002, total technology
development and support costs decreased $23.1 million, or 11.5%, to $177.6
million from $200.7 million in 2001. The major
21
development projects that achieved technological feasibility during 2003
included 6 new interactive and debugging products, 9 new fault management
products, 11 new file and data management products, 5 new automated testing
products, 21 new systems management products, 53 new application development
products, 1 new licensing product, 2 new application performance management
products, and 69 new windows development tools.
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 2003 was primarily attributable to decreased
salaries and benefits, decreased travel expenses, and decreased commissions. The
decrease in sales and marketing costs from 2001 to 2002 was primarily
attributable to decreased salaries and benefits, decreased distributor
commissions associated with decreased software license revenue, decreased travel
expenses, and decreased advertising expenditures. As a percentage of license
fees, sales and marketing costs were 89.3%, 70.5% and 70.9% in 2003, 2002 and
2001, 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
$221.7 million or 24.9% during 2003 and decreased $193.9 million or 17.9% during
2002. These decreases in revenue were 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.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
United States $ 599,913 $ 795,284 $ 988,044
Europe and Africa 64,816 90,536 89,017
Other international operations 2,715 3,342 5,989
----------- ----------- -----------
Total professional services revenue $ 667,444 $ 889,162 $ 1,083,050
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
Revenue $ 667,444 $ 889,162 $ 1,083,050
Expenses 611,644 840,149 973,854
----------- ----------- -----------
Professional services contribution $ 55,800 $ 49,013 $ 109,196
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
22
The professional services segment generated contribution margins of 8.4%, 5.5%
and 10.1% during 2003, 2002 and 2001, respectively. The increase in professional
services margin in 2003 is primarily a result of the branch closings and other
changes discussed in the revenue section above. The decrease in professional
services margin in 2002 was primarily due to lower utilization, lower billing
rates, and reduced customer demand for our services associated with the decline
of the economy as a whole and the IT sector specifically.
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 from 2002 to 2003 is due, primarily, to
reductions in staff associated with the restructuring discussed below, resulting
in lower salaries and benefits, and decreased use of subcontractors for special
services. The decrease in these costs from 2001 to 2002 is due, primarily, to
reductions in staff, resulting in lower salaries and benefits, reduced travel
expenditure and decreased use of subcontractors for special services. The
professional services billable staff decreased 1,861 people to 5,164 people as
of March 31, 2003 from 7,025 people at March 31, 2002. This compares to a
decrease of 1,016 professional billable staff, to 7,025 at March 31, 2002 from
8,041 people at March 31, 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 7.7% during 2003 and decreased
17.2% during 2002. The decrease in administrative and general expenses in 2003
was primarily attributable to decreased building rent, decreased telephone
costs, and decreased salaries and benefits resulting from the restructuring
discussed below offset, in part, by increased legal costs. Legal expenses
associated with the IBM litigation increased significantly during the fourth
quarter of 2003. External legal fees for all litigation and other matters were
$34.6 million, $12.5 million and $9.9 million in 2003, 2002 and 2001,
respectively. These costs are expected to fluctuate in relation to legal
activity. The decrease in administrative and general expenses during 2002 was
primarily attributable to decreased charges against investments in joint
ventures.
Interest and investment income for 2003 was $27.8 million compared to $29.5
million in 2002 and $30.7 million in 2001. The decrease from 2002 to 2003 was
due to lower interest earnings on deferred customer receivables offset, in part,
by an increase in interest on investments due to higher investment balances. The
decrease from 2001 to 2002 was due to lower interest earnings on investments due
to reduced interest rates, offset, in part, by increased interest related to
customers' deferred installments. Interest and other expense includes
amortization of deferred interest associated with future lease obligations
related to facilities no longer used by the Company as well as amortization of
the initial financing fees and fees associated with the unutilized balance of
the prior credit facility discussed in the Liquidity and Capital Resources
section below. Interest and other expense for 2003 was $6.1 million as compared
to $7.4 million in 2002 and $31.3 million in 2001. The decrease in interest and
other expense for 2003 is due to the decrease in amortization of initial
financing fees and fees associated with the unutilized balance of the credit
facility offset, in part, by the increase in amortized interest associated with
lease obligations. The decrease in interest expense from 2001 to 2002 was
primarily attributable to the July 2001 payoff of debts previously outstanding
under the prior credit facility.
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 $53.1 million in 2003, which represents an effective tax rate
of 34%. This compares to an income tax benefit of $5.6 million in 2002 and an
income tax provision of $73.0 million in 2001, which represents an effective tax
rate of 38%. Our
23
effective tax rate for 2002 differed significantly from the US federal income
tax rate of 35% primarily as a result of nondeductible goodwill amortization and
impairment charges. See Note 12 of Notes to Consolidated Financial Statements
included in Item 8 of this report for additional analysis of income taxes.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, the Company adopted a restructuring plan to
reorganize its 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 were terminated as
a result of the reorganization. Payments continue to be made to certain
terminated employees in accordance with their separation agreements.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002 and 2003 (in thousands):
Employee Facilities costs Legal, consulting Total
termination (primarily lease and outplacement restructuring
benefits abandonments)* costs Other charge
------------ ---------------- ----------------- -------- -------------
Restructuring charge $ 19,012 $ 26,341 $ 1,299 $ 278 $ 46,930
Incurred during year ended
March 31, 2002 (553) (676) (1,229)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2002 18,459 25,665 1,299 278 45,701
Incurred during year ended
March 31, 2003 (16,405) (8,589) (691) (215) (25,900)
Reclassification (1,356) 2,012 (593) (63)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
============ ================ ================= ======== =============
*Lease obligations will end in March of 2009.
During the year ended March 31, 2003, we determined the accruals associated with
employee terminations, legal and outplacement were in excess of actual costs
incurred. These excess accruals have been reclassified to the accrual for
facilities costs, since we have not been as successful in subleasing abandoned
leased space as originally anticipated. Approximately 70% of the accrual related
to facilities costs is included in "long term accrued expenses" in the
consolidated balance sheet at March 31, 2003.
GOODWILL AMORTIZATION AND IMPAIRMENT CHARGES
In fiscal 2002, in conjunction with the development of the restructuring plan,
we evaluated the carrying value of goodwill and other intangible assets related
to the professional services business, and recorded an impairment charge related
to our prior services acquisitions. Certain professional services offices
acquired as part of those acquisitions have not achieved critical mass or a
sustained level of profitability and were closed in April 2002 as part of the
restructuring plan. We utilized discounted cash flow analyses to value the
remaining business, and recognized goodwill impairment based upon current
estimated fair market values.
24
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Note 1 of the Consolidated Financial Statements contains a summary of our
significant 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 March 31, 2003;
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. These accounting policies discussed below 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.
Revenue Recognition -
We earn revenue from licensing software products, providing maintenance and
support for those products and rendering professional services. Our revenue
recognition policies are based on US GAAP including Statements of Position 97-2
and 98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101.
Accordingly, we recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment has occurred or services
have been rendered, the fee is fixed or determinable, and collectibility is
reasonably assured.
Software license fees - Our software license agreements provide our customers
with a right to use our software perpetually (perpetual licenses) or during a
defined term (term licenses). Perpetual license fee revenue is recognized using
the residual method, under which the fair value, based on Compuware-specific
objective evidence (CSOE), of all undelivered elements of the agreement (e.g.,
maintenance and professional services) is deferred. CSOE is based on rates
charged for maintenance and professional services when sold separately. The
remaining portion of the fee, (the residual), net of discretionary discounts, is
recognized as license fee revenue upon shipment of the products, provided that
no significant obligations remain and collection of the related receivable is
deemed probable. For term licenses and for agreements in which the fair value of
the undelivered elements cannot be determined using CSOE (e.g., transactions
that include an option to exchange or select products in the future), we
recognize the license fee revenue on a ratable basis over the term of the
license agreement.
We offer flexibility to customers purchasing products and related maintenance.
Terms vary ranging from the standard perpetual license sale to large multi-year,
multi-product contracts. We allow installment payment terms on multi-year
contracts, with installments collectible over the term of the contract. For
these contracts, the license fee portion of the receivable is discounted to its
net present value. The discount is recognized as interest income over the term
of the receivables.
Generally, revenues from license and maintenance transactions that include
installment payment terms are recognized in the same manner as those requiring
current payment. This is because we have an established business practice of
offering installment payment terms to customers and have a history of
successfully enforcing original payment terms without making concessions.
However, because a significant portion of our license fee revenue is earned in
connection with installment sales, changes in future economic conditions or
technological developments could adversely affect our ability to immediately
record license fees for these types of transaction and/or limit our ability to
collect these receivables.
Based on our interpretation of US GAAP including Statements of Position 97-2 and
98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101 we
believe our revenue has been properly reported. New interpretations or
pronouncements related to software revenue recognition policies could result in
changes to our method of revenue recognition in the future.
25
Maintenance fees - Our maintenance agreements provide for technical support and
advice, including problem resolution services and assistance in product
installation, error corrections and any product enhancements released during the
maintenance period. Maintenance is included with all mainframe software license
agreements for at least one year, and for most distributed product agreements
for three months. Maintenance is renewable thereafter for an annual fee.
Maintenance fees are deferred and recognized as revenue on a ratable basis over
the maintenance period.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees are also included in deferred revenue for those
contracts that are being recognized on a ratable basis.
