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1
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, 1998
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
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. [ ]
There were 180,751,402 shares of $.01 par value common stock outstanding as of
June 1, 1998. The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the closing sales price of the
common stock on June 1, 1998 as reported on the Nasdaq Stock Market, was
approximately $7,376,005,186.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III.
The Exhibit Index is located on pages 44 and 45.
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COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Item
Number Page
----
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 11
6. Selected Consolidated Financial Data 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
8. Consolidated Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 40
PART III
10. Directors and Executive Officers of the Registrant 41
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners and Management 42
13. Certain Relationships and Related Transactions 42
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 43
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PART I
ITEM 1. BUSINESS
Compuware provides software products and professional services designed to
increase the productivity of the information systems departments of its target
market, the 15,000 largest enterprises worldwide. The Company has historically
focused on the testing and implementation environment in the mainframe market,
where it has extensive experience and has established long-term customer
relationships. The Company also operates in the client/server market, with
products and professional services in the application development, testing and
implementation and systems management environments.
The Company was incorporated in Michigan in 1973. The Company's executive
offices are located at 31440 Northwestern Highway, Farmington Hills, Michigan
48334-2564, and its telephone number is (248) 737-7300.
THE COMPANY'S STRATEGY
The focus of the Company is to provide products and professional services to
improve the productivity of both mainframe and client/server programmers and
analysts in its target market, the 15,000 largest enterprises worldwide
deploying data processing technology. These companies invest substantial
resources to build and maintain large, complex, mission-critical applications.
As a result, this target market can benefit most from the Company's product and
professional services offerings.
The Company has developed software products and professional services for the
mainframe and client/server markets. The Company believes that each market
includes three environments: 1) the application development environment in which
application software is initially constructed; 2) the testing and implementation
environment in which application software is executed, debugged, tested and
maintained in a series of repetitive, ongoing cycles for the life of the
application; and 3) the systems management environment in which operating
systems, databases, applications and telecommunications networks are managed.
The Company has chosen not to compete in the application development and systems
management environments of the mainframe market because these are mature markets
served by several other large companies.
PRODUCTS DIVISION
MAINFRAME MARKET
The Company believes that the market for mainframe products is well-defined,
mature and is influenced by large, well-established companies. The prevalence of
IBM and IBM-compatible mainframes over the past thirty years has resulted in a
set of well-established standards in today's mainframe market.
Compuware intends to remain focused on developing, marketing and supporting
high-quality testing and implementation programmer productivity software and to
work closely with its customers to meet their evolving needs. In doing so, the
Company believes it can leverage its customer relationships, market presence and
testing and implementation expertise to better serve its mainframe clients, as
well as the faster-growing client/server market. In addition, the Company
intends to bridge the mainframe and client/server markets with integrated
product offerings.
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CLIENT/SERVER MARKET
In contrast to the mainframe market, the client/server market is characterized
by multiple hardware, software and network configurations, as well as evolving
standards and practices. As a result, it is a burdensome task for large
organizations to develop, deploy and maintain software applications that address
the wide-ranging needs of individual users, departments and the enterprise as a
whole. The Company believes its client/server products address these challenges
and that it is well positioned to successfully market client/server application
development, testing and implementation and systems management software to its
target market.
In the last four years, the Company has developed products and made acquisitions
in the application development, testing and implementation and systems
management environments of the client/server market. The Company believes it has
made substantial progress in penetrating the market in all three environments
because of the quality and visibility of its UNIFACE, EcoSystems, QA Center and
DevPartner Studio products.
MAINFRAME TESTING AND IMPLEMENTATION TOOLS
The Company currently offers testing and implementation software products that
focus on improving the productivity of programmers and analysts in application
testing, test data preparation, error analysis and maintenance of systems
running on IBM and IBM-compatible mainframes.
The Company's testing and implementation products are functionally rich, focused
on user needs and require minimal user training. Compuware strives to ensure a
common "look and feel" across its products and emphasizes 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, can be quickly integrated into day-to-day testing, debugging, and
maintenance activities and provide demonstrable benefits soon after
installation.
Compuware's mainframe testing and implementation products are grouped into the
following four product families:
File and Data Management. Compuware's file and data management products include
the File-AID and XPERT series products. These products provide a consistent,
familiar and secure method for IS professionals to access data across all
strategic environments in order to automate the creation of test data, quickly
resolve production data problems and manage changes to data and databases.
Fault Management. Compuware's Abend-AID products assist programmers in more
quickly and accurately analyzing and diagnosing software errors generally
occurring during testing and implementation. These errors, which result in the
abnormal end of the application execution, must be corrected before the program
at fault is restarted.
Interactive Analysis and Debugging. Compuware's XPEDITER interactive debugging
products enable programmers to identify and resolve errors in complex software
efficiently and accurately. Compuware's PATHVU interactive analysis products
enable programmers to assess the quality of program code, document program logic
and trace the flow of the program's logical execution.
Automated Testing. Compuware's QA Hiperstation simulates the on-line systems
environment, allowing programmers to test on-line applications under production
conditions without requiring actual users at terminals. These products capture
actual production transactions, allow test data to be created by modification of
these transactions, and then execute application programs using the test data in
a simulated on-line environment. QA Solutions is a complete line of testing
services that supplements Compuware's testing products.
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CLIENT/SERVER APPLICATION DEVELOPMENT TOOLS
The Company's client/server application development toolset, UNIFACE, is
designed to assist software developers in the creation, deployment and
maintenance of complex client/server 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 re-use in the development of technology independent applications
and allows for easier management and maintenance of applications. In addition,
UNIFACE insulates applications development and deployment from the individual
technical components which comprise a computing environment. This reduces
development and maintenance costs, permits applications to be developed once
using existing technology, and then permits the application to be deployed into
different computing technology without significant redevelopment.
UNIFACE runs on Microsoft Windows, Windows 95, Windows/NT, DOS, VMS, MPE/IX,
OS/2, Macintosh System 7 and a variety of UNIX platforms. In addition,
applications built with UNIFACE have access to relational and non-relational
data sources, including Oracle, Sybase, Informix, Ingres, DB2/6000 and RdB.
CLIENT/SERVER TESTING AND IMPLEMENTATION TOOLS
The Company's client/server testing and implementation toolset is rapidly
evolving to improve the productivity of programmers and analysts who work in the
various client/server computing platforms. Similar to their mainframe
counterparts, these products can be used immediately without modification of
customer development practices and standards, can be quickly integrated into
day-to-day testing, debugging and maintenance activities and provide
demonstrable benefits soon after installation.
Compuware's client/server testing and implementation products are grouped into
the following four product lines:
File and Data Management. File-AID/CS is a test data management tool designed to
save time and reduce the level of expertise required to manipulate data during
the development, testing and support of client/server applications. Users can
age, reformat, generate, convert, copy, compare, modify and view data without
being an expert in numerous database environments. File-AID/CS eliminates the
need to write programs, scripts or SQL or use multiple utilities. It works with
Oracle, Sybase, Microsoft QL Server, Informix, DB2 UDB and many other file and
database types.
Fault Management. Compuware's DevPartner Studio is the SmartDebugging(TM)
companion for Microsoft (R) Visual Studio(TM) 97. It accelerates team
development of multi-language components for Windows and Internet
applications. DevPartner Studio SmartDebugging tools automatically detect,
diagnose and facilitate resolution of software errors and performance problems.
Interactive Analysis and Debugging. Compuware's XPEDITER/SQL provides
interactive analysis and resolution of SQL program errors.
Automated Testing. Compuware's line of QA/Center products addresses the growing
demand for automated testing solutions for client/server and web applications.
QARun is Compuware's enterprise-wide script development and test execution tool
for client/server applications. QADirector provides test management. QALoad is
used for server load and performance testing. These products are augmented by
QASolutions, a complete line of testing services.
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CLIENT/SERVER SYSTEMS MANAGEMENT TOOLS
EcoSYSTEMS is the Company's suite of products for improving service level
management of enterprise networks, servers, distributed databases and
client/server applications in a variety of environments. Supported environments
include Windows NT, UNIX, Oracle, Sybase and Informix. EcoTOOLS simplifies
troubleshooting by allowing users to monitor vital service level metrics, as
well as the ability to automatically initiate corrective actions to help prevent
application downtime. EcoSCOPE gathers and monitors data for managing
application performance. Fault XPERT allows real-time responses to application
failures.
PROFESSIONAL SERVICES DIVISION
The Company believes that the demand for professional services is driven by the
need to control costs, the greater level of resources necessary to support
complex and rapidly changing hardware, software and communication technologies,
the need for a larger technical staff for ongoing maintenance, and more
recently, the increased growth of the client/server market.
The rapid growth of the client/server market has created strong demand for
professional services and consulting to assist customers in building new
client/server environments. Generally, these customers do not have a sufficient
staff of programmers with the expertise to implement client/server systems and
applications. The Company believes it has a competitive advantage in the
client/server market by providing products as well as professional services. For
an organization implementing a client/server system, Compuware offers software
tools and professional services to deliver complete client/server solutions.
Compuware has trained a significant segment of its professional services staff
in UNIFACE, EcoSystems, QA Center and other major client server technologies so
that it can assign such personnel to fulfill client/server-oriented consulting
and implementation requirements.
The need to modify applications systems for the Year 2000 has created demand for
professional services and consulting to assist customers in sizing, analyzing,
converting and testing their applications programs for Year 2000 compliance. The
Company believes it has a competitive advantage by combining its products and
services offerings in order to provide clients with comprehensive, efficient
Year 2000 solutions. Its PRODUCTION 2000 offerings demonstrate the Company's
unique capability to respond to its customers' evolving, and sometimes
transient, needs. The Company believes that its long term success, however, will
depend upon its ability to respond effectively to changes in customer needs
beyond the Year 2000.
Compuware offers a broad range of professional services, including business
systems analysis, design and programming, software conversion, systems planning
and systems consulting. Compuware's business approach to professional services
delivery emphasizes the hiring of experienced staff, extensive ongoing training,
high staff utilization and immediate, productive deployment of new personnel at
client accounts.
The objective of the Company's professional services division is to create
long-term relationships with clients in which its professional staff joins with
the client's information systems organization to plan, design, program,
implement and maintain technology-based solutions that achieve client business
goals. Typically, the professional services staff is integrated with the
client's development team on a specific application or project. Professional
services staff work primarily at client sites or at Compuware's Development
Centers in Farmington Hills, Michigan; Milwaukee, Wisconsin; Columbus, Ohio;
Colorado Springs, Colorado; and Phoenix, Arizona. The Company also has
professional services operations in its international locations.
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CUSTOMERS
Compuware's products and professional services are used by the information
systems departments of a wide variety of large commercial and government
organizations. As of March 31, 1998, approximately 200,000 copies of Compuware's
products had been licensed by over 11,800 customers.
None of Compuware's customers accounted for 10% or more of Compuware's total
revenues during any of the last three fiscal years.