Professional services fees - Revenues from professional services are recognized
in the period the services are performed, provided that collection of the
related receivable is deemed probable. Professional services fees are generally
based on hourly or daily rates; however, for services rendered under fixed-price
contracts, revenue is recognized using the percentage of completion method.
Allowance for Doubtful Accounts - The collectibility of accounts receivable is
regularly evaluated and we believe our allowance for doubtful accounts is
appropriate for our accounts receivable balances. In evaluating the allowance,
we consider historical loss experience, including the need to adjust for current
conditions, and the aging of outstanding receivables. Larger accounts are
reviewed on a detail basis, giving consideration to collection experience and
any information on the financial viability of the customer. The allowance is
reviewed and adjusted each quarter based on the best information available at
the time.
Capitalized Software - The cost of purchased and internally developed software
is capitalized and stated at the lower of unamortized cost or expected net
realizable value. Software is subject to rapid technological obsolescence and
estimates of future revenues to be derived from the software could be
significantly affected by future developments. The amortization period for
capitalized software is generally five years, but adverse developments could
result in a shorter life or a write-off based on reduced estimates of net
realizable value.
Impairment of Goodwill - We are required to assess the impairment of goodwill
annually, or more frequently if events or changes in circumstances indicate that
the carrying value may exceed the fair value.
The assessment of goodwill impairment is performed in two steps. First, the
carrying value of each reporting unit (Products and Services) is compared to the
fair value of the reporting unit including the goodwill. If the carrying amount
of the reporting unit is greater than the fair value of the reporting unit, we
move to the second step of the impairment test. The second step of the
impairment test, used to measure the amount of impairment loss, compares the
implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of the goodwill, the impairment loss shall be recognized as
an operating expense in an amount equal to that excess. We measure fair value
using an estimate of the related business's discounted cash flow. The discounted
cash flow approach uses significant assumptions, including projected future cash
flows, the discount rate reflecting the risk inherent in future cash flows, and
a terminal growth rate. These estimates and assumptions, and unknown future
events or circumstances (e.g. economic conditions or technological developments)
could have a significant impact on whether or not an impairment charge is
recognized and the magnitude of any such charge.
Other - Other accounting policies, although not generally subject to the same
level of estimation as those discussed above, are nonetheless important to an
understanding of the financial statements. Many assets, liabilities, revenues
and expenses require some degree of estimation or judgment in determining the
appropriate accounting.
26
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, cash and investments totaled approximately $571.3 million.
During 2003 and 2002, we generated $377.3 million and $386.8 million,
respectively, in operating cash flow. A significant portion of operating cash
flow is generated from the collection of the current portion of prior years'
installment receivables as reflected in the decrease in total accounts
receivable. During these periods, we had capital expenditures that included
property and equipment, capitalized research and software development, and
purchased software of $236.7 million and $103.7 million, respectively.
As of March 31, 2003, we had no long-term debt. The credit facility agreement
which would have expired in August 2003 was terminated effective November 4,
2002. In May 2003, we entered into a $100 million revolving credit agreement
with a bank. See Note 17 of Notes to Consolidated Financial Statements for a
discussion of this revolving credit agreement. There is currently no outstanding
balance under the new credit agreement.
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 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, fixtures and equipment. Future annual depreciation expense will be
approximately $17 million. This will be partially offset by the savings realized
by the consolidation of offices. Capital expenditures to date total $325.9
million. Remaining cash outlays are expected to be completed in calendar 2003.
Currently, we intend to fund the building using cash on hand and cash flow from
operations.
On May 6, 2003, the Board of Directors authorized a stock repurchase plan of up
to $125 million. We intend to purchase our common stock on the open market
through negotiated or block transactions, periodically, based upon market and
business conditions. As of June 13, 2003, no repurchases have been made under
this plan.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. We believe that we take the necessary
steps to appropriately reduce the potential impact of interest rate and foreign
exchange exposures on our financial position and operating performance. We do
not use derivative financial instruments or forward foreign exchange contracts
for investment, speculative or trading purposes. Immediate changes in interest
rates and foreign currency rates discussed in the following paragraphs are
hypothetical rate scenarios used to calibrate risk and do not currently
represent management's view of future market developments. A discussion of our
accounting policies for derivative instruments is included in the Notes to
Consolidated Financial Statements in Item 8 of this report.
INTEREST RATE RISK
Exposure to market risk for changes in interest rates relates primarily to our
cash investments and installment receivables. Derivative financial instruments
are not a part of our investment strategy. Investments are placed with high
quality issuers to preserve invested funds by limiting default and market risk.
In addition, marketable debt securities and long term debt investments are
classified as "held to maturity" which does not expose the consolidated
statement of operations or balance sheet to fluctuations in interest rates.
The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates (in thousands, except
interest rates):
Year Ended March 31,
--------------------------------- Fair Value at
2004 2005 2006 Total March 31, 2003
-------- -------- ------- -------- --------------
Cash Equivalents $319,466 $319,466 $319,466
Average Interest Rate 1.38% 1.38%
Average Interest Rate (tax equivalent) 1.39% 1.39%
Investments $156,737 $ 88,921 $ 6,174 $251,832 $252,527
Average Interest Rate 1.78% 1.90% 1.42% 1.81%
Average Interest Rate (tax equivalent) 2.56% 2.72% 2.19% 2.61%
We offer financing arrangements with installment payment terms in connection
with our multi-year software sales. Installment accounts are generally
receivable over a three to five year period. As of March 31, 2003, non-current
receivables amount to $260.7 million and are due approximately $164.0 million,
$59.3 million, $29.3 million, $5.8 million and $2.3 million in each of the years
ended March 31, 2005 through 2009, respectively. The fair value of non-current
accounts receivable is estimated by discounting the future cash flows using the
current rate at which the Company would finance a similar transaction. At March
31, 2003, the fair value of such receivables is approximately $262.3 million.
Each 25 basis point increase in interest rates would have an associated $900,000
negative impact on the fair value of non-current accounts receivable based on
the balance of such receivables at March 31, 2003. A change in interest rates
will have no impact on cash flows or net income associated with non-current
accounts receivable.
FOREIGN CURRENCY RISK
We have entered into forward foreign exchange contracts primarily to hedge
amounts due to or from select subsidiaries denominated in foreign currencies
(mainly in Europe and Asia/Pacific) against fluctuations in exchange rates. Our
accounting policies for these contracts are based on our designation of the
contracts as hedging transactions. The criteria we use for designating a
contract as a hedge include the contract's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. Gains
and losses on forward foreign exchange contracts are
28
recognized in income, offsetting foreign exchange gains or losses on the foreign
balances being hedged. If the underlying hedged transaction is terminated
earlier than initially anticipated, the offsetting gain or loss on the related
forward foreign exchange contract would be recognized in income in the same
period. In addition, since we enter into forward contracts only as a hedge, any
change in currency rates would not result in any material net gain or loss, as
any gain or loss on the underlying foreign currency denominated balance would be
offset by the gain or loss on the forward contract. We operate in certain
countries in Latin America and Asia/Pacific where there are limited forward
currency exchange markets and thus we have unhedged transaction exposures in
these currencies.
The table below provides information about our foreign exchange forward
contracts at March 31, 2003. The table presents the value of the contracts in
U.S. dollars at the contract maturity date and the fair value of the contracts
at March 31, 2003 (in thousands, except contract rates):
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2003 2003 Rate U.S. Dollars March 31, 2003
-------- -------- -------- ------------ --------------
Forward Sales
Canadian Dollar March 31 April 30 1.4778 $ 812 $ 816
Japanese Yen March 31 April 30 118.7980 741 744
Norwegian Krone March 31 April 30 7.2965 809 810
Singapore Dollar March 31 April 30 1.7620 1,022 1,020
Swiss Franc March 31 April 30 1.3498 963 960
---------- -----------
$ 4,347 $ 4,350
========== ===========
Forward Purchases
Australian Dollar March 31 April 30 1.6587 $ 4,522 $ 4,525
Danish Krone March 31 April 30 6.7706 871 866
Euro Dollar March 31 April 30 1.0875 9,951 9,973
Swedish Krona March 31 April 30 8.4400 1,540 1,535
---------- -----------
$ 16,884 $ 16,899
========== ===========
Approximately 25% to 30% of our revenue is derived from foreign sources. This
exposes us to exchange rate risks on foreign currencies related to the fair
value of foreign assets and liabilities, net income and cash flows.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Compuware Corporation:
We have audited the accompanying consolidated balance sheets of Compuware
Corporation and subsidiaries (the "Company") as of March 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Compuware Corporation and its
subsidiaries as of March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, effective April 1, 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to SFAS No. 142, "Goodwill and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2003
30
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS NOTES 2003 2002
------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 319,466 $ 233,305
Investments 3 156,737 133,503
Accounts receivable, less allowance for doubtful
accounts of $26,543 and $23,190 515,819 609,579
Deferred tax asset, net 12 30,605 41,811
Income taxes refundable, net 10,853 27,687
Prepaid expenses and other current assets 16,951 16,954
---------- ----------
Total current assets 1,050,431 1,062,839
---------- ----------
INVESTMENTS 3 95,095 55,566
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 386,678 199,365
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $195,464 AND $169,611 8 54,514 68,998
---------- ----------
OTHER:
Accounts receivable 260,735 306,751
Goodwill, less accumulated amortization 2,8 212,288 211,792
Deferred tax asset, net 12 20,174 44,884
Other assets 5 42,770 43,743
---------- ----------
Total other assets 535,967 607,170
---------- ----------
TOTAL ASSETS $2,122,685 $1,993,938
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 37,588 $ 28,646
Accrued expenses 7 101,196 141,825
Accrued bonuses and commissions 33,383 44,652
Deferred revenue 296,998 341,024
---------- ----------
Total current liabilities 469,165 556,147
DEFERRED REVENUE 299,079 218,624
ACCRUED EXPENSES 7 22,750 29,316
---------- ----------
Total liabilities 790,994 804,087
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 10
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
382,367,156 and 375,820,254 shares in 2003
and 2002, respectively 10,15 3,824 3,758
Additional paid-in capital 704,190 676,617
Retained earnings 631,906 528,804
Accumulated other comprehensive loss (8,229) (19,328)
---------- ----------
Total shareholders' equity 1,331,691 1,189,851
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,122,685 $1,993,938
========== ==========
See notes to consolidated financial statements.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES 2003 2002 2001
------- ---------- ---------- ----------
REVENUES:
Software license fees $ 295,720 $ 417,631 $ 495,572
Maintenance fees 412,176 433,751 456,534
Professional services fees 667,444 889,162 1,083,050
---------- ---------- ----------
Total revenues 1,375,340 1,740,544 2,035,156
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 30,740 34,102 37,885
Cost of professional services 611,644 840,149 973,854
Technology development and support 143,289 164,280 187,155
Sales and marketing 264,012 294,496 351,214
Administrative and general 5 191,131 207,166 250,324
Goodwill amortization and impairment 8 426,344 42,092
Restructuring costs 7 46,930
---------- ---------- ----------
Total operating expenses 1,240,816 2,013,467 1,842,524
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 134,524 (272,923) 192,632
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and investment income 3 27,791 29,504 30,692
Interest and other expense (6,100) (7,428) (31,255)
---------- ---------- ----------
Total other income (expense) 21,691 22,076 (563)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 156,215 (250,847) 192,069
INCOME TAX PROVISION (BENEFIT) 12 53,113 (5,592) 72,986
---------- ---------- ----------
NET INCOME (LOSS) $ 103,102 $ (245,255) $ 119,083
========== ========== ==========
Basic earnings (loss) per share 11 $ 0.27 $ (0.66) $ 0.33
========== ========== ==========
Diluted earnings (loss) per share 11 $ 0.27 $ (0.66) $ 0.32
========== ========== ==========
See notes to consolidated financial statements.
32
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Common Stock Additional Other
----------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Gain (Loss)
----------- --------- ----------- ---------- -------------
BALANCE AT APRIL 1, 2000 361,621,234 $ 3,616 $ 556,150 $ 654,976 $ (10,870)
Net income 119,083
Foreign currency translation, net of tax (10,258)
Comprehensive income
Issuance of common stock 5,735,834 57 40,301
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 15) 2,459,364 25 16,838
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2001 369,816,432 3,698 620,743 774,059 (21,128)
Net loss (245,255)
Foreign currency translation, net of tax 1,800
Comprehensive loss
Issuance of common stock 1,981,659 20 17,636
Issuance of warrant (Note 10) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 15) 4,022,163 40 24,492
Other 4,067
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2002 375,820,254 3,758 676,617 528,804 (19,328)
Net income 103,102
Foreign currency translation, net of tax 11,099
Comprehensive income
Issuance of common stock 6,010,067 60 18,868
Acquisition tax benefits 7,056
Exercise of employee stock options
and related tax benefit (Note 15) 536,835 6 1,649
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2003 382,367,156 $ 3,824 $ 704,190 $ 631,906 $ (8,229)
=========== ========= =========== ========== =============
Total
Shareholders' Comprehensive
Equity Income (Loss)
------------- -------------
BALANCE AT APRIL 1, 2000 $ 1,203,872
Net income 119,083 $ 119,083
Foreign currency translation, net of tax (10,258) (10,258)
-------------
Comprehensive income $ 108,825
=============
Issuance of common stock 40,358
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 15) 16,863
-------------
BALANCE AT MARCH 31, 2001 1,377,372
Net loss (245,255) $ (245,255)
Foreign currency translation, net of tax 1,800 1,800
-------------
Comprehensive loss $ (243,455)
=============
Issuance of common stock 17,656
Issuance of warrant (Note 10) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 15) 24,532
Other 4,067
-------------
BALANCE AT MARCH 31, 2002 1,189,851
Net income 103,102 $ 103,102
Foreign currency translation, net of tax 11,099 11,099
-------------
Comprehensive income $ 114,201
=============
Issuance of common stock 18,928
Acquisition tax benefits 7,056
Exercise of employee stock options
and related tax benefit (Note 15) 1,655
-------------
BALANCE AT MARCH 31, 2003 $ 1,331,691
=============
See notes to consolidated financial statements.
33
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
------------ ------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 103,102 $ (245,255) $ 119,083
Adjustments to reconcile net income (loss) to cash provided by
operations:
Goodwill amortization and impairment 426,344 42,092
Depreciation and amortization 53,808 63,619 61,571
Tax benefit from exercise of stock options 152 8,384 10,283
Issuance of common stock to Employee Stock Ownership Trust 9,425 10,657 10,685
Acquisition tax benefits 7,056 6,854 7,454
Deferred income taxes 35,916 (75,485) 105
Other 14,780 3,589 (4,080)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 139,776 145,647 67,799
Prepaid expenses and other current assets (2,106) 681 8,298
Other assets (32) 2,595 13,199
Accounts payable and accrued expenses (37,819) 20,578 (51,012)
Deferred revenue 36,429 36,240 39,034
Income taxes 16,834 (17,659) 12,084
------------ ------------ ------------
Net cash provided by operating activities 377,321 386,789 336,595
------------ ------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (17,576)
Property and equipment:
Headquarters facility (219,071) (81,644) (25,166)
Other (6,222) (8,784) (14,637)
Capitalized software (11,369) (13,300) (13,881)
Investments:
Proceeds from maturity 201,938 221,716 175,787
Purchases (267,502) (210,784) (144,515)
------------ ------------ ------------
Net cash used in investing activities (302,226) (92,796) (39,988)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 1,503 16,148 6,580
Contribution to stock purchase plans 9,563 6,999 29,673
Proceeds from sale of warrant 2,825
Proceeds from long term debt 18,000
Payment of long term debt (140,000) (328,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 11,066 (114,028) (273,747)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 86,161 179,965 22,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 233,305 53,340 30,480
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 319,466 $ 233,305 $ 53,340
============ ============ ============
See notes to consolidated financial statements.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Compuware Corporation develops, markets and supports an integrated
set of systems software products designed to improve the productivity of data
processing professionals in application development, implementation and
maintenance. In addition, the Company's professional services include business
systems analysis, design, programming and implementation as well as software
conversion and systems planning and consulting. The Company's products and
services are offered worldwide across a broad spectrum of technologies,
including mainframe and distributed systems platforms.
Basis of Presentation - The consolidated financial statements include the
accounts of Compuware Corporation and its wholly owned subsidiaries after
elimination of all significant intercompany balances and transactions. The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (US GAAP), which require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and the disclosure of contingencies at March 31, 2003 and
2002 and the results of operations for the years ended March 31, 2003, 2002 and
2001. While management has based their assumptions and estimates on the facts
and circumstances known at March 31, 2003, final amounts may differ from
estimates.
Certain amounts in the fiscal 2002 and 2001 financial statements have been
reclassified to conform to the fiscal 2003 presentation.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services. The Company's revenue recognition policies are based on
US GAAP including Statements of Position 97-2 and 98-9 and Securities and
Exchange Commission Staff Accounting Bulletin 101. Accordingly, the Company
recognizes revenue when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the fee is fixed or determinable, and collectibility is reasonably
assured.
Software license fees - The Company's software license agreements provide their
customers with a right to use their software perpetually (perpetual licenses) or
during a defined term (term licenses). Perpetual license fee revenue is
recognized using the residual method, under which the fair value, based on
Compuware-specific objective evidence (CSOE), of all undelivered elements of the
agreement (e.g., maintenance and professional services) is deferred. CSOE is
based on rates charged for maintenance and professional services when sold
separately. The remaining portion of the fee, net of discretionary discounts,
(the residual) is recognized as license fee revenue upon shipment of the
products, provided that no significant obligations remain and collection of the
related receivable is deemed probable. For term licenses and for agreements in
which the fair value of the undelivered elements cannot be determined using CSOE
(e.g., transactions that include an option to exchange or select products in the
future), the Company recognizes the license fee revenue on a ratable basis over
the term of the license agreement.
The Company offers flexibility to customers purchasing their products and
related maintenance. Terms vary ranging from the standard perpetual license sale
to large multi-year, multi-product contracts. For fiscal years 2003, 2002 and
2001, contracts greater than $5 million represented approximately 4.5%, 6.9% and
12.8%, respectively, of license fee revenue. The Company allows deferred payment
terms on multi-year contracts, with installments collectible over the term of
the contract. For these contracts, the license fee portion of the receivable is
discounted to its net present value. The discount is recognized as interest
income over the term of the receivables, and amounted to $15,455,000,
35
$19,562,000 and $18,219,000 for fiscal 2003, 2002 and 2001, respectively. At
March 31, 2003, current accounts receivable includes installments on multi-year
contracts totaling $273,798,000 due within the year ending March 31, 2004.