SALES AND MARKETING
Compuware markets its testing and implementation tools, client/server systems
management tools and client/server application development tools primarily
through a direct sales force in the United States, Canada, Europe, Japan,
Asia/Pacific, Brazil, and South Africa as well as through independent
distributors in over 30 other countries. Compuware's combined products sales and
marketing staff as of March 31, 1998 numbered 728 in the United States
(including headquarters support for international sales), 34 in Canada, 760 in
Europe, 36 in Japan, 179 in Asia/Pacific, 35 in Brazil and 44 in South Africa,
for a total of 1,816 worldwide.
Compuware markets its professional services primarily through account managers
located in offices throughout North America, Europe and Asia/Pacific. Senior
professional services executives support branch marketing efforts by identifying
new business opportunities and making joint sales calls. This marketing
structure enables the Company to keep abreast of, and respond quickly to, the
changing needs of its clients and to call on the actual users of Compuware's
professional services on a regular basis. UNIFACE and QA Solutions professional
services are generally provided in conjunction with product sales, but have
substantial follow-up business as well.
PRODUCT DEVELOPMENT AND MANUFACTURING
Compuware has been successful in developing acquired products and technologies
into marketable software for its distribution channels. Compuware believes that
its 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.
Compuware's product development staff consisted of 589 employees as of March 31,
1998. Product development is performed primarily at Compuware's headquarters in
Farmington Hills, Michigan, and at its offices in Campbell, California, Nashua,
New Hampshire and in Amsterdam, The Netherlands.
Total research and development costs incurred internally by Compuware were $65.0
million, $54.3 million and $55.7 million during fiscal 1998, 1997 and 1996,
respectively. Of these amounts, $10.6 million, $9.8 million and $12.9 million
were capitalized during the same periods, respectively. Capitalization of
internally developed software products begins when technological feasibility of
the product is established. Software product development expense in the
statement of operations includes all expenditures for research and development
net of amounts capitalized.
Compuware's software products are distributed as object code on standard
magnetic cartridges and diskettes, together with printed documentation.
Compuware purchases cartridges, diskettes and documentation printing from
outside vendors. The product duplication, packing and distribution to
Compuware's customers is performed at the Company's corporate headquarters in
Farmington Hills, Michigan.
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PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
Compuware believes that effective support of its 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. Compuware believes its
installed base is a significant asset and intends to continue to provide high
levels of customer support and periodic product upgrades to assure a continuing
high level of customer satisfaction. In fiscal year 1998, approximately 97% of
Compuware's existing customers renewed at least one of their maintenance
arrangements. Compuware had 286 employees as of March 31, 1998 devoted to its
maintenance and customer support services.
All customers who subscribe to Compuware's 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 Compuware during the maintenance period.
Maintenance and support services are provided primarily by telephone access to
technical personnel located in Farmington Hills, Michigan; Campbell, California;
Nashua, New Hampshire; and in the offices of Compuware's foreign subsidiaries
and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee of approximately 15% of the then current list price of the
licensed product. They also have the option of committing to maintenance for up
to five years on a contractual basis. For fiscal years 1998, 1997 and 1996,
maintenance fees represented approximately 21.4%, 25.8% and 30.0%, respectively,
of Compuware's total revenues.
COMPETITION
The markets for Compuware's software products are highly competitive and
characterized by continual change and improvement in technology. Compuware's
competitors include BMC Software, Computer Associates, Centura, Forte, Informix,
Oracle, PLATINUM Technology, Sybase and VIASOFT. None of the competitors
competes in all of Compuware's product lines. Although Compuware believes its
mainframe products are generally complementary to those marketed by IBM, IBM
does offer some products that are directly competitive and there can be no
assurance that IBM will not choose to offer significant competing products in
the future. The principal competitive factors affecting the market for the
Company's software products include: responsiveness to customer needs,
functionality, performance, reliability, ease of use, quality of customer
support, vendor reputation and price. The Company believes, based on its current
market position, that it has competed effectively in the software products
marketplace. Nevertheless, a variety of external and internal events and
circumstances could adversely affect the Company's competitive capacity. The
Company's ability to remain competitive will depend, to a great extent, upon its
performance in product development and customer support. To be successful in the
future, the Company must respond promptly and effectively to the challenges of
technological change and its competitors' innovations by continually enhancing
its own product offerings.
The market for data processing professional services is highly competitive,
fragmented and characterized by low barriers to entry. Compuware's principal
competitors in professional services include Andersen Consulting, Electronic
Data Systems Corporation, IBM's Integrated Systems Solutions Corp., Analysts
International Corporation, Keane, Inc. and numerous other regional and local
firms in the markets in which Compuware has professional services offices.
Several of these competitors have substantially greater financial, marketing,
recruiting and training resources than Compuware. The principal competitive
factors affecting the market for Compuware's professional services include
responsiveness to customer needs, breadth and depth of technical skills offered,
availability and productivity of personnel, ability to demonstrate achievement
of results and price.
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PROPRIETARY RIGHTS
Compuware regards its products as proprietary trade secrets and confidential
information. Compuware relies largely upon a combination of trade secret,
copyright and trademark laws together with its license agreements with customers
and its internal security systems, confidentiality procedures and employee
agreements to maintain the trade secrecy of its products. Compuware typically
provides its products to users under nonexclusive, nontransferable licenses.
Under the general terms and conditions of Compuware's 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
circumstances, Compuware makes source code for its products available to its
customers under an escrow arrangement which restricts access to and use of the
source code. Although Compuware takes steps to protect its trade secrets, there
can be no assurance that misappropriation will not occur. In addition, the laws
of some foreign countries do not protect Compuware's proprietary rights to the
same extent as the laws of the United States.
Compuware seeks to protect its software, documentation and other written
materials under copyright law, which affords only limited protection. It also
asserts trademark rights in its product names. Compuware has eight patent
applications pending for certain product technology and has plans to seek
additional patents in the future. However, because the industry is characterized
by rapid technological change, Compuware believes that factors such as the
technological and creative skills of its 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 its technology.
There can be no assurance that third parties will not assert infringement claims
against Compuware in the future with respect to current and future products or
that any such assertion may not require Compuware to enter into royalty
arrangements or result in costly litigation.
EMPLOYEES
As of March 31, 1998, Compuware employed 8,663 people worldwide, with 1,816 in
products sales, sales support and marketing; 589 in research and development;
286 in product maintenance and customer support; 5,218 in professional services
marketing and delivery; and 754 in other general and administrative functions.
None of Compuware's domestic employees is represented by a labor union.
Compuware has experienced no work stoppages and believes that its relations with
its employees are good. Compuware's success will depend in part on its 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.
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ITEM 2. PROPERTIES
The Company's executive offices, research and development, principal marketing,
primary professional services office, customer service and support facilities
are located in approximately 225,000 square feet that the Company owns in an
executive office park in Farmington Hills, Michigan. The Company also leases
approximately 80,000 square feet in the same office park. In addition, the
Company owns approximately 40,000 square feet in nearby West Bloomfield,
Michigan which houses its production, distribution and additional services
facilities.
The Company operates 93 offices with a presence in over 47 countries. Remote
product research and development facilities are located in Campbell, California;
Nashua, New Hampshire; and Amsterdam, The Netherlands.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol
CPWR. As of June 1, 1998, there were approximately 2,391 shareholders of record
of Compuware Common Stock. The Company has not paid any cash dividends on its
Common Stock since fiscal 1986, and it anticipates that for the foreseeable
future, it will continue to retain its earnings for use in its business. In
April 1997, the Company effected a two-for-one stock split by means of a 100%
stock dividend payable to shareholders of record as of April 4, 1997. In October
1997, the Company effected a two-for-one stock split by means of a 100% stock
dividend payable to shareholders of record as of October 22, 1997. The following
table sets forth the range of high and low trading sale prices for the Company's
Common Stock for the periods indicated, all as reported by Nasdaq. The
information presented below has been restated for the stock splits.
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
First quarter $25.38 $15.50
Second quarter 32.69 22.63
Third quarter 39.50 28.19
Fourth quarter 51.25 31.13
FISCAL YEAR ENDED MARCH 31, 1997 HIGH LOW
First quarter $14.19 $ 5.69
Second quarter 11.50 8.07
Third quarter 15.57 11.13
Fourth quarter 17.32 12.07
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended March 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ----------- ------------ ----------- ------------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 467,251 $ 318,907 $ 226,690 $ 223,589 $ 163,563
Maintenance fees 244,273 209,521 184,039 153,828 116,399
Professional services fees 427,794 284,468 203,630 156,460 114,395
------------ ------------ ------------ ------------ ------------
Total revenues 1,139,318 812,896 614,359 533,877 394,357
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of software license fees 22,874 20,881 20,146 14,894 10,612
Cost of maintenance 31,203 27,278 26,867 24,111 19,138
Cost of professional services 365,948 250,405 174,215 133,823 99,129
Software product development 54,416 44,494 42,792 31,825 25,596
Sales and marketing 325,793 256,139 204,403 174,829 120,338
Administrative and general 58,965 48,233 38,537 33,951 28,431
Restructuring and merger-related costs 3,606 (1) 10,688 (2) 10,547 (3)
Purchased research and development 3,160 (4) 21,790 (5) 24,943 (6) 11,990 (7)
------------ ------------ ------------ ------------ ------------
Total operating expenses 865,965 669,220 542,591 435,970 303,244
------------ ------------ ------------ ------------ ------------
Income from operations 273,353 143,676 71,768 97,907 91,113
Interest and investment income, net 17,417 5,710 7,015 5,805 2,797
------------ ------------ ------------ ------------ ------------
Income before merger costs-escrow claims 290,770 149,386 78,783 103,712 93,910
Merger costs-escrow claims 8,531 (3)
------------ ------------ ------------ ------------ ------------
Income before income taxes 290,770 149,386 78,783 95,181 93,910
Income tax provision 96,826 51,950 34,541 33,084 31,623
------------ ------------ ------------ ------------ ------------
Net income $ 193,944 $ 97,436 $ 44,242 $ 62,097 $ 62,287
============ ============ ============ ============ ============
Basic earnings per share (8) $ 1.10 $ 0.57 $ 0.26 $ 0.35 $ 0.36
Diluted earnings per share (8) 1.00 0.54 0.25 0.33 0.34
Shares used in computing net income per share:
Basic earnings per share 176,137 170,385 173,758 179,029 174,697
Diluted earnings per share 193,713 179,870 179,475 190,738 185,626
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 362,324 $ 179,508 $ 141,842 $ 195,941 $ 149,542
Total assets 1,072,640 755,407 555,726 524,095 401,875
Long-term debt, less current maturities 6,956 6,068 - - -
Total shareholders' equity 708,296 445,636 318,985 336,201 253,925
(1) Reflects costs incurred with the merger and integration of NuMega
Technologies, Inc. See note 2 of Notes to Consolidated Financial
Statements.
(2) Reflects restructuring costs incurred with the reorganization of the
Company's operating units and corporate functions. See note 3 of Notes to
Consolidated Financial Statements.