Non-current accounts receivable at March 31, 2003 amounted to $260,735,000, and
are due approximately $164,032,000, $59,282,000, $29,284,000, $5,837,000 and
$2,300,000 in each of the years ending March 31, 2005 through 2009,
respectively.
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all mainframe
software license agreements for at least one year, and for most distributed
product agreements for three months. Maintenance is renewable thereafter for an
annual fee. Maintenance fees are deferred and recognized as revenue on a ratable
basis over the maintenance period.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees are also included in deferred revenue for those
contracts that are being recognized on a ratable basis.
Professional services fees - Revenues from professional services are recognized
in the period the services are performed, provided that collection of the
related receivable is deemed probable. Professional services fees are generally
based on hourly or daily rates; however, for services rendered under fixed-price
contracts, revenue is recognized using the percentage of completion method.
Cash and Cash Equivalents - For the purpose of the statement of cash flows, the
Company considers all investments with an original maturity of three months or
less to be cash equivalents.
Investments consist of municipal obligations, tax-free zero coupon bonds, U.S.
Treasury notes, tax-free and tax advantage auction rate securities. Investments
are classified as held-to-maturity and carried at amortized cost. Those
investments that mature within one year from the balance sheet date are
classified as current assets. The amortization of bond premiums and discounts is
included in interest and investment income.
Property and Equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
which are generally estimated to be 39 years for buildings and three to ten
years for furniture and fixtures, computer equipment and software. Leasehold
improvements are amortized over the term of the lease, or the estimated life of
the improvement, whichever is less. Depreciation and amortization of property
and equipment totaled $24,841,000, $26,993,000 and $28,031,000 for the years
ended March 31, 2003, 2002 and 2001, respectively.
Capitalized Software includes the costs of purchased and internally developed
software products and is stated at the lower of unamortized cost or net
realizable value. Net purchased software included in capitalized software at
March 31, 2003 and 2002 is $17,971,000 and $29,723,000, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Technology development
and support includes primarily the costs of programming personnel associated
with product development and support net of amounts capitalized. Total
technology development and support costs incurred internally by the Company were
$154,665,000, $177,573,000 and $200,685,000 in fiscal 2003, 2002 and 2001,
respectively, of which $11,376,000, $13,293,000 and $13,530,000, respectively,
were capitalized.
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, including the period being reported on.
Amortization begins when the product is available for general release to
customers. The amortization period for capitalized software is generally five
years. Capitalized software amortization amounted to $25,853,000, $32,081,000
and $28,126,000 in fiscal 2003, 2002 and
36
2001, respectively, which is included in "cost of software license fees" in the
consolidated statements of operations. Included in the fiscal 2002 total is
additional amortization of $4,328,000 related to acquired technology that is no
longer utilized in the Company's products.
Goodwill - Effective April 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets". Under this pronouncement, goodwill and those
intangible assets with indefinite lives will no longer be amortized, but rather
will be tested for impairment annually and/or when events or circumstances
indicate that their fair value has been reduced below carrying value. The
Company evaluated its remaining goodwill as of April 1, 2002 and March 31, 2003,
and determined there was no impairment this fiscal year.
Prior to the adoption of SFAS No. 142, goodwill was amortized over periods
ranging from ten to twenty years using the straight-line method. Goodwill
amortization expense was $38,926,000 and $42,092,000, for the years ended March
31, 2002 and 2001, respectively. During fiscal 2002, the Company recorded an
aggregate charge of $387,418,000 to recognize impairment of goodwill resulting
from the restructuring announced on March 31, 2002 ($342,922,000), the transfer
of the professional services engineering division to an unrelated third party in
December 2001 ($9,298,000) and a change in technology related to its distributed
products ($35,198,000).
Fair Value of Financial Instruments - The carrying value of cash equivalents,
current accounts receivable and accounts payable approximated fair values due to
the short-term maturities of these instruments. At March 31, 2003, the fair
value of non-current receivables is approximately $262,338,000 compared to the
carrying amount of $260,735,000. At March 31, 2002, the fair value of
non-current receivables was approximately $304,043,000 compared to the carrying
amount of $306,751,000. Fair value is estimated by discounting the future cash
flows using the current rate at which the Company would finance a similar
transaction.
Legal expenses are included in "administrative and general" in the consolidated
statements of operations. Legal expenses for the years ended March 31, 2003,
2002 and 2001 were $34,649,000, $12,529,000 and $9,898,000, respectively.
Income Taxes - The Company accounts 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.
Foreign Currency Translation - The Company's foreign subsidiaries use their
respective local currency as their functional currency. Accordingly, assets and
liabilities in the consolidated balance sheets have been translated at the rate
of exchange at the respective balance sheet dates, and revenues and expenses
have been translated at average exchange rates prevailing during the year the
transactions occurred. Translation adjustments have been excluded from the
results of operations and are reported as accumulated other comprehensive loss.
Foreign Currency Transactions and Derivatives - Gains and losses from foreign
currency transactions are included in the determination of net income. To
partially offset the risk of future currency fluctuations on balances due to or
from foreign subsidiaries, the Company enters into foreign exchange contracts to
sell or buy currencies at specified rates on specific dates. Market value gains
and losses on these contracts are recognized, offsetting foreign exchange gains
or losses on foreign receivables or payables. The Company does not use foreign
exchange contracts to hedge anticipated transactions. The net foreign currency
transaction loss was $1,716,000, $1,321,000 and $2,487,000 for the years ended
March 31, 2003, 2002 and 2001, respectively. These amounts are included in
"administrative and general" in the consolidated statements of operations.
At March 31, 2003, the Company had contracts maturing through April 2003 to sell
$4,347,000 and purchase $16,884,000 in foreign currencies. At March 31, 2002,
the Company had contracts maturing through April 2002 to sell $12,415,000 and
purchase $6,896,000 in foreign currencies.
37
Stock-Based Compensation - Through March 31, 2003, in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", the Company applied APB Opinion
No. 25 and related Interpretations in accounting for its plans. Stock options
are granted at current market prices at the date of grant, therefore, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for fiscal 2003, 2002 and
2001 consistent with the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", Compuware's net income (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated below:
Year Ended March 31,
-------------------------------------------------------
2003 2002 2001
------------- ------------ -------------
Net income (loss):
As reported $ 103,102 $ (245,255) $ 119,083
Pro forma 51,221 (307,170) 62,154
Earnings (loss) per share:
As reported:
Basic earnings (loss) per share 0.27 (0.66) 0.33
Diluted earnings (loss) per share 0.27 (0.66) 0.32
Pro forma:
Basic earnings (loss) per share 0.14 (0.83) 0.17
Diluted earnings (loss) per share 0.14 (0.83) 0.17
The pro forma amounts for compensation cost may not be indicative of the effects
on net income and earnings per share for future years.
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in fiscal 2003, 2002 and 2001,
respectively: expected volatility of 94.46%, 64.55% and 95.55%; risk-free
interest rates of 2.9%, 4.7% and 4.6%; and expected lives at date of grant of
5.0, 4.1 and 5.0 years. Dividend yields were not a factor as the Company has
never issued cash dividends.
Under SFAS No. 123, the fair value of the employees' stock purchase rights
acquired by participation in the Employee Stock Purchase Plan were estimated
using the Black-Scholes model with assumptions comparable to the stock option
plans above. The weighted-average fair value of the purchase rights granted in
fiscal 2003, 2002 and 2001 were $1.11, $2.13 and $3.12, respectively.
Earnings Per Share - Basic EPS is computed by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS assumes the issuance of common stock for all
potentially dilutive equivalent shares outstanding.
Business Segments - The Company's two principal operating segments are 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.
Recently Issued Accounting Pronouncements - In November 2002, the Financial
Accounting Standards Board (FASB) issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the
38
guarantor's obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the provisions of the Interpretation
as of January 1, 2003. Adoption of Interpretation 45 did not result in any
changes to the financial statements.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock Based Compensation" to
provide alternative methods of voluntarily transitioning to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirements to require disclosure of the method used to
account for stock-based employee compensation and the effect of the method on
reported results in both annual and interim financial statements. The Company
adopted this statement as of March 31, 2003.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities." In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. See Note 5 for a discussion of variable
interest entities. The Company is currently evaluating all the provisions of the
Interpretation, but believes its adoption will not have a material impact on its
financial statements.
2. ACQUISITIONS
During fiscal 2001, the Company completed the acquisitions of Optimal Networks
Corporation, a developer of e-business performance measurement tools, for
$5,000,000 in cash and assumed liabilities and Nomex, Inc., a privately-held
provider of web design and development services located in Montreal, Canada, for
approximately $8,900,000 in cash. These acquisitions have been accounted for as
purchases, and, accordingly, assets and liabilities acquired have been recorded
at fair value as of their respective acquisition dates. The aggregate amount by
which the acquisition cost exceeded the fair value of the net assets acquired
was approximately $10,500,000.
39
3. INVESTMENTS
A summary of securities at March 31, 2003 and 2002 is set forth below (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
March 31, 2003:
Municipal Obligations $ 122,679 $ 474 $ 9 $ 123,144
Tax Advantage Auction Rate Securities 39,000 39,000
Tax Free Auction Rate Securities 58,100 58,100
US Treasury Securities 19,987 235 20,222
Zero Coupon Bonds 12,066 5 12,061
----------- ---------- ---------- ----------
Securities classified as held to maturity $ 251,832 $ 709 $ 14 $ 252,527
=========== ========== ========== ==========
March 31, 2002:
Municipal Obligations $ 94,987 $ 286 $ 207 $ 95,066
Tax Advantage Auction Rate Securities 13,200 13,200
Tax Free Auction Rate Securities 71,176 1 71,175
US Treasury Notes 4,956 17 4,939
Zero Coupon Bonds 4,750 20 4,730
----------- ---------- ---------- ----------
Securities classified as held to maturity $ 189,069 $ 286 $ 245 $ 189,110
=========== ========== ========== ==========
Scheduled maturities of securities classified as held to maturity at March 31,
2003 were as follows (in thousands):
Amortized Fair
Cost Value
--------- ---------
Due in:
2004 $ 156,737 $ 157,174
2005 88,921 89,182
2006 6,174 6,171
--------- ---------
Total $ 251,832 $ 252,527
========= =========
40
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
March 31,
---------------------------
2003 2002
---------- ----------
Land $ 1,776 $ 1,776
Construction in progress 325,881 117,160
Buildings 28,792 28,788
Leasehold improvements 20,744 26,099
Furniture and fixtures 41,947 52,621
Computer equipment and software 77,519 86,438
---------- ----------
496,659 312,882
Less accumulated depreciation and
amortization 109,981 113,517
---------- ----------
Total $ 386,678 $ 199,365
========== ==========
On October 23, 2000, the Company entered into a Restated Development Agreement
with the city of Detroit and the City of Detroit Downtown Development Authority
to construct an office building with retail and related amenities for a current
estimated cost of $350 million for the building and an estimated $50 million for
furniture and fixtures. All amounts included in construction in progress relate
to this building and its furnishings.
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2003, the Company held a 33.3% interest in CareTech Solutions, Inc.
(CareTech) and a 49% interest in ForeSee Results, Inc. (ForeSee). CareTech
provides outsourcing for healthcare information technology organizations
including data, voice, applications and data center operations. ForeSee was
incorporated in October 2001 to provide online customer satisfaction management.
For the year ended March 31, 2001, the Company held investments in two other
software companies. These two companies were closed in fiscal 2001. The
investments in these companies are accounted for under the equity method. The
Company records its share of income or loss against its net investment in the
company. For the years ended March 31, 2003, 2002 and 2001, the Company
recognized net losses of $2,317,000, $819,000 and $21,693,000, respectively,
from these investments. These losses are included in "administrative and
general" in the consolidated statements of operations.
At March 31, 2003 and 2002, the Company's carrying value of its investments in
and advances to these two companies was $20,359,000 and $20,079,000,
respectively. Included in the net investment at March 31, 2003 are notes
receivable from ForeSee in the amount of $3,500,000 and from CareTech in the
amount of $17,283,000 ($18,800,000 at March 31, 2002.) The ForeSee notes bear
interest at the prime rate (4.25% at March 31, 2003) and are due between June
2007 and March 2008. The CareTech note is payable in quarterly installments
through January 2012 and bears interest at 5.25%. The net investment balance is
included in "other assets" in the consolidated balance sheets.
Professional services revenue for the years ended March 31, 2003, 2002 and 2001
included approximately $27,517,000, $20,593,000 and $15,442,000, respectively,
from services provided to CareTech customers on a subcontractor basis. Cost of
professional services for the years ended March 31, 2003, 2002 and 2001 included
approximately $16,000, $37,548,000 and $66,408,000, respectively, related to
services provided by CareTech to Compuware on a subcontractor basis.
41
Professional services revenue for the years ended March 31, 2003 and 2002
included approximately $1,229,000 and $580,000, respectively, from services
provided to ForeSee.
The Company has guaranteed lease obligations of CareTech up to $12,500,000. At
March 31, 2003, outstanding lease obligations were approximately $5,000,000. The
Company has not recorded any liability related to these guarantees since it
believes that CareTech will continue to meet its obligations. The Company has
pledged $2,500,000 in additional loans to ForeSee, provided that ForeSee meets
certain milestones in their development process.
6. RELATED PARTY TRANSACTIONS
The Company purchases products and services from companies associated with
certain officers or directors of the Company.
G. Scott Romney, Director of the Company, is a partner in the law firm of
Honigman Miller Schwartz and Cohn LLP (Honigman). Honigman provides legal
services to the Company. For the years ended March 31, 2003, 2002 and 2001,
approximately $4,578,000, $271,000 and $1,083,000 was included in
"administrative and general" in the consolidated statements of operations for
services provided to the Company by Honigman.
Dennis W. Archer, Director of the Company, is a partner in the law firm of
Dickinson Wright PLLC (Dickinson). Dickinson provides legal services to the
Company. For the year ended March 31, 2003, approximately $259,000 was included
in "administrative and general" in the consolidated statements of operations for
services provided to the Company by Dickinson. The Company did not utilize this
firm in fiscal 2002 or 2001.
Peter Karmanos, Jr., Chairman of the Board and Chief Executive Officer of the
Company, and Thomas Thewes, Vice-Chairman of the Board through September 2002,
are the sole shareholders of Compuware Sports Corporation (CSC). CSC operates an
amateur hockey program in Southeastern Michigan. On September 8, 1992, the
Company entered into a one-year Promotion Agreement with CSC to promote and
sponsor business. The promotion agreement automatically renews for successive
one-year terms, unless terminated with 60 days prior notice by either party. For
the years ended March 31, 2003, 2002 and 2001, approximately $858,000, $845,000
and $843,000 was included in "sales and marketing" in the consolidated
statements of operations for advertising through CSC.
Peter Karmanos, Jr. and Thomas Thewes control the entities that own and manage
the Compuware Arena. The Company entered into an advertising agreement with the
arena to promote and sponsor business, including the right to name the arena
"Compuware Arena" and the right to place advertising in and around the arena.
For the years ended March 31, 2003, 2002 and 2001, approximately $269,000,
$266,000 and $268,000 was included in "sales and marketing" in the consolidated
statements of operations for each of the years ended March 31, 2003, 2002 and
2001 associated with this advertising.
The Company utilizes Karmanos Printing and Graphics, Inc. for certain printing
services. Karmanos Printing and Graphics, Inc. is owned by the brother and
sister-in-law of Peter Karmanos, Jr. For the years ended March 31, 2003, 2002
and 2001, printing charges from Karmanos Printing and Graphics, Inc. totaled
approximately $625,000, $1,055,000 and $1,312,000. These costs are primarily
included in "sales and marketing" in the consolidated statements of operations.
42
7. RESTRUCTURING CHARGES
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
to reorganize its 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 were terminated as
a result of the reorganization. Payments continue to be made to certain
terminated employees in accordance with their separation agreements.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002 and 2003 (in thousands):
Employee Facilities costs Legal, consulting Total
termination (primarily lease and outplacement restructuring
benefits abandonments) costs Other charge
----------- ---------------- ----------------- ---------- -------------
Restructuring charge $ 19,012 $ 26,341 $ 1,299 $ 278 $ 46,930
Incurred during year ended
March 31, 2002 (553) (676) (1,229)
---------- ---------- ---------------- ---------- -------------
Accrual at March 31, 2002 18,459 25,665 1,299 278 45,701
Incurred during year ended
March 31, 2003 (16,405) (8,589) (691) (215) (25,900)
Reclassification (1,356) 2,012 (593) (63)
---------- ---------- ---------------- ---------- -------------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
========== ========== ================ ========== =============
During the year ended March 31, 2003, the Company determined the accruals
associated with employee terminations, legal and outplacement were in excess of
actual costs incurred. These excess accruals have been reclassified to the
accrual for facilities costs, since the Company has not been as successful in
subleasing abandoned leased space as originally anticipated. Approximately 70%
of the accrual related to facilities costs is included in "long term accrued
expenses" in the consolidated balance sheet at March 31, 2003.
43
8. GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
March 31, 2003
---------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
---------------- ----------------- -------------
Amortized intangible assets:
Capitalized software (1) $ 221,603 $ (167,089) $ 54,514
Other (2) 6,200 (4,055) 2,145
--------- ---------- --------
Total $ 227,803 $ (171,144) $ 56,659
========= ========== ========
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) Amortization of capitalized software is included in "cost of software
license fees" in the consolidated statements of operations.
2) Other amortized intangible assets include trademarks associated with
past product acquisitions. This amortization expense is included in
"administrative and general" in the consolidated statements of
operations.