(3) Reflects merger costs Incurred in connection with the acquisition,
restructuring and integration of Uniface.
(4) Reflects purchased research and development incurred in connection with
the UnderWare Inc. acquisition. See note 2 of Notes to Consolidated
Financial Statements.
(5) Reflects purchased research and development incurred in connection with
the Direct Technology and DRD Promark acquisitions. See note 2 of Notes
to Consolidated Financial Statements.
(6) Reflects purchased research and development incurred in connection with
the CoroNet Systems, Inc. acquisition. See note 2 of Notes to
Consolidated Financial Statements.
(7) Reflects purchased research and development incurred in connection with
the purchase of Simon and Oliver interactive analysis and debugging
products for CICS and batch environments from Advanced Programming
Techniques, Ltd.
(8) See notes 1 and 9 of Notes to the Consolidated Financial Statements and
Exhibit 11.1 for the basis of computing earnings per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
Percentage of Period-to-Period
Total Revenues Change
----------------------------------- ------------------------
Fiscal Year Ended 1997 1996
March 31, to to
-----------------------------------
1998 1997 1996 1998 1997
---------- ----------- ----------- ----------- -----------
Revenues:
Software license fees 41.0% 39.2% 36.9% 46.5% 40.7%
Maintenance fees 21.4 25.8 30.0 16.6 13.8
Professional services fees 37.6 35.0 33.1 50.4 39.7
-------- -------- --------
Total revenues 100.0 100.0 100.0 40.2 32.3
-------- -------- --------
Operating expenses:
Cost of software license fees 2.0 2.6 3.3 9.5 3.6
Cost of maintenance 2.7 3.4 4.4 14.4 1.5
Cost of professional services 32.1 30.8 28.3 46.1 43.7
Software product development 4.8 5.4 7.0 22.3 4.0
Sales and marketing 28.6 31.5 33.3 27.2 25.3
Administrative and general 5.2 5.9 6.3 22.3 25.2
Restructuring and merger-related costs 0.3 1.7 100.0 (100.0)
Purchased research and development 0.3 2.7 4.0 (85.5) (12.6)
-------- -------- --------
Total operating expenses 76.0 82.3 88.3 29.4 23.3
-------- -------- --------
Income from operations 24.0 17.7 11.7 90.3 100.2
Interest and investment income, net 1.5 0.7 1.1 205.0 (18.6)
-------- -------- --------
Income before income taxes 25.5 18.4 12.8 94.6 89.6
Income tax provision 8.5 6.4 5.6 86.4 50.4
-------- -------- --------
Net income 17.0% 12.0% 7.2% 99.0% 120.2%
======== ======== ========
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14
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding fiscal 1998, 1997 and 1996 special
charges from the calculations:
Percentage of Period-to-Period
Total Revenues Change
----------------------------------- -----------------------
Fiscal Year Ended 1997 1996
March 31, to to
-----------------------------------
1998 1997 1996 1998 1997
----------- ---------- ---------- ---------- -----------
Income from operations 24.6% 20.4% 17.5% 69.3% 54.1%
Interest and investment income, net 1.5 0.7 1.1 205.0 (18.6)
-------- -------- --------
Income before income taxes 26.1 21.1 18.6 73.8 49.6
Income tax provision 8.7 7.1 6.2 72.3 50.9
-------- -------- --------
Net income 17.4% 14.0% 12.4% 74.6% 49.0%
======== ======== ========
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues for fiscal 1998 were $1.1 billion, an increase of $326.4 million,
or 40.2%, as compared to $812.9 million for fiscal 1997. The Company experienced
growth in all revenue categories during fiscal 1998.
Software license fees increased $148.3 million, or 46.5%, to $467.3 million in
fiscal 1998 from $318.9 million in fiscal 1997. Almost all of the Company's
product families experienced growth in license sales. These increases were
spread primarily in the third and fourth quarter, and were due primarily to
increased demand for the Company's mainframe testing and implementation
products, and to a lesser extent, client/server testing and implementation
products.
Maintenance fee revenues increased $34.8 million, or 16.6%, to $244.3 million in
fiscal 1998 from $209.5 million in fiscal 1997. The Company continues to
experience growth in maintenance fees for all of its product families due to the
growth in the number of installed copies of its products and its relatively high
rate of maintenance contract renewals.
Revenues from professional services increased $143.3 million, or 50.4%, to
$427.8 million in fiscal 1998 from $284.5 million in fiscal 1997. This increase
was due primarily to increased business at new and existing clients equal to
$31.8 million, $16.7 million and $13.1 million at Compuware's Farmington Hills,
Michigan, Milwaukee, Wisconsin and Columbus, Ohio branches, respectively.
Revenues from professional services related to client/server systems increased
$53.9 million in fiscal 1998 over fiscal 1997.
Revenues from North American operations increased $266.9 million, or 47.8% to
$826.0 million in fiscal 1998 from $559.0 million in fiscal 1997. International
revenues increased $59.5 million, or 23.4%, to $313.3 million in fiscal 1998
from $253.9 million in fiscal 1997.
During fiscal 1998, the overall strengthening of the dollar against European and
Japanese currencies had a negative impact on Compuware's foreign revenues, as
compared to fiscal 1997. If exchange rates had been the same as they were in
fiscal 1997, international revenues during fiscal 1998 would have increased
$87.7 million, or 34.6%, instead of $59.5 million, or 23.4%, as reported.
However, the impact on revenue was partially offset by the exchange rate impact
on foreign expenses, the majority of which are in sales and marketing. The $69.7
million or 27.2% increase in sales and marketing expenses over fiscal 1997 would
have been $85.7 million, or 33.4%, if foreign exchange rates in fiscal 1998 had
been the same as they were
14
15
in fiscal 1997. As indicated from the above comments, Compuware's future
operating results may be adversely impacted by the overall strengthening of the
U.S. dollar against foreign currencies of countries where Compuware conducts
business; conversely, future operating results may be favorably impacted by an
overall weakening of the U.S. dollar against foreign currencies.
Cost of software license fees increased $2.0 million, or 9.5%, to $22.9 million
in fiscal 1998 from $20.9 million in fiscal 1997. Cost of software license fees
includes amortization of capitalized software, the cost of preparing and
disseminating products to customers and the cost of author royalties. The
Company capitalizes the cost of internally developed software when technological
feasibility has been achieved. The increase in these costs is due primarily to
an increase in amortization of purchased and internally developed software
products, and to a lesser extent, to increased packaging and distribution costs.
As a percentage of software license fees, these costs decreased to 4.9% in
fiscal 1998 from 6.5% in fiscal 1997.
Cost of maintenance increased $3.9 million, or 14.4%, to $31.2 million in fiscal
1998 from $27.3 million in fiscal 1997. Cost of maintenance consists of the cost
of maintenance programmers and product support personnel and the computing,
facilities and benefits costs allocated to such personnel. The increase in cost
of maintenance was due primarily to the increase in maintenance and support
staff in order to support the worldwide growth of the installed base. As a
percentage of maintenance fees, these costs decreased to 12.8% for fiscal 1998
from 13.0% in fiscal 1997. The Company will continue to look for ways to reduce
this percentage while maintaining superior service levels and high renewal
rates.
Cost of professional services increased $115.5 million, or 46.1%, to $365.9
million in fiscal 1998 from $250.4 million in fiscal 1997. Cost of professional
services includes all costs of the Company's professional services business,
including the personnel costs of the professional, management and administrative
staff of the Company's services business and the facilities and benefits costs
allocated to such personnel. The increase in these expenses was due primarily to
an increase of 1,033 professional staff to 4,555 people at the end of fiscal
1998, as compared to 3,522 people at the end of fiscal 1997. As a percentage of
professional services fees, these costs decreased to 85.5% in fiscal 1998 from
88.0% in fiscal 1997. The Company believes that the demand for its services
offerings will allow higher rates and staff utilization in order to maintain or
improve services margins.
Software product development costs increased $9.9 million, or 22.3% to $54.4
million in fiscal 1998 from $44.5 million in fiscal 1997. Before the
capitalization of internally developed software products, total research and
development expenditures increased to $65.0 million, or 19.8%, in fiscal 1998
from $54.3 million in fiscal 1997. Software product development costs consist of
the cost of programming personnel, the facilities, computing and benefits costs
allocated to such personnel and the costs of preparing user and installation
guides for the Company's software products, less the amount of software
development costs capitalized during the fiscal year. The increase in these
costs was due primarily to a 27.5% increase in software development staff needed
to meet the demand for new and enhanced products. Those major development
projects that achieved technological feasibility for fiscal 1998 included five
new interactive analysis and debugging products, two new fault management
products, four new file and data management products, five automated testing
products and two systems management products.
Sales and marketing costs increased $69.7 million, or 27.2%, to $325.8 million
in fiscal 1998 from $256.1 million in fiscal 1997. Sales and marketing costs
consist of the sales and marketing expenses associated with the Company's
products business, which include costs of direct sales, sales support and
marketing staff, the facilities and benefits costs allocated to such personnel
and the costs of marketing and sales incentive programs. The increase in sales
and marketing costs was largely attributable to the expansion of the worldwide
sales force, higher sales commissions associated with increased product sales,
and increased advertising expenditures. The direct sales and sales support staff
increased by 686 to 1,816 people at the end of fiscal 1998, as compared to 1,130
at the end of fiscal 1997. Approximately 56% of the Company's
15
16
direct sales force is selling client/server products. The proportion of
client/server sales representatives is expected to increase gradually over the
next few years. As a percentage of software license fees, sales and marketing
costs decreased from 80.3% in fiscal 1997 to 69.7% in fiscal 1998.
Administrative and general costs increased $10.7 million, or 22.3%, to $59.0
million in fiscal 1998 from $48.2 million in fiscal 1997. Administrative and
general costs consist of facilities, computing, compensation and benefit costs
of the Company's executive officers, legal, human resources, finance,
administrative and recruiting staffs and other personnel. The increase in these
costs was due primarily to the increase in the costs of executive compensation,
plus additional costs of employee development programs, legal services and
corporate communications necessary to support the Company's growth. As a
percentage of total revenues, administrative and general costs decreased from
5.9% in fiscal 1997 to 5.2% in fiscal 1998.
During fiscal 1998, the Company incurred special charges of $3.2 million related
to purchased research and development incurred in connection with the
acquisition of UnderWare, Inc. Since the research and development in process had
not reached technological feasibility, this amount was expensed in accordance
with Statement of Financial Accounting Standards No. 2. The Company also
incurred $3.6 million of merger-related costs incurred in connection with the
merger and integration of NuMega Technologies, Inc.
Net interest and investment income for fiscal 1998 was $17.4 million as compared
to $5.7 million in fiscal 1997. This increase in income was due primarily to
higher average cash and investment balances resulting from cash generated from
higher operating earnings and to interest received on prior years' amended
federal tax returns.
Income before income taxes increased approximately $141.4 million, or 94.6%, to
$290.8 million, as compared to income before income taxes of $149.4 million in
fiscal 1997. Excluding special charges, Compuware's income before income taxes
would have increased $126.3 million, or 73.8%, to $297.5 million from $171.2
million in fiscal 1997. As a percentage of total revenues, income before income
taxes exclusive of special charges was 26.1% in fiscal 1998, as compared to
21.1% in fiscal 1997.
The Company's provision for income taxes was $96.8 million in fiscal 1998, which
represents an effective tax rate of 33.3%, as compared to an income tax
provision of $52.0 million in fiscal 1997, which represents an effective tax
rate of 34.8%. The difference between the effective tax rate for fiscal 1998 and
1997 was due primarily to the non-deductibility of the purchased research and
development costs incurred during fiscal 1997 in connection with the DRD
Promark, Inc. acquisition. The effective tax rate for fiscal 1997 would have
been 33.6% without this cost.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for fiscal 1997 were $812.9 million, an increase of $198.5
million, or 32.3%, as compared to $614.4 million for fiscal 1996. The Company
experienced growth in all revenue categories during fiscal 1997.
Software license fees increased $92.2 million, or 40.7%, to $318.9 million in
fiscal 1997 from $226.7 million in fiscal 1996. Almost all of the Company's
product families experienced growth in license sales. These increases were
accomplished in all four quarters, and were due primarily to increased demand
for the Company's mainframe products, and to a lesser extent, the expansion of
the testing and implementation and systems management sales forces.
Maintenance fee revenues increased $25.5 million, or 13.8%, to $209.5 million in
fiscal 1997 from $184.0 million in fiscal 1996. The Company continues to
experience growth in maintenance fees for all of its product families due to the
growth in the number of installed copies of its products and its relatively high
rate of maintenance contract renewals.
16
17
Revenues from professional services increased $80.8 million, or 39.7%, to $284.5
million in fiscal 1997 from $203.6 million in fiscal 1996. This increase was due
primarily to increased business at new and existing clients equal to $17.1
million, $13.5 million and $10.1 million at Compuware's Minneapolis, Minnesota,
Farmington Hills, Michigan and Columbus, Ohio branches, respectively. In
addition, the acquisition of Adams and Reynolds, Inc. in early fiscal 1997,
contributed approximately $8.8 million in growth in services revenue. Revenues
from professional services related to client/server systems increased $16.8
million in fiscal 1997 over fiscal 1996.
Revenues from North American operations increased $153.5 million, or 37.8% to
$559 million in fiscal 1997 from $405.6 million in fiscal 1996. International
revenues increased $45.1 million, or 21.6%, to $253.8 million in fiscal 1997
from $208.8 million in fiscal 1996.
During fiscal 1997, the overall strengthening of the dollar against European and
Japanese currencies had a negative impact on Compuware's foreign revenues, as
compared to fiscal 1996. If exchange rates had been the same as they were in
fiscal 1996, international revenues during fiscal 1997 would have increased $58
million, or 28.1%, instead of $45.1 million, or 21.6%, as reported. However, the
impact on revenue was partially offset by the exchange rate impact on foreign
expenses, the majority of which are in sales and marketing. The $51.7 million or
25.3% increase in sales and marketing expenses over fiscal 1996 would have been
$57.6 million, or 28.2%, if foreign exchange rates in fiscal 1997 had been the
same as they were in fiscal 1996. As indicated from the above comments,
Compuware's future operating results may be adversely impacted by the overall
strengthening of the U.S. dollar against foreign currencies of countries where
Compuware conducts business; conversely, future operating results may be
favorably impacted by an overall weakening of the U.S. dollar against foreign
currencies.
Cost of software license fees increased $735,000, or 3.6%, to $20.9 million in
fiscal 1997 from $20.1 million in fiscal 1996. Cost of software license fees
includes amortization of capitalized software, the cost of preparing and
disseminating products to customers and the cost of author royalties. The
Company capitalizes the cost of internally developed software when technological
feasibility has been achieved. The increase in these costs is due primarily to
an increase in amortization of purchased and internally developed software
products, and to a lesser extent, to increased packaging and distribution costs.
As a percentage of software license fees, these costs decreased to 6.5% in
fiscal 1997 from 8.9% in fiscal 1996.
Cost of maintenance increased $411,000, or 1.5%, to $27.3 million in fiscal 1997
from $26.9 million in fiscal 1996. Cost of maintenance consists of the cost of
maintenance programmers and product support personnel and the computing,
facilities and benefits costs allocated to such personnel. The increase in cost
of maintenance was due primarily to the increase in maintenance and support
staff in order to support the worldwide growth of the installed base. As a
percentage of maintenance fees, these costs decreased to 13.0% for fiscal 1997
from 14.6% in fiscal 1996.
Cost of professional services increased $76.2 million, or 43.7%, to $250.4
million in fiscal 1997 from $174.2 million in fiscal 1996. Cost of professional
services includes all costs of the Company's professional services business,
including the personnel costs of the professional, management and administrative
staff of the Company's services business and the facilities and benefits costs
allocated to such personnel. The increase in these expenses was due primarily to
an increase of 1,141 professional staff to 3,522 people at the end of fiscal
1997, as compared to 2,381 people at the end of fiscal 1996. As a percentage of
professional services fees, these costs increased to 88.0% in fiscal 1997 from
85.6% in fiscal 1996.
Software product development costs increased $1.7 million, or 4.0% to $44.5
million in fiscal 1997 from $42.8 million in fiscal 1996. Before the
capitalization of internally developed software products, total research
and development expenditures decreased to $54.3 million, or 2.5%, in fiscal
1997 from $55.7 million in fiscal
17
18
1996. Software product development costs consist of the cost of programming
personnel, the facilities, computing and benefits costs allocated to such
personnel and the costs of preparing user and installation guides for the
Company's software products, less the amount of software development costs
capitalized during the fiscal year. The decrease in these costs was due
primarily to the consolidation of product development facilities and
cross-training of certain development staff personnel. This was offset by a 5.5%
increase in software development staff needed to meet the demand for new and
enhanced products. Those major development projects that achieved technological
feasibility for fiscal 1997 included the major new release of UNIFACE, two new
interactive analysis and debugging products, two new fault management products,
two new file and data management products, three automated testing products and
one systems management product.
Sales and marketing costs increased $51.7 million, or 25.3%, to $256.1 million
in fiscal 1997 from $204.4 million in fiscal 1996. Sales and marketing costs
consist of the sales and marketing expenses associated with the Company's
products business, which include costs of direct sales, sales support and
marketing staff, the facilities and benefits costs allocated to such personnel
and the costs of marketing and sales incentive programs. The increase in sales
and marketing costs was largely attributable to the expansion of the worldwide
sales force and higher sales commissions associated with increased product
sales. Including the increase in sales staff for the Company's client/server
products, the direct sales and sales support staff increased by 307 to 1,130
people at the end of fiscal 1997, as compared to 823 at the end of fiscal 1996.
As a percentage of software license fees, sales and marketing costs decreased
from 90.2% in fiscal 1996 to 80.3% in fiscal 1997.
Administrative and general costs increased $9.7 million, or 25.2%, to $48.2
million in fiscal 1997 from $38.5 million in fiscal 1996. Administrative and
general costs consist of facilities, computing, compensation and benefit costs
of the Company's executive officers, legal, human resources, finance,
administrative and recruiting staffs and other personnel. The increase in these
costs was due primarily to the increase in the costs of executive compensation,
plus additional costs of employee development programs, legal services and
corporate communications necessary to support the Company's growth. As a
percentage of total revenues, administrative and general costs decreased from
6.3% in fiscal 1996 to 5.9% in fiscal 1997.
During fiscal 1997, the Company incurred special charges of $21.8 million
related to purchased research and development acquired in connection with the
purchases of Direct Technology Limited and DRD Promark, Inc. Since the research
and development in process had not reached technological feasibility, this
amount was expensed in accordance with Statement of Financial Accounting
Standards No. 2.
Net interest and investment income for fiscal 1997 was $5.7 million as compared
to $7.0 million in fiscal 1996. This decrease in income was due primarily to
lower average cash and investment balances as a result of large cash
expenditures for acquisitions.
Income before income taxes increased approximately $70.6 million, or 89.6%, to
$149.4 million, as compared to income before income taxes of $78.8 million in
fiscal 1996. Excluding special charges, Compuware's income before income taxes
would have increased $56.8 million, or 49.6%, to $171.2 million from $114.4
million in fiscal 1996. As a percentage of total revenues, income before income
taxes exclusive of special charges was 21.1% in fiscal 1997, as compared to
18.6% in fiscal 1996.
The Company's provision for income taxes was $52.0 million in fiscal 1997, which
represents an effective tax rate of 34.8%, as compared to an income tax
provision of $34.5 million in fiscal 1996, which was an effective tax rate of
43.8%. The difference between the effective tax rates in fiscal 1997 and 1996 is
due primarily to the nondeductibility of the purchased research and development
incurred in connection with the DRD Promark Inc. and CoroNet acquisitions,
respectively. Without these expenses, the effective tax rates for fiscal 1997
and 1996 would have been 33.6% and 33.3%, respectively.
18
19
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had approximately $368.3 million in cash and
investments which resulted primarily from cash generated from operations. During
fiscal 1998, 1997 and 1996, Compuware generated $210.6 million, $134.3 million
and $78.2 million, respectively, in operating cash flow. During these periods,
the Company had capital expenditures which included property and equipment,
capitalized research and software development and purchased software of $41.8
million, $38.0 million and $29.4 million, respectively.
During fiscal 1998, the Company acquired UnderWare, Inc. a privately held
software product company for approximately $3.5 million cash and Vine Systems
Company Ltd., a professional services firm for approximately $5.0 million. Each
acquisition was accounted for as a purchase. See note 2 of Notes to Consolidated
Financial Statements.
Compuware believes its available cash resources, together with cash flow from
operations, will be sufficient to meet its cash needs for the foreseeable
future.
Compuware has a line of credit which permits the Company to borrow up to $30
million. The line of credit expires on September 1, 1999 and its availability is
subject to a number of financial covenants (see note 7 of Notes to Consolidated
Financial Statements). During the last fiscal year, the Company had no
borrowings under this line of credit. The Company's long-term debt includes $6.1
million of pound-denominated notes issued as part of the Direct Technology
Limited acquisition (see notes 2 and 7 of Notes to Consolidated Financial
Statements). The notes are due April 30, 1999 and interest is paid semiannually
at the six month LIBOR rate. The Company also has approximately $800,000 of
pound-denominated notes outstanding at March 31, 1998 that were issued as part
of the Vine Systems acquisition (see note 2 of Notes to Consolidated Financial
Statements). The notes are due March 31, 2001 and interest is paid semiannually
using the six month LIBOR rate.