Amortization expense on intangible assets for the years ended March 31,
2003, 2002 and 2001 was $26,183,000, $34,286,000 and $30,956,000,
respectively. Annual amortization expense, based on identified intangible
assets at March 31, 2003, is expected to be as follows (in thousands):
Year Ended March 31,
--------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
------- ------- ------- ------- ------- ----------
Capitalized software $24,733 $16,531 $ 7,211 $ 4,348 $ 1,691
Other 330 330 330 330 330 495
------- ------- ------- ------- ------- -------
Total $25,063 $16,861 $ 7,541 $ 4,678 $ 2,021 $ 495
======= ======= ======= ======= ======= =======
44
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it is tested at least
annually for impairment. The Company evaluated its remaining goodwill at March
31, 2003, and determined there was no impairment this fiscal year. Changes in
the carrying amounts of goodwill for the year ended March 31, 2003 were as
follows (in thousands):
Products Services Total
-------- -------- --------
Goodwill:
Balance at March 31, 2002, net $ 72,182 $139,610 $211,792
Effect of foreign currency translation 496 496
-------- -------- --------
Balance at March 31, 2003, net $ 72,182 $140,106 $212,288
======== ======== ========
The Company's reported net income (loss) and diluted earnings (loss) per share
exclusive of amortization of goodwill in the prior years on an after-tax basis
were as follows (in thousands except per share data):
Year Ended March 31,
--------------------------------------
2003 2002 2001
--------- --------- ---------
Reported net income (loss) $ 103,102 $(245,255) $ 119,083
Add goodwill amortization, net of tax 32,825 34,783
--------- --------- ---------
Adjusted net income (loss) $ 103,102 $(212,430) $ 153,866
========= ========= =========
Adjusted basic earnings (loss) per share $ 0.27 $ (0.57) $ 0.42
========= ========= =========
Adjusted diluted earnings (loss) per share $ 0.27 $ (0.57) $ 0.41
========= ========= =========
9. LONG TERM DEBT
The Company has no long term debt.
In August 1999, the Company entered into a $900 million unsecured Senior Credit
Facility (credit facility) maturing in August 2003. All borrowings under the
credit facility were repaid as of August 2001. The Company did not anticipate
additional utilization of this credit facility prior to its expiration, and
therefore the agreement was terminated effective November 4, 2002.
Cash paid for interest totaled approximately $2,202,000, $3,622,000 and
$28,627,000 for the years ended March 31, 2003, 2002 and 2001, respectively.
45
10. CAPITAL STOCK
Preferred Stock Purchase Rights - Under the Company's shareholder rights plan,
each shareholder receives one right to purchase one two-thousandth of a share of
Series A Junior Participating Preferred Stock (a right) for each share of common
stock owned by the shareholder. Holders of the rights are entitled to purchase
for $40.00 one two-thousandth of one share of the Company's Series A Junior
Participating Preferred Stock in certain limited circumstances involving
acquisitions of, or offers for, 15% or more of the Company's common stock. After
any such acquisition is completed, each right entitles its holder to purchase
for $40.00 an amount of common stock of the Company, or in certain circumstances
securities of the acquirer, having a then current market value of two times the
exercise price of the right. In connection with the shareholder rights plan, the
Company has designated 800,000 shares of its 5,000,000 shares of authorized but
unissued Preferred Stock as "Series A Junior Participating Preferred Stock."
Each one two-thousandth of each share of Series A Junior Participating Preferred
Stock will generally be afforded economic rights similar to one share of the
Company's common stock. The rights are redeemable for a specified period at a
price of $0.001 per right and expire on November 9, 2010 unless extended or
earlier redeemed by the Board of Directors.
Common Stock Warrant - In November 2001, the Company issued a non-transferrable
warrant entitling a customer to purchase one million shares of common stock at
$10.51 per share in exchange for approximately $2,800,000 in cash, which was the
warrant's fair value at the date of issue. The warrant expires on November 16,
2004 or on the fifth day after the Company's common stock trades at an average
price of $20.00 per share for five consecutive days, whichever is earlier.
11. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share data were computed as follows (in thousands,
except for per share data):
Year Ended March 31,
--------------------------------------
2003 2002 2001
--------- --------- ---------
Basic earnings (loss) per share:
Numerator: Net income (loss) $ 103,102 $(245,255) $ 119,083
--------- --------- ---------
Denominator:
Weighted-average common shares outstanding 377,028 371,786 365,192
--------- --------- ---------
Basic earnings (loss) per share $ 0.27 $ (0.66) $ 0.33
========= ========= =========
Diluted earnings (loss) per share:
Numerator: Net income (loss) $ 103,102 $(245,255) $ 119,083
--------- --------- ---------
Denominator:
Weighted-average common shares outstanding 377,028 371,786 365,192
Dilutive effect of stock options and warrant 1,412 7,617
--------- --------- ---------
Total shares 378,440 371,786 372,809
--------- --------- ---------
Diluted earnings (loss) per share $ 0.27 $ (0.66) $ 0.32
========= ========= =========
During the years ended March 31, 2003, 2002 and 2001, stock options and a
warrant to purchase approximately 61,917,000, 66,864,000 and 23,077,000 shares,
respectively, were excluded from the diluted EPS calculation because they were
anti-dilutive.
46
12. INCOME TAXES
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows (in thousands):
March 31,
----------------------
2003 2002
-------- --------
Deferred tax assets:
Deferred maintenance $ 10,661 $ 11,915
Amortization of intangible assets 60,319 69,774
Restructuring accrual 6,823 15,702
Allowance for doubtful accounts 7,028 5,307
Net operating loss carryforwards 21,706 24,201
Other 37,470 34,399
-------- --------
144,007 161,298
Less valuation allowance 6,915 1,686
-------- --------
Net deferred tax assets 137,092 159,612
Current portion 30,850 41,995
-------- --------
Long term portion $106,242 $117,617
======== ========
Deferred tax liabilities:
Capitalized research and development costs $ 12,790 $ 13,746
Depreciation 16,633 10,892
Other 56,890 48,279
-------- --------
Total deferred tax liabilities 86,313 72,917
Current portion 245 184
-------- --------
Long term portion $ 86,068 $ 72,733
======== ========
The income tax provision (benefit) includes the following (in thousands):
Year Ended March 31,
-------------------------------------
2003 2002 2001
-------- -------- --------
Current:
Federal $ 6,946 $ 56,794 $ 50,711
Foreign 9,785 8,673 16,370
State 466 4,426 5,800
-------- -------- --------
Total current tax provision 17,197 69,893 72,881
-------- -------- --------
Deferred:
Federal 30,934 (71,435) (3,297)
Foreign 2,642 1,081 3,402
State 2,340 (5,131)
-------- -------- --------
Total deferred tax expense (benefit) 35,916 (75,485) 105
-------- -------- --------
Total income tax provision (benefit) $ 53,113 $ (5,592) $ 72,986
======== ======== ========
47
The Company's income tax expense (benefit) differed from the amount computed on
pre-tax income (loss) at the U.S. federal income tax rate of 35% for the
following reasons (in thousands):
Year Ended March 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
Federal income tax (benefit) at
statutory rates $ 54,675 $(87,796) $ 67,224
Increase (decrease) in taxes:
Export sales benefit (4,065) (4,290) (8,024)
State income taxes, net 1,824 (458) 3,770
Goodwill amortization and impairment 88,600 8,831
Other 679 (1,648) 1,185
-------- -------- --------
Provision (benefit) for income taxes $ 53,113 $ (5,592) $ 72,986
======== ======== ========
At March 31, 2003 the Company has net operating loss carryforwards for income
tax purposes of approximately $75,592,000 which expire as follows (in
thousands):
Year ending March 31:
2004 $ 3,206
2005 5,696
2006 6,257
2008 863
2010 1,594
2011 3,011
2012 77
2018 441
2019 31
Unlimited carryforward 54,416
Of this amount, approximately $1,965,000 is available to offset U.S. federal
income taxes and approximately $73,627,000 relates to various foreign
jurisdictions. The deferred tax asset for the foreign loss carryforwards has
been offset by a valuation allowance of approximately $2,100,000. In addition,
approximately $5,768,000 of tax credits expiring in 2008 are available to offset
future U.S. federal income tax liabilities. The tax credit has been offset by a
valuation allowance of approximately $2,900,000. A capital loss carryforward is
available to offset future U.S. federal capital gains of approximately $900,000
(expiring in 2006); such deferred tax asset has been offset entirely by a
valuation allowance.
Cash (received) paid for income taxes totaled approximately ($7,905,000),
$65,935,000 and $41,538,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.
13. SEGMENT INFORMATION
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 IT professionals efficiently
develop, implement and support the applications that run their businesses.
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. The Company also offers a broad range of data
processing professional services including business systems analysis, design and
programming, software conversion and system planning and consulting.
48
Ford Motor Company accounted for approximately 12% of total revenue during
fiscal 2003. This revenue was primarily associated with the professional
services segment of the business. No single customer accounted for greater than
10% of total revenue during fiscal 2002 or 2001. No single customer accounted
for greater than 10% of accounts receivable at March 31, 2003 and 2002.