At March 31, 1998, the Company had approximately $101.2 million in net operating
loss carryforwards available for income tax purposes. Of this amount,
approximately $4.5 million is available to offset U.S. federal income taxes and
approximately $96.7 million related to various foreign jurisdictions. The
Company has evaluated the realizability of such loss carryforwards using the
"more likely than not" criteria established under SFAS 109 and has recorded an
estimated valuation allowance.
The Financial Accounting Standards Board issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" in June 1997. The Company is required to
adopt these Statements with its fiscal year ending March 31, 1999. The adoption
of these new standards are not expected to have a material impact on the
Company's financial statements. In October 1997, the American Institute of
Certified Public Accountants (AICPA) released Statement of Position (SOP) 97-2,
"Software Revenue Recognition", which supersedes SOP 91-1, "Software Revenue
Recognition". SOP 97-2 establishes standards for recognizing revenues related to
software products and related services. The Company is required to adopt this
pronouncement prospectively with its fiscal year ending March 31, 1999. The
adoption of SOP 97-2 is not expected to have a material impact on the Company's
financial statements. In March 1998, the AICPA released SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which establishes guidance on accounting for the costs of computer software
developed or obtained for internal use. The Company is required to adopt this
pronouncement with its fiscal year ending March 31, 1999. The adoption of SOP
98-1 is not expected to have a material impact on the Company's financial
statements.
Compuware is designing and testing the most current versions of its products to
process Year 2000 data without interruption or errors and believes that these
versions are substantially Year 2000 compliant.
19
20
Compuware may experience migration costs for customers who are not running
current levels of its products. Compuware is continually testing its products to
assure Year 2000 support and compliance; there can be no assurance, however,
that despite such testing, undetected errors or defects will not exist that
could cause a product to fail to process Year 2000 data correctly. Compuware's
products are typically used in high volume information systems that are critical
to a customer's operations, so that business interruptions, loss or corruption
of data or other major problems could have significant consequences to the
customer. At this time, the Company is not aware of any material operational
issues or costs associated with Year 2000 compliance of its own products.
Compuware is also unaware of any potential material liabilities or operational
difficulties associated with Year 2000 compliance of its own internal
information systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INVESTMENT PORTFOLIO
The table below provides information about the Company's 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):
FAIR VALUE AT
FY 1999 FY 2000 FY 2001 TOTAL MARCH 31, 1998
-------------- -------------- ------------- -------------- -----------------
Cash Equivalents $ 182,366 $ 182,366 $ 182,366
Average Interest Rate 5.02% 5.02%
Investments 54,349 $ 103,659 $ 4,062 162,070 162,191
Average Interest Rate 3.91% 3.97% 4.03% 3.95%
Average Interest Rate
(tax equivalent) 6.01% 6.11% 6.20% 6.08%
FOREIGN EXCHANGE HEDGING
Compuware uses a hedging program employing forward contracts on the local
currencies of its major foreign subsidiaries to reduce its exposure to currency
fluctuations on intercompany foreign currency denominated balance sheet
positions. Rather than hedging individual transactions denominated in one
currency the Company hedges the aggregate of such transactions in each currency,
or the balance due from the foreign subsidiary to the U.S. at a given point,
usually at month end. The normal holding period for any hedge entered into is 30
to 90 days. The Company does not take firm delivery of the foreign currency
amounts and it does not hedge anticipated transactions or outstanding
commitments. The difference between the contract rate and the current market
rate on the maturity date is paid or received from the bank on the settlement
date. The gain or loss incurred as of month end on any open contract is
recognized in the statement of income. See note 1 of Notes to Consolidated
Financial Statements. The Board of Directors has approved the Company's hedging
program. The Chief Financial Officer reviews and approves all hedging
transactions.
The Company had $45.5 million of short-term foreign exchange forward contracts
at March 31, 1998, denominated in German, Belgium, Austrian, French, Japanese,
Australian, Dutch, Italian and Swiss currencies. The Company does not anticipate
any material adverse effect on its consolidated financial position, results of
operations, or cash flows resulting from the use of these instruments. There can
be no assurance that these strategies will be effective in eliminating or
reducing transaction losses.
20
21
The following table provides information about the Company's foreign exchange
forward contracts at March 31, 1998. 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 31,1998 (in thousands, except contract rates):
CONTRACT FORWARD FAIR VALUE
DATE IN MATURITY CONTRACT POSITION IN AT
1998 DATE IN 1998 RATE U.S. DOLLARS MARCH 31, 1998
-------------- ----------------- ---------------- ---------------- -----------------
German Marks Mar-31 May-29 1.84466 $ 11,926 $ 11,959
Belgium Francs Feb-27 Apr-30 37.29500 3,754 3,684
Austrian Shilling Mar-31 May-29 13.01440 3,688 3,710
French Francs Mar-31 May-29 6.18440 7,600 7,627
Japanese Yen Mar-31 May-29 132.06200 3,407 3,411
Australian Dollar Mar-31 May-29 1.50750 3,317 3,309
Dutch Guilders Mar-31 May-29 2.07965 4,809 4,824
Italian Lire Mar-31 May-29 1,824.32000 1,370 1,375
Swiss Francs Mar-31 May-29 1.51950 5,607 5,632
22
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REFERENCE SHOULD BE MADE TO ITEM 14 (A) 1 FOR AN INDEX TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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 as of March 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 4, 1998
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23
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS NOTES 1998 1997
---------- ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 206,278 $ 107,341
Investments 4 54,349 26,604
Accounts receivable, less allowance for doubtful
accounts of $8,812 and $6,941 388,573 290,922
Deferred tax asset 10 14,133 9,747
Income taxes refundable 2,594 9,593
Prepaid expenses and other current assets 10,348 7,605
---------- ----------
Total current assets 676,275 451,812
---------- ----------
INVESTMENTS 4 107,721 44,465
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 5 84,494 70,578
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $70,243 AND $53,933 50,455 53,355
---------- ----------
OTHER:
Accounts receivable 64,282 54,637
Deferred tax asset 10 12,926 11,084
Excess of cost of investment over fair value of
net assets acquired, less accumulated amortization
of $9,835 and $5,417 2 57,607 55,700
Other assets 6 18,880 13,776
---------- ----------
Total other assets 153,695 135,197
---------- ----------
TOTAL ASSETS $1,072,640 $ 755,407
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY NOTES 1998 1997
----------- --------- -----------
CURRENT LIABILITIES:
Accounts payable $ 19,985 $ 24,275
Accrued expenses 71,104 53,562
Accrued bonuses and commissions 42,688 30,100
Deferred revenue 180,174 164,367
---------- ----------
Total current liabilities 313,951 272,304
LONG-TERM DEBT 7 6,956 6,068
DEFERRED REVENUE 43,437 31,399
---------- ----------
Total liabilities 364,344 309,771
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares
Common stock, $.01 par value - authorized
400,000,000 shares; issued and outstanding
180,170,973 and 171,863,540 shares in 1998
and 1997, respectively 8 1,802 1,719
Additional paid-in capital 8 282,668 212,132
Retained earnings 427,455 232,630
Foreign currency translation adjustment (3,629) (845)
---------- ----------
Total shareholders' equity 708,296 445,636
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,072,640 $ 755,407
========== ==========
See notes to consolidated financial statements.
23
24
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (IN
THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------
NOTES 1998 1997 1996
-------------- -------------- -------------
REVENUES:
Software license fees $ 467,251 $ 318,907 $ 226,690
Maintenance fees 244,273 209,521 184,039
Professional services fees 427,794 284,468 203,630
------------- ------------- ------------
Total revenues 1,139,318 812,896 614,359
------------- ------------- ------------
OPERATING EXPENSES:
Cost of software license fees 22,874 20,881 20,146
Cost of maintenance 31,203 27,278 26,867
Cost of professional services 365,948 250,405 174,215
Software product development 54,416 44,494 42,792
Sales and marketing 325,793 256,139 204,403
Administrative and general 58,965 48,233 38,537
Restructuring and merger-related costs 2,3 3,606 10,688
Purchased research and development 2 3,160 21,790 24,943
------------ ------------ -------------
Total operating expenses 865,965 669,220 542,591
------------ ------------ -------------
INCOME FROM OPERATIONS 273,353 143,676 71,768
OTHER INCOME 17,417 5,710 7,015
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 290,770 149,386 78,783
INCOME TAX PROVISION 96,826 51,950 34,541
------------- ------------ ------------
NET INCOME $ 193,944 $ 97,436 $ 44,242
============= ============= =============
Basic earnings per share $ 1.10 $ 0.57 $ 0.26
============= ============= =============
Diluted earnings per share $ 1.00 $ 0.54 $ 0.25
============= ============= =============
See notes to consolidated financial statements.
24
25
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
Foreign
Additional Currency
Common Stock Paid-In Retained Translation
----------------------------- Capital Earnings Adjustment
Shares Amount
-------------- -------------- -------------- -------------- ----------------
BALANCE AT APRIL 1, 1995, as restated (Note 8) 182,028,568 $ 1,820 $ 185,730 $ 149,257 $ 271
Net income 44,242
Issuance of common stock 360,000 4 1,504
Purchase of common stock (11,663,200) (117) (11,852) (58,305)
Return of Uniface escrow shares (2,714,876) (27) 27
Acquisition tax benefits 3,852
Foreign currency translation adjustment (1,287)
Unrealized loss on marketable securities
Exercise of employee stock options
and related tax benefit (Note 13) and other 1,181,600 12 4,819
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 1996 169,192,092 1,692 184,080 135,194 (1,016)
Net income 97,436
Issuance of common stock 160,000 2 2,328
Acquisition tax benefits 6,603
Foreign currency translation adjustment 171
Realized gain on sale of marketable
securities (Note 4)
Exercise of employee stock options
and related tax benefit (Note 13) 2,511,448 25 19,121
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 1997 171,863,540 1,719 212,132 232,630 (845)
Net income 193,944
NuMega acquisition (Note 2) 3,341,603 33 3,767 881
Issuance of common stock 725,308 7 12,738
Acquisition tax benefits 6,485
Foreign currency translation adjustment (2,784)
Exercise of employee stock options
and related tax benefit (Note 13) 4,240,522 43 47,546
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 1998 180,170,973 $ 1,802 $ 282,668 $ 427,455 $ (3,629)
============= ============= ============= ============= =============
Unrealized
Loss On Total
Marketable Shareholders'
Securities Equity
-------------- ---------------
BALANCE AT APRIL 1, 1995, as restated (Note 8) $ (877) $ 336,201
Net income 44,242
Issuance of common stock 1,508
Purchase of common stock (70,274)
Return of Uniface escrow shares
Acquisition tax benefits 3,852
Foreign currency translation adjustment (1,287)
Unrealized loss on marketable securities (88) (88)
Exercise of employee stock options
and related tax benefit (Note 13) and other 4,831
------------- -------------
BALANCE AT MARCH 31, 1996 (965) 318,985
Net income 97,436
Issuance of common stock 2,330
Acquisition tax benefits 6,603
Foreign currency translation adjustment 171
Realized gain on sale of marketable
securities (Note 4) 965 965
Exercise of employee stock options
and related tax benefit (Note 13) 19,146
------------- -------------
BALANCE AT MARCH 31, 1997 - 445,636
Net income 193,944
NuMega acquisition (Note 2) 4,681
Issuance of common stock 12,745
Acquisition tax benefits 6,485
Foreign currency translation adjustment (2,784)
Exercise of employee stock options
and related tax benefit (Note 13) 47,589
------------- --------------
BALANCE AT MARCH 31, 1998 $ - $ 708,296
============= ==============
See notes to consolidated financial statements.
25
26
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 193,944 $ 97,436 $ 44,242
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 3,160 21,790 24,943
Depreciation and amortization 36,504 31,401 21,915
Tax benefit from exercise of stock options 30,402 5,306 1,467
Issuance of common stock to Employee Stock Ownership Trust 3,500 2,330 1,508
Acquisition tax benefits 6,485 6,603 3,852
Deferred income taxes (6,108) (4,256) (10,219)
Other 240 (290) 999
Net change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (104,702) (88,574) (57,736)
Prepaid expenses and other current assets (2,118) 1,361 5,153
Other assets (6,255) 88 (5,898)
Accounts payable and accrued expenses 22,582 25,960 15,935
Deferred revenue 26,206 37,797 39,000
Refundable income taxes 6,765 (2,618) (6,965)
------------ ------------ ------------
Net cash provided by operating activities 210,605 134,334 78,196
------------ ------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (5,198) (69,083) (26,113)
Property and equipment (28,006) (23,442) (15,789)
Capitalized software (13,823) (14,544) (13,647)
Minority interest in subsidiary (9,419)
Investments:
Proceeds from maturity 85,682 63,202 162,227
Purchases (172,865) (74,491) (95,340)
Other (246) (2,661)
------------ ------------ ------------
Net cash used in investing activities (134,210) (118,604) (742)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (3,890)
Net proceeds from sale of common stock 9,245
Repurchase of common stock (70,274)
Net proceeds from exercise of stock options 17,187 13,840 3,364
------------ ------------ ------------
Net cash provided by (used in) financing activities 22,542 13,840 (66,910)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 98,937 29,570 10,544
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 107,341 77,771 67,227
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 206,278 $ 107,341 $ 77,771
============ ============ ============
See notes to consolidated financial statements.
26
27
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 division offers
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, mid-range and client/server 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 generally accepted
accounting principles which require management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of
contingencies at March 31, 1998 and 1997 and the results of operations for the
years ended March 31, 1998, 1997 and 1996. While management has based their
assumptions and estimates on the facts and circumstances known at March 31,
1998, final amounts may differ from estimates.
Revenue Recognition - Revenue from licensing of software products is recognized
upon shipment of the products, provided that no significant obligations remain
and collection of the related receivable is deemed probable. A portion of new
license fees, generally 15%, is deferred and recognized ratably over the initial
maintenance period, generally one year. Annual product maintenance fees are
recognized as revenue ratably over the contract period. Professional services
fees are recognized in the period the services are performed.
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 and marketable equity securities.
Municipal obligations are classified as held-to-maturity and carried at
amortized cost. Marketable equity securities are classified as
available-for-sale and are carried at market value. Unrealized gains and losses
on available-for-sale securities are reported as a separate component of
shareholders' equity, net of tax. Those investments that mature within one year
from the balance sheet date are classified as short-term. The amortization of
bond premiums and discounts is included in interest 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.
Capitalized Software includes the costs of purchased and internally developed
software products and are stated at the lower of unamortized cost or net
realizable value. Net purchased software included in capitalized software at
March 31, 1998 and 1997 is $14,249,000 and $20,284,000, respectively. In
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed", capitalization of internally developed software products
begins when technological feasibility of the product is established. Software
product development includes all expenditures for research and development, net
of amounts capitalized. Total software development costs incurred internally by
the Company were $65,015,000, $54,292,000 and $55,705,000 in fiscal 1998, 1997
and 1996, respectively, of which $10,599,000, $9,798,000 and $12,913,000,
respectively, were capitalized.
27
28
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 generally
approximates five years. Capitalized software amortization is included in "Cost
of software license fees" in the Statements of Income.
Excess of Cost Over Fair Value of Net Assets Acquired ("goodwill") is being
amortized over periods ranging from 15 to 20 years using the straight-line
method.
Fair Value of Financial Instruments - The carrying value of cash equivalents,
accounts receivable, accounts payable and long-term debt approximated fair
values due to the short-term maturities of these instruments.
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 the local
currency as the 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 occur.
Translation adjustments have been excluded from the results of operations and
are reported as a separate component of shareholders' equity.
Foreign Currency Transactions and Derivatives - Gains and losses from foreign
currency transactions are included in the determination of net income. To offset
the risk of future currency fluctuations on receivables due from foreign
subsidiaries, the Company enters into foreign exchange contracts to sell
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. The Company does not use foreign exchange contracts to
hedge anticipated transactions. The net foreign currency transaction gain (loss)
was ($627,000), ($1,446,000) and $192,000 for the fiscal years ended March 31,
1998, 1997 and 1996, respectively. These amounts are included in "Sales and
marketing" in the Statements of Income.
At March 31, 1998, the Company had contracts maturing through May 1998 to sell
$45,478,000 in foreign currencies. At March 31, 1997, the Company had contracts
maturing through May 1997 to sell $51,937,000 in foreign currencies.
Earnings Per Share - Effective in December 1997, the Company adopted SFAS No.
128, "Earnings per Share", which replaces the presentation of primary earnings
per share ("EPS") and fully diluted EPS with presentation of basic EPS and
diluted EPS, respectively. Basic EPS is computed by dividing earnings available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS assumes
the issuance of common stock for all potentially dilutive equivalent shares
outstanding. All prior-period EPS data have been restated. The adoption of this
new accounting standard did not have a material effect on the Company's reported
EPS amounts on a diluted basis.
Recently Issued Accounting Pronouncements - The Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", in June
1997. The Company is required to adopt these Statements with its fiscal year
ending March 31, 1999. The adoption of these new standards are not expected to
have a material impact on the Company's financial statements. In October 1997,
the American Institute of Certified Public Accountants (AICPA) released
Statement of Position (SOP) 97-2, "Software Revenue Recognition", which
supersedes SOP 91-1, "Software Revenue Recognition". SOP 97-2 establishes
standards for recognizing revenues related to software products and related
services. The Company is required to adopt this pronouncement prospectively with
its fiscal year ending March 31, 1999. The adoption of SOP 97-2 is not expected
to have a material impact on the Company's financial statements. In March 1998,
the AICPA
28
29
released SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", which establishes guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is required to adopt this pronouncement with its fiscal year ending March 31,
1999. The adoption of SOP 98-1 is not expected to have a material impact on the
Company's financial statements.
2. ACQUISITIONS
UnderWare, Inc. - In March 1998, the Company acquired UnderWare, Inc., a
privately held software product company, for approximately $3,500,000 cash. The
acquisition has been accounted for as a purchase and, accordingly, assets and
liabilities acquired have been recorded at fair value as of the date of
acquisition. The amount by which the acquisition cost exceeded the fair value of
the net assets acquired was approximately $141,000 and is being amortized over a
fifteen-year period on a straight-line basis. Of the total purchase price,
$3,160,000 was allocated to in-process research and development based upon
independent valuations of the expected future cash flows, less costs to complete
the development. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs", this amount was expensed as of the purchase date. The
company that provided the independent valuation for the UnderWare acquisition is
Valuation Counselors.
NuMega Technologies, Inc. - In December 1997, the Company issued approximately
3,341,000 shares of its common stock in exchange for all of the outstanding
common stock of NuMega Technologies, Inc. (NuMega). In addition, options to
acquire approximately 888,000 shares of the Company's common stock were
exchanged for all outstanding NuMega options. The merger has been accounted for
by the pooling of interests method, and accordingly, the assets and liabilities
of NuMega were combined with those of the Company at their book value. The
financial results of NuMega have been included in the accompanying financial
statements since October 1, 1997. Due to the immaterial size of NuMega when
compared with the Company, prior periods were not restated to include the
financial results of NuMega. The Company also incurred approximately $3,606,000
of special charges related to the merger and integration of NuMega. Such costs
consisted primarily of financial advisory fees and professional fees.
Vine Systems Company Ltd. - In April 1997, the Company acquired Vine Systems
Company Ltd., a professional services firm, for approximately 3,100,000 pounds
sterling (approximately $5,022,000). Of the total purchase price approximately
$566,000 was paid in cash. The Company issued notes for the remaining
$4,456,000, of which approximately $3,656,000 was repaid during fiscal 1998. The
acquisition has been accounted for as a purchase and, accordingly, assets and
liabilities acquired have been recorded at fair value as of the date of
acquisition. The amount by which the acquisition cost exceeded the fair value of
the net assets acquired was approximately $4,841,000 and is being amortized over
a fifteen-year period on a straight-line basis.
During fiscal 1997, the Company completed the acquisition of certain
professional service companies for a combined total of $48,045,000 net cash
expended. The companies purchased were Technalysis ($25,061,000), Adams &
Reynolds ($12,410,000), MC Squared Incorporated ($9,212,000) and Virtual
Innovations, Inc. ($362,000). All of the acquisitions were 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 $44,177,000 and is being amortized over a fifteen-year period
on a straight line basis.
The Company also acquired all of the outstanding stock of certain privately-held
software product companies for an aggregate cost of $29,637,000 during fiscal
1997. The companies purchased were Direct Technology Limited ($23,800,000) and
DRD Promark, Inc. ($5,837,000). Of the total purchase price, $23,837,000 was
paid in cash and $5,800,000 in notes that are due in April 1999. The aggregate
amount by which the acquisition cost exceeded the fair value of the net assets
acquired was approximately $3,165,000 and is being amortized over a fifteen-year
period on a straight-line basis. Of the total purchase price, $21,790,000 was
allocated to in-process research and development based upon independent
valuations of the expected future cash flows, less costs to complete the
development and in accordance with SFAS No. 2 this amount was expensed as of the
purchase date. The company that provided the independent valuation for these
acquisitions is Valuation Counselors.
29
30
In September 1995, the Company acquired all non-Company owned outstanding stock
of Compuware Nordic AS (Nordic) for approximately $9,419,000. Nordic was
formerly a majority owned subsidiary which distributes the Company's products in
Norway and Denmark. The acquisition of the minority interest has been accounted
for as a purchase. The amount by which the acquisition cost exceeded the fair
value of the net assets acquired of approximately $8,592,000 is being amortized
over a fifteen-year period on a straight-line basis.
In November 1995, the Company acquired all of the outstanding stock of CoroNet
Systems, Inc. for approximately $27,000,000 in cash. The acquisition has been
accounted for as a purchase and, accordingly, assets and liabilities acquired
have been recorded at fair value as of the date of the acquisition. Of the total
purchase price, $24,943,000 was allocated to in-process development projects
based on their expected future cash flows, less costs to complete the
development, and in accordance with SFAS No. 2 this amount was expensed as of
the purchase date.