The Company evaluates the performance of its segments based primarily on
operating profit (loss) before corporate expenses, other income (expense),
restructuring charges, and goodwill amortization and impairment. The allocation
of income taxes is not evaluated at the segment level. Financial information for
the Company's business segments is as follows (in thousands):
Year Ended March 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues:
Products:
Mainframe $ 553,480 $ 687,286 $ 762,778
Distributed systems 154,416 164,096 189,328
----------- ----------- -----------
Total products revenue 707,896 851,382 952,106
Services 667,444 889,162 1,083,050
----------- ----------- -----------
Total revenues $ 1,375,340 $ 1,740,544 $ 2,035,156
=========== =========== ===========
Income (loss) from operations:
Products $ 269,855 $ 358,504 $ 375,852
Services 55,800 49,013 109,196
Corporate expenses (191,131) (207,166) (250,324)
Goodwill amortization (38,926) (42,092)
----------- ----------- -----------
Income from operations before goodwill
impairment and other charges 134,524 161,425 192,632
Goodwill impairment charge (387,418)
Restructuring charge (46,930)
Other income (expense) 21,691 22,076 (563)
----------- ----------- -----------
Income (loss) before income taxes $ 156,215 $ (250,847) $ 192,069
=========== =========== ===========
Financial information regarding geographic operations are presented in the table
below (in thousands):
Year Ended March 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues:
United States $1,009,354 $1,328,056 $1,585,326
Europe and Africa 286,088 314,172 334,448
Other international operations 79,898 98,316 115,382
---------- ---------- ----------
Total revenue $1,375,340 $1,740,544 $2,035,156
========== ========== ==========
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than ten percent
of the Company's long lived assets, other than financial instruments, are
located outside of the United States.
49
14. COMMITMENTS AND CONTINGENCIES
The Company leases land, office space and equipment under various operating
lease agreements extending through fiscal 2100. Certain of these leases contain
provisions for renewal options and escalation clauses. The Company also has
commitments under various advertising agreements. The following is a schedule of
future minimum commitments for the next five years and in total (in thousands):
Year ending Total
March 31: Commitment
----------------- ------------
2004 39,698
2005 28,574
2006 21,314
2007 18,343
2008 13,354
Thereafter 237,717
-----------
Total $ 359,000
===========
In connection with the new headquarters facility, the Company has entered into a
lease agreement for the land associated with the facility. Currently, rent is
being capitalized in conjunction with the construction project. When the
facility is placed into service in fiscal 2004, monthly rent will be charged to
expense. Total rent payments under this agreement were approximately $717,000
for the year ended March 31, 2003. The agreement includes provisions for annual
rent increases based on increases in the Consumer Price Index with a maximum of
5% per year. The lease expires in fiscal 2100.
The new headquarters facility will include retail and restaurant space. At March
31, 2003, leases had been finalized for approximately 20% of the available space
and the Company is currently negotiating with various potential tenants for the
remaining space.
Director Compensation - Effective April 1, 2002, the Board of Directors approved
the 2002 Directors Phantom Stock Plan (the Plan) for external Board members to
provide increased incentive to make contributions to the long term growth of the
Company, to align the interests of directors with the interests of shareholders,
and to facilitate attracting and retaining directors of exceptional ability. The
Plan provides for issuance of rights to receive the value of a share of the
Company's common stock in cash upon vesting which occurs upon the retirement of
the director from the Board. Phantom shares are granted automatically at the
beginning of each fiscal year and at the discretion of the Board. As of March
31, 2003, approximately 75,000 phantom shares had been issued. The expense
incurred related to this program was approximately $275,000 for fiscal 2003 and
is included in "administrative and general" in the consolidated statements of
operations. Any fluctuation in the Company's stock price as quoted on the NASDAQ
will result in a change to the expected payments under the Plan.
50
15. BENEFIT PLANS
Employee Stock Ownership Plan - In July 1986, the Company established an
Employee Stock Ownership Plan (ESOP) and Trust. Under the terms of the ESOP, the
Company makes annual contributions to the Plan for the benefit of substantially
all US employees of the Company. The contribution may be in the form of cash or
common shares of the Company. The Board of Directors may authorize contributions
between a maximum of 25% of eligible compensation and a minimum sufficient to
cover current obligations of the Plan. The Company made contributions of
$9,425,000, $10,657,000 and $10,685,000 in fiscal 2003, 2002 and 2001,
respectively. This is a non-leveraged ESOP plan.
Employee Stock Purchase Plan - During fiscal 1996, the Company adopted and the
shareholders approved the global Employee Stock Purchase Plan under which the
Company was authorized to issue up to eight million shares of common stock to
eligible employees, all of which were distributed as of March 2001. During
fiscal 2002, the shareholders approved international and domestic employee stock
purchase plans authorizing 15 million shares for issuance to eligible employees.
Currently, the offering periods commence on April 1st and October 1st each year.
Under the terms of the plan, employees can elect to have up to ten percent of
their compensation withheld to purchase Company stock at the close of the
offering period. The value of the stock purchased in any calendar year cannot
exceed $25,000. The purchase price is 85% of the first or last day's average
high and low price for each offering period, whichever is lower. During fiscal
2003, 2002 and 2001, the Company sold approximately 3,482,000, 1,007,000 and
4,515,000 shares, respectively, to eligible employees under the plan.
Employee Stock Option Plans - The Company adopted five employee stock option
plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees and directors
of the Company, of which approximately 38,028,000 options were outstanding at
March 31, 2003. Under the terms of the plans, the Company may grant nonqualified
options at the fair market value of the stock on the date of grant. During
fiscal 2003, the Company granted approximately 2,408,000 options under the five
different Employee Stock Option Plans. Options granted under these plans vest in
cumulative annual installments over a three to five year period. All options
were granted at fair market value and expire ten years from the date of grant.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval. The plan provides for grants of options to purchase
up to 50,000,000 shares of the Company's common stock to employees or directors
of the Company. Under the terms of the plan, the Company may grant nonqualified
stock options at the fair market value of the stock on the date of grant. During
fiscal 2003, the Company granted approximately 3,567,000 options under the Broad
Based Stock Option Plan. Approximately 24,882,000 options were outstanding at
March 31, 2003. Options granted under the Broad Based Stock Option Plan either
vest every six months over a four year period or in cumulative annual
installments over a three to five year period. All options were granted at fair
market value and expire ten years from the date of grant.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming
director. During fiscal 2003, no options were granted under the Non-Employee
Director Stock Option Plan. Approximately 1,247,000 options were outstanding at
March 31, 2003.
Prior to March 31, 2002, each non-employee director received an annual grant of
20,000 options with additional grants for board and committee meeting
attendance. Non-employee directors were granted stock options out of the
Non-Employee Director Stock Option Plan or the Fiscal 1999 Stock Option Plan.
51
At March 31, 2003, approximately 76,000 options were outstanding under plans
that were terminated by the Company, of which virtually all are fully vested.
All outstanding options under the terminated plans remain in effect in
accordance with the terms under which they were granted.
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction. During
fiscal 2003, approximately 38,000 options were exercised under the Replacement
Stock Option Award program for which approximately 11,000 replacement options
were granted.
The Company applied the intrinsic value method of recognition and measurement
under APB Opinion No. 25 to its stock-based compensation plans. Accordingly, no
compensation expense related to employee stock options is reflected in net
income, as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of the grant. See Note 1 for the
Company's pro forma net income and earnings per share in accordance with SFAS
No. 123.
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2003, 2002 and 2001, and changes
during the years ending on those dates is as follows (shares in thousands):
2003 2002 2001
------------------------- ------------------------- -------------------------
Shares Shares Shares
Under Weighted-Avg. Under Weighted-Avg. Under Weighted-Avg.
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 65,864 $ 12.30 46,272 $ 13.53 44,965 $ 13.93
Granted 5,975 7.17 31,380 9.46 11,482 9.80
Exercised (552) 2.82 (4,022) 5.02 (2,459) 5.52
Exchanged (12) 8.35 (878) 12.07 (1,973) 11.43
Forfeited (7,042) 13.79 (6,888) 12.62 (5,743) 15.45
------ ------ ------
Outstanding at
year end 64,233 $ 11.75 65,864 $ 12.30 46,272 $ 13.53
====== ====== ======
Options exercisable
at year end 34,510 $ 12.78 27,581 $ 12.42 20,140 $ 9.77
====== ====== ======
Weighted-average
fair value of options
granted during the
year $ 5.24 $ 5.09 $ 7.30
====== ====== ======
52
The following table summarizes information about stock options outstanding
at March 31, 2003 (shares in thousands):
------------------------------------------------ --------------------------
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Shares Shares
Under Weighted-Avg. Weighted-Avg. Under Weighted-Avg.
Option Remaining Life Exercise Price Option Exercise Price
------ -------------- -------------- ------ --------------
Range of Exercise Prices
$ 0.01 to $10.00 43,624 6.96 $ 8.20 18,927 $ 7.51
10.01 to 20.00 11,734 5.44 14.87 8,729 14.60
20.01 to 30.00 8,149 4.98 24.40 6,303 24.35
30.01 to 42.00 726 5.26 32.20 551 32.36
------ ------
64,233 6.41 11.75 34,510 12.78
====== ======
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
------------------------ ----------------------- -------------------------
Equity compensation plans
approved by security holders 39,350 $13.44 7,019
Equity compensation plans not
approved by security holders 24,883 9.07 24,577
The maximum number of shares for which additional options may be granted was
31,596,483 at March 31, 2003, 32,058,441 at March 31, 2002 and 55,672,142 at
March 31, 2001. At March 31, 2003, a total of 96,829,541 shares of the Company's
common stock are reserved for issuance under the warrant and all option plans.
Income tax benefits associated with the exercise of stock options are reflected
as adjustments to additional paid-in capital.