3. RESTRUCTURING COSTS
In fiscal 1996, the Company recognized $10,688,000 of special charges related to
the reorganization of the Company's operating units and the decentralization of
certain corporate office functions. The components of the restructuring reserve,
as ultimately executed, included $5,806,000 for severance related costs for
employees made redundant by the reorganization, and $4,882,000 for estimated
future leasing costs of abandoned offices in the United States and Europe. At
March 31, 1998, the costs accrued for future lease expenses of approximately
$3,286,000 are expected to be paid over a period not to exceed the remaining
lease terms, which extend through April 2002.
4. INVESTMENTS
Municipal obligations - The Company's municipal obligations are classified as
held-to-maturity and are carried at amortized cost. The Company will receive the
face value of these bonds at their maturity date and, accordingly, has not
recognized any gain or loss resulting from current fair value fluctuations. The
amortized cost and aggregate fair value of the debt securities, by maturity, are
as follows (in thousands):
March 31,
-------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
Less than 1 - 5 Less than 1 - 5
One Year Years One Year Years
---------------- --------------- --------------- ---------------
Amortized cost $ 54,349 $ 107,721 $ 26,604 $ 44,465
Aggregate fair value 54,419 107,772 26,614 44,209
------------- ------------- ------------- -------------
Difference between
amortized cost and
fair value $ (70) $ (51) $ (10) $ 256
============= ============ ============= =============
Marketable equity securities - There were no marketable equity securities held
during fiscal 1998. During fiscal 1997, the Company sold securities that had
been classified as available-for-sale for approximately $6.2 million. The gain
realized during fiscal 1997 related to these sales was approximately $905,000.
The Company uses the specific identification method as a basis for determining
cost and calculating realized gains.
30
31
5. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
March 31,
----------------------------
1998 1997
------------ -------------
Land $ 1,776 $ 1,297
Buildings 28,777 26,293
Leasehold improvements 14,227 10,242
Furniture and fixtures 29,678 24,601
Computer equipment and software 59,279 47,069
----------- -----------
133,737 109,502
Less accumulated depreciation and
amortization 49,243 38,924
----------- -----------
Total $ 84,494 $ 70,578
=========== ===========
6. RELATED PARTY TRANSACTIONS
At March 31, 1997 the Company had a $300,000 note receivable, included in "Other
assets", from a company controlled by certain shareholders of the Company. The
note was repaid in fiscal 1998.
The Company has agreed to pay 75% of the annual premiums on a life insurance
policy for the Chief Executive Officer. The Company has received a collateral
assignment of the policy and will recover the premiums advanced upon the
termination of the policy or the death of the officer. For each of the years
ended March 31, 1998 and 1997, the total premiums paid by the Company were
approximately $185,000. The aggregate amount paid of approximately $1,113,000 is
included in "Other assets".
The following items included in operations were paid to or from companies
controlled by certain officers or directors of the Company or their affiliates
(in thousands):
Year Ended March 31,
---------------------------------------
1998 1997 1996
------------ ----------- -----------
Revenues
Professional services fees $ - $ 286 $ 1,346
Expenses
Marketing and promotion $ 1,354 $ 823 $ 644
Printing 1,046 759 908
Professional services 232 618 185
7. CREDIT FACILITIES AND LONG-TERM DEBT
Cash paid for interest totaled approximately $810,000, $450,000 and $313,000 for
the years ended March 31, 1998, 1997 and 1996, respectively.
Revolving Bank Credit Facility - The Company has a revolving bank credit
facility which provides for borrowings of up to $30,000,000 through September 1,
1999. The Company is obligated for a commitment fee of .125% per annum for any
unused portion of the credit facility. The Company may choose between various
interest rate options. The revolving credit arrangement contains affirmative and
negative covenants including limitations on dividend payments, loans and
advances. The Company had no borrowings outstanding during fiscal 1998 or 1997.
31
32
Long-term debt - The Company's long-term debt includes $6.1 million of
pound-denominated notes issued as part of the Direct Technology Limited
acquisition (see note 2 of Notes to Consolidated Financial Statements). The
notes are due April 30, 1999 and interest is paid semiannually at the six month
LIBOR rate. The Company also has approximately $800,000 of pound-denominated
notes outstanding at March 31, 1998 that were issued as part of the Vine Systems
acquisition (see note 2 of Notes to Consolidated Financial Statements). The
notes are due March 31, 2001 and interest is paid semiannually using the six
month LIBOR rate.
8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
On April 3, 1997 the Company's shareholders approved an increase in the
Company's authorized shares of common stock from 80,000,000 to 200,000,000
shares to permit a two-for-one stock split which was previously approved by the
Board of Directors. The stock split was effected by means of a 100% stock
dividend as of April 14, 1997 to holders of record April 4, 1997. In August
1997, the Company's shareholders approved an increase in the Company's
authorized shares of common stock from 200,000,000 to 400,000,000 shares. In
October 1997, the Company's Board of Directors approved a two-for-one stock
split, payable as a 100% stock dividend to shareholders of record on October 22,
1997.
The effect of the stock splits has been retroactively reflected as of April 1,
1995. All references throughout the consolidated financial statements to number
of shares, per share amounts and stock option data have been restated to reflect
the stock splits.
9. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
Year Ended March 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
BASIC EPS:
----------
Numerator: Net Income $ 193,944 $ 97,436 $ 44,242
------------- ------------- ------------
Denominator:
Weighted-average common shares outstanding 176,137 170,385 173,758
------------- ------------- ------------
Basic EPS $ 1.10 $ 0.57 $ 0.26
============= ============= =============
DILUTED EPS:
------------
Numerator: Net Income $ 193,944 $ 97,436 $ 44,242
------------- ------------- -------------
Denominator:
Weighted-average common shares outstanding 176,137 170,385 173,758
Dilutive effect of stock options 17,576 9,485 5,717
------------- ------------- -------------
Total Shares 193,713 179,870 179,475
------------- ------------- -------------
Diluted EPS $ 1.00 $ 0.54 $ 0.25
============= ============= =============
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10. 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,
--------------------
1998 1997
---- ----
Deferred tax assets:
Accrued vacation $ 2,582 $ 2,682
Purchased software 9,410 9,371
Net operating loss carryforwards 35,139 26,138
Other 12,055 7,288
------- -------
59,186 45,479
Less: valuation allowance 8,891 5,065
------- -------
Net deferred tax assets 50,295 40,414
Current portion 14,512 10,267
------- -------
Long-term portion $35,783 $30,147
======= =======
Deferred tax liabilities:
Capitalized research and
development costs $ 9,605 $10,576
Purchased software 2,565 3,373
Other 11,066 5,634
------- -------
Total deferred tax liabilities 23,236 19,583
Current portion 379 520
------- -------
Long-term portion $22,857 $19,063
======= =======
The income tax provision (benefit) includes the following (in thousands):
Year Ended March 31,
----------------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $ 96,629 $ 46,073 $ 41,354
Foreign 4,316 6,506 952
State 5,800 4,500 3,000
--------- --------- ---------
Total current tax provision 106,745 57,079 45,306
--------- --------- ---------
Deferred:
Federal 1,309 6,050 (382)
Foreign (11,228) (11,179) (10,383)
--------- --------- ---------
Total deferred tax benefit (9,919) (5,129) (10,765)
--------- --------- ---------
Total income tax provision $ 96,826 $ 51,950 $ 34,541
========= ========= =========
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The Company's income tax expense differed from the amount computed on pre-tax
income at the U.S. federal income tax rate of 35% for the following reasons (in
thousands):
Year Ended March 31,
-----------------------------
1998 1997 1996
---- ---- ----
Federal income tax at statutory rates $ 101,769 $ 52,285 $ 27,574
Increase (decrease) in taxes:
Items related to acquisitions 1,792 9,332
Foreign Sales Corporation subsidiary (6,462) (4,638) (3,190)
Research and development credit (1,700) (1,300) (325)
Other, net 3,219 3,811 1,150
--------- --------- ---------
Provision for income taxes $ 96,826 $ 51,950 $ 34,541
========= ========= =========
At March 31, 1998 the Company has net operating loss carryforwards for income
tax purposes of approximately $101,173,000 which expire as follows (in
thousands):
Year ending March 31:
1999 $ 480
2000 5,737
2001 2,238
2002 6,787
2003 13,908
2004 2,430
2005 2,035
2008 898
2010 919
2011 274
Unlimited carryforward 65,467
Of this amount, approximately $4,511,000 is available to offset U.S. federal
income taxes and approximately $96,662,000 relates to various foreign
jurisdictions. In addition, approximately $921,000 of tax credits expiring
through the year 2002 are available to offset future U.S. federal income tax
liabilities.
Cash paid for income taxes totaled approximately $55,481,000, $46,760,000 and
$45,414,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
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11. GEOGRAPHIC SEGMENT INFORMATION
Revenues and income (loss) for each of the three years in the period ended
March 31, 1998 and identifiable assets at March 31, 1998, 1997 and 1996 are
as follows (in thousands):
March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
North America $ 825,989 $ 559,058 $ 405,603
European subsidiaries 217,478 180,095 150,656
Other international operations 95,851 73,743 58,100
----------- ----------- -----------
Total revenue $ 1,139,318 $ 812,896 $ 614,359
=========== =========== ===========
Income (loss) before taxes:
North America (1) $ 309,602 $ 174,643 $ 107,486
European subsidiaries (13,733) (19,985) (22,203)
Other international operations (5,099) (5,272) (6,500)
----------- ----------- -----------
Total income before taxes (2) $ 290,770 $ 149,386 $ 78,783
=========== =========== ===========
Identifiable assets:
North America $ 837,568 $ 568,458 $ 404,463
European subsidiaries 176,107 139,307 122,448
Other international operations 58,965 47,642 28,815
----------- ----------- -----------
Total assets $ 1,072,640 $ 755,407 $ 555,726
=========== =========== ===========
(1) Includes net intercompany royalty income of approximately $114,973,000,
$87,548,000 and $71,105,000 for the years ended March 31, 1998, 1997 and
1996, respectively. The income (loss) from foreign subsidiaries reflects
the corresponding net royalty expense.
(2) Income before taxes also includes $6,766,000, $21,790,000 and $35,631,000
of special charges for the years ended March 31, 1998, 1997 and 1996,
respectively. Exclusive of these charges, income (loss) before taxes is as
follows:
March 31,
-----------------------------------
1998 1997 1996
------ --------- ---------
Income (loss) before special charges and taxes:
North America $ 316,368 $ 196,433 $ 139,964
European subsidiaries (13,733) (19,985) (19,284)
Other international operations (5,099) (5,272) (6,266)
--------- --------- ---------
Total income before special charges and taxes $ 297,536 $ 171,176 $ 114,414
========= ========= =========
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12. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases building and office space and computer equipment
under various operating lease agreements extending through fiscal 2005. Certain
of these leases contain provisions for renewal options and escalation clauses.
The following is a schedule of future minimum rental payments for the next five
years (in thousands):
Year ending March 31:
1999 $ 23,710
2000 19,134
2001 14,230
2002 10,525
2003 7,241
Thereafter 8,503
-------------
Total $ 83,343
=============
Lease expense for the years ended March 31, 1998, 1997 and 1996 under all
operating leases amounted to approximately $19,193,000, $16,815,000 and
$10,078,000, respectively.
Employment Contracts - The Company has entered into employment agreements with
certain key employees that include noncompete provisions in exchange for
specified terms of employment.
13. 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 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
$3,500,000, $2,330,000 and $1,508,000 in fiscal 1998, 1997 and 1996,
respectively. The provisions of SFAS No. 123 do not apply to the Employee Stock
Ownership Plan. This is a non-leveraged ESOP plan.
Employee Stock Purchase Plan - During fiscal 1997, the Company adopted the
Global Employee Stock Purchase Plan (GESPP) under which the Company is
authorized to issue up to four million shares of common stock to eligible
employees. Each offering period is limited to six months and a maximum number of
500,000 common shares. The Company's first offering period began January 1,
1997. Under the terms of the plan, employees elect to have up to 10 percent of
their annual earnings withheld to purchase Company stock, with a value not to
exceed $25,000, at the close of the offering period. The purchase price is 85
percent of the first or last day's closing market price for each offering
period, whichever is lower. During fiscal 1998, the Company sold approximately
625,129 shares to eligible employees.
NuMega Technologies, Inc. 1996 Stock Option Plan - In connection with the NuMega
acquisition (see note 2 of Notes to Consolidated Financial Statements), options
to acquire approximately 887,831 shares of the Company's common stock were
exchanged for all outstanding NuMega incentive and nonqualified stock options,
of which 520,231 were outstanding at March 31, 1998. The option prices range
from $2.63 to $23.66 and expire in 10 years.
1998 Employee Stock Option Plan - In August 1997, the Company adopted the Fiscal
1998 Stock Option Plan. The plan provides for grants of options to purchase up
to 8,000,000 shares of the Company's common stock to employees of the Company,
of which 3,035,624 were outstanding at March 31, 1998. Under the terms of the
plan, the Company may grant nonqualified options at the fair
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37
market value of the stock on the date of grant. During fiscal 1998, the Company
granted 3,240,820 options under the 1998 Employee Stock Option Plan.
1996 Employee Stock Option Plan - In August 1995, the Company adopted the 1996
Employee Stock Option Plan. The plan provides for grants of options to purchase
up to 14,300,000 shares of the Company's common stock to employees of the
Company, of which 13,186,052 were outstanding at March 31, 1998. Under the terms
of the plan, the Company may grant nonqualified options at the fair market value
of the stock on the date of grant. During fiscal 1998, the Company granted
1,774,136 options under the 1996 Employee Stock Option Plan.
1993 Employee Stock Option Plan - In November 1992, the Company adopted the 1993
Employee Stock Option Plan. The plan provides for grants of options to purchase
up to 10,800,000 shares of the Company's common stock to officers and key
employees of the Company, of which 4,661,091 non qualified options were
outstanding at March 31, 1998. Under the terms of the plan, the Company may
grant incentive stock options at the fair market value of the stock on the date
of grant or nonqualified stock options at a price not less than 50% of fair
market value or $1.00 per share. The plan also provides for stock appreciation
rights which may be granted independently, or in conjunction with any stock
option granted under the plan. Stock options and appreciation rights expire 10
years from the date of grant. In addition, the Company may award shares of
restricted stock to participants subject to the terms and conditions specified
at the time of the award. During fiscal 1998, the Company granted 27,000
nonqualified options under the 1993 Employee Stock Option Plan.
1992 Employee Stock Option Plan - The 1992 Employee Stock Option Plan provides
for grants of options to purchase shares of common stock to officers and key
employees of the Company. Under this plan, up to 8,400,000 shares of common
stock may be granted to officers and key employees. The provisions of the plan
are identical to the Company's 1993 Employee Stock Option Plan. During fiscal
1998, the Company granted 28,200 nonqualified options under the 1992 Employee
Stock Option Plan of which 3,708,142 were outstanding at March 31, 1998.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 1,200,000 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. In June 1995, the Compensation Committee amended the provisions of
this plan to provide for the one-time grant of 20,000 option shares to each new
non-employee director in addition to an annual grant of 5,000 option shares to
each non-employee director. During fiscal 1998, 200,000 options were granted
under the Non-Employee Director Stock Option Plan of which 740,000 options were
outstanding at March 31, 1998.
Options generally vest in cumulative annual installments over a three to five
year period. All options were granted at fair market value and expire 10 years
from the date of grant.
At March 31, 1998, a total of 199,554 options were outstanding under plans that
were terminated by the Company, of which 177,132 are fully vested. All
outstanding options under the terminated plans remain in effect in accordance
with the terms under which they were granted.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans and its stock purchase plan.
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38
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 1998, 1997 and
1996 consistent with the method prescribed by SFAS No. 123, Compuware's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below:
Year Ended March 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Net Earnings
As reported $ 193,944 $ 97,436 $ 44,242
Pro forma 172,394 85,319 37,565
Earnings per Share
As reported:
Basic earnings per share 1.10 0.57 0.26
Diluted earnings per share 1.00 0.54 0.25
Pro forma:
Basic earnings per share 0.98 0.50 0.22
Diluted earnings per share 0.89 0.47 0.21
The pro forma amounts for compensation cost may not be indicative of the effects
on net earnings 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 1998, 1997 and 1996, respectively:
expected volatility of 51.50, 55.22 and 64.73 percent; risk-free interest rates
of 5.7, 6.6 and 6.6 percent; and expected lives at date of grant of 4.9, 4.3 and
4.8 years. Dividend yields were not a factor as the Company has never issued
cash dividends and has no plans to do so in the future.
Under SFAS No. 123, the fair value of the employees' purchase rights were
estimated using the Black-Scholes model with assumptions that, except for an
expected life of six months and a risk-free interest rate of 5.26 percent for
fiscal 1998, were consistent with those used for the Company's stock purchase
plans described above. The weighted average fair value of those purchase rights
granted in fiscal 1998 were $4.94.
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39
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 1998, 1997 and 1996, and changes
during the years ending on those dates is as follows (shares in thousands):
1998 1997 1996
--------------------------- ------------------------------ --------------------------
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 25,318 $ 7.65 20,208 $ 4.62 14,578 $ 3.94
NuMega acquisition 888 3.32
Granted 5,270 29.79 8,848 13.79 8,027 5.74
Exercised (4,241) 4.13 (2,511) 5.49 (1,182) 2.42
Forfeited (1,184) 14.86 (1,227) 5.47 (1,215) 5.84
-------- -------- --------
Outstanding at end
of year 26,051 $ 12.26 25,318 $ 7.65 20,208 $ 4.62
======== ======== ========
Options exercisable
at year end 8,545 $ 5.41 10,645 $ 4.03 10,226 $ 3.59
======== ======== ========
Weighted-average
fair value of
options granted
during the year $ 15.16 $ 7.36 $ 3.47
======== ======== ========
The following table summarizes information about fixed stock options outstanding
at March 31, 1998 (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
$ 0.09 to $9.00 14,009 6.12 $ 4.70 7,808 $ 4.04
9.01 to 18.00 7,364 8.83 15.05 486 13.19
18.01 to 27.00 87 9.22 23.30 5 22.50
27.01 to 37.00 4,345 9.49 30.08 196 32.12
37.01 to 45.00 246 9.80 41.00 50 37.99
---------- ----------
26,051 7.49 12.26 8,545 5.41
========== ==========
The maximum number of shares for which additional options may be granted was
6,700,602 at March 31, 1998, 2,720,368 at March 31,1997 and 10,347,624 at March
31, 1996. At March 31, 1998, a total of 32,751,296 shares of the Company's
common stock are reserved for issuance under all option plans. Income tax
benefits associated with the exercise of stock options are reflected as
adjustments to additional paid-in capital.
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14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 1998 and 1997 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------- -------------- -------------- -------------- ---------------
Fiscal 1998:
Revenues $ 224,478 $ 247,381 $ 309,635 $ 357,824 $1,139,318
Operating income 39,998 49,804 77,915 105,636 273,353
Pre-tax income 42,387 51,949 81,665 114,769 290,770
Net Income (1) 28,272 34,650 54,471 76,551 193,944
Basic earnings per share (1) 0.16 0.20 0.31 0.43 1.10
Diluted earnings per share (1) 0.15 0.18 0.28 0.39 1.00
Fiscal 1997:
Revenues $ 162,338 $ 184,266 $ 213,713 $ 252,579 $ 812,896
Operating income 3,651 25,646 47,020 67,359 143,676
Pre-tax income 4,883 26,694 48,345 69,464 149,386
Net income (2) 3,257 16,100 32,246 45,833 97,436
Basic earnings per share (2) 0.02 0.10 0.19 0.27 0.57
Diluted earnings per share (2) 0.02 0.09 0.18 0.25 0.54
(1) In fiscal 1998, the Company incurred special pre-tax charges totaling
$3,606,000 and $3,160,000 in the third and fourth quarters, respectively.
The charges include $3,606,000 for merger-related costs and $3,160,000 for
purchased research and development, expensed in connection with the NuMega
and UnderWare acquisitions, respectively (Note 2). Excluding these
charges, in fiscal 1998 net income was $56,876,000 and $78,659,000 for the
third and fourth quarters, respectively, basic earnings per share was
$0.32 and $0.44, and diluted earnings per share was $0.29 and $0.40 for
the third and fourth quarters, respectively. For the year ended March 31,
1998, net income and earnings per share, excluding special charges, was
$198,457,000 and $1.13 per share - basic and $1.02 per share - diluted.
(2) In fiscal 1997, the Company incurred special pre-tax charges totaling
$16,670,000 and $5,120,000 in the first and second quarters, respectively.
The charges include $16,670,000 and $5,120,000 for purchased research and
development expensed in connection with the Direct Technology and DRD
Promark acquisitions, respectively (Note 2). Excluding these charges, in
fiscal 1997 net income was $14,376,000 and $21,220,000 for the first and
second quarters, respectively, basic earnings per share was $0.09 and
$0.13, and diluted earnings per share was $0.08 and $0.12 for the first
and second quarters, respectively. For the year ended March 31, 1997, net
income and earnings per share, excluding special charges, was $113,675,000
and $0.67 per share - basic and $0.63 per share - diluted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
Executive Officers of the Registrant
The executive officers of the Company, who are elected by and serve at the
discretion of the Company's Board of Directors, are as follows as of June 1,
1998:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 55 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 45 President and Chief Operating Officer
Denise A. Knobblock 42 Executive Vice President, Human Resources and
Administration
W. James Prowse 55 Executive Vice President, Corporate Marketing and
Communications
Eliot R. Stark 45 Executive Vice President, Finance
Laura