53
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2003 and 2002 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Fiscal 2003:
Revenues $ 346,599 $ 357,994 $ 333,139 $ 337,608 $ 1,375,340
Operating income 28,860 47,398 32,031 26,235 134,524
Pre-tax income 34,038 51,258 38,528 32,391 156,215
Net income 22,465 33,830 25,429 21,378 103,102
Basic earnings per share 0.06 0.09 0.07 0.06 0.27
Diluted earnings per share 0.06 0.09 0.07 0.06 0.27
Fiscal 2002:
Revenues $ 450,475 $ 427,761 $ 453,780 $ 408,528 $ 1,740,544
Operating income (loss) 51,026 36,961 42,049 (402,959) (272,923)
Pre-tax income (loss) 55,413 42,750 48,047 (397,057) (250,847)
Net income (loss) 34,356 26,505 29,789 (335,905) (245,255)
Basic earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
Diluted earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
17. SUBSEQUENT EVENT
Revolving Credit Facility - On May 2, 2003, the Company entered into a
$100,000,000 revolving credit facility maturing in 364 days. If at any time the
combined unencumbered liquid assets of the Company (as defined in the credit
facility) are less than $200,000,000, the credit facility will be reduced to
$50,000,000. Interest may be determined on a Eurodollar basis or base rate (as
defined in the credit facility) at the Company's option.
The terms of the credit facility contain, among other provisions, certain
financial covenants including minimum net worth requirements, and specific
limitations on additional indebtedness, liens and merger activity.
Stock Repurchase Plan - On May 6, 2003, the Company's Board of Directors
authorized the repurchase of up to $125 million of the Company's common stock.
The Company will purchase stock on the open market, through negotiated or block
transactions, periodically, based upon market and business conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in the Proxy Statement
under the captions "Election of Directors" and "Other Matters - Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Proxy Statement
under the caption "Compensation of Executive Officers and Directors"
(excluding the Compensation Committee Report on Executive Compensation and
the Performance Graph) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the Proxy Statement
under the caption "Security Ownership of Management and Major Shareholders"
and is incorporated herein by reference. In addition, the information
contained in the Equity Compensation table under Item 5 of this report and
in Note 15 in the Notes to Consolidated Financial Statements which are
included in this report in Item 8 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the Proxy Statement
under the caption "Other Matters - Related Party Transactions" and is
incorporated herein by reference.
ITEM 14. 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.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries are filed herewith:
Page
----
Independent Auditors' Report 30
Consolidated Balance Sheets as of March 31, 2003 and 2002 31
Consolidated Statements of Operations for each of the years
ended March 31, 2003, 2002 and 2001 32
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2003, 2002 and 2001 33
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2003, 2002 and 2001 34
Notes to Consolidated Financial Statements 35-54
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 62
Schedule II - Valuation and Qualifying Accounts and Reserves 63
All other financial statement schedules not listed above are omitted as the
required information is not applicable or the information is presented in the
consolidated financial statements or related notes.
3. EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index attached to this report. The Exhibit
Index is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2003.
56
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Farmington Hills, State of Michigan on June 23, 2003.
COMPUWARE CORPORATION
By: /S/ PETER KARMANOS, JR.
-------------------------------
Peter Karmanos, Jr.
Chairman of the Board, Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ PETER KARMANOS, JR. Chairman of the Board, Chief Executive Officer June 23, 2003
- -------------------------------- And Director (Principal Executive Officer)
Peter Karmanos, Jr.
/S/ JOSEPH A. NATHAN President and Chief Strategy Officer June 23, 2003
- --------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 23, 2003
- -------------------------------- and Treasurer (Chief Financial and Accounting Officer)
Laura L. Fournier
/S/ DENNIS W. ARCHER Director June 23, 2003
- --------------------------------
Dennis W. Archer
/S/ GURMINDER S. BEDI Director June 23, 2003
- --------------------------------
Gurminder S. Bedi
Director
- --------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 23, 2003
- --------------------------------
Elaine K. Didier
/S/ WILLIAM O. GRABE Director June 23, 2003
- --------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 23, 2003
- --------------------------------
William R. Halling
/S/ FAYE A. NELSON Director June 23, 2003
- --------------------------------
Faye A. Nelson
/S/ GLENDA D. PRICE Director June 23, 2003
- --------------------------------
Glenda D. Price
Director
- --------------------------------
W. James Prowse
Director
- --------------------------------
G. Scott Romney
Director
- --------------------------------
Lowell P. Weicker, Jr.
57
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter Karmanos, Jr., Chief Executive Officer of the Company, certify
that:
1. I have reviewed this annual report on Form 10-K of Compuware
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation
Date"); and
c. presented in this annual 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 functions):
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 annual report whether 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.
/s/ Peter Karmanos, Jr.
- ------------------------------
Peter Karmanos, Jr.
Chief Executive Officer
June 23, 2003
58
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Laura L. Fournier, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Compuware
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation
Date"); and
c. presented in this annual 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 functions):
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 annual report whether 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.
/s/ Laura L. Fournier
- ------------------------------
Laura L. Fournier
Chief Financial Officer
June 23, 2003
59
EXHIBITS
The following exhibits are filed herewith or incorporated by reference. Each
management contract or compensatory plan or arrangement filed as an exhibit to
this report is identified below with an asterisk before the exhibit number. The
Company's SEC file number is 0-20900.
Exhibit
Number Description of Document
-------- -----------------------
3(i).1 Restated Articles of Incorporation of Compuware Corporation,
as amended, as of October 25, 2000. (11)
3(i).5 Amended and Restated Bylaws of Compuware Corporation, as of
October 2001. (12)
4.0 Rights Agreement dated as of October 25, 2000 between
Compuware Corporation and Equiserve Trust Company, N.A., as
Rights Agent. (8)
4.1 Warrant dated November 16, 2001 (13)
*4.2 Revolving Credit Agreement dated as of May 2, 2003, between
Compuware Corporation and Comerica Bank
10.4 1992 Stock Option Plan. (1)
10.24 Promotion Agreement, dated September 8, 1992, between
Compuware Sports Corporation and the Company. (1)
10.35 Fiscal 1993 Stock Option Plan. (1)
10.36 Stock Option Plan for Non-Employee Directors. (1)
10.37 Fiscal 1998 Stock Option Plan (3)
10.51 Fiscal 1996 Stock Option Plan (7)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (7)
10.83 Fiscal 1999 Stock Option Plan (9)
10.84 Agreement and Plan of Merger, dated June 23, 1999, among the
Company, DPRC and COMP Acquisition Co. (5)
10.85 2001 Broad Based Stock Option Plan (6)
10.86 First Amendment to 1992 Stock Option Plan (2)
10.87 First Amendment to 1993 Stock Option Plan (2)
10.88 First Amendment to 1996 Stock Option Plan (2)
10.89 First Amendment to Stock Option Plan For Non-Employee
Directors (4)
*10.90 Phantom Stock Plan
*21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99.(B)(2) Credit Agreement, dated as of August 3, 1999, between
Compuware Corporation, Various Lenders, Comerica Bank, as
Administrative Agent and Co-Arranger, and Morgan Stanley
Senior Funding, Inc., as Lead Arranger, Syndication Agent and
Book Manager (10)
*99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------------------
(1) Incorporated by reference to the corresponding exhibit to
the Registration Statement on Form S-1, as amended
(Registration No. 33-53652).
(2) Incorporated by reference to exhibits 12.0, 12.1 and 12.2
to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
(3) Incorporated by reference to exhibit 4.1 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-37873).
(4) Incorporated by reference to exhibit 12.3 to the 1998
Annual Report on Form 10-K.
(5) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999.
(6) Incorporated by reference to exhibit 4.10 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-57984).
60
(7) Incorporated by reference to the corresponding exhibit to
the fiscal 2000 Annual Report on Form 10-K.
(8) Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 26, 2000.
(9) Incorporated by reference to Exhibit 10 to the Quarterly
Report on Form 10-Q for the quarterly period ended
December 31, 2000.
(10) Incorporated by reference to Exhibit 99.(B)(2) to the
Company's Amendment No. 3 (Final Amendment) to Schedule
14D-1.
(11) Incorporated by reference to the corresponding exhibit to
the fiscal 2001 Annual Report on Form 10-K.
(12) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2001.
(13) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2001.
61
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF COMPUWARE CORPORATION:
We have audited the consolidated financial statements of Compuware Corporation
and subsidiaries as of March 31, 2003 and 2002 and for each of the three years
in the period ended March 31, 2003, and have issued our report thereon dated May
6, 2003, (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the adoption of FASB 142 "Goodwill and Other
Intangible Assets"); such report is included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedule of
Compuware Corporation and subsidiaries, listed in Item 14(a)2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2003
62
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- --------------- ---------------------------------- ----------------- -------------
ADDITIONS
----------------------------------
CHARGED
BALANCE AT CHARGED TO OTHER (1) BALANCE AT
BEGINNING TO COSTS ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ---------------------------------------- --------------- ---------------------------------- ----------------- -------------
Allowance for doubtful accounts:
Year ended March 31, 2003 $ 23,190 $ 10,139 $ 6,786 $ 26,543
Year ended March 31, 2002 21,267 10,037 8,114 23,190
Year ended March 31, 2001 15,466 10,432 4,631 21,267
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
63
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
4.2 Revolving Credit Agreement dated as of May 2, 2003 between
Compuware Corporation and Comerica Bank
10.90 Phantom Stock Plan
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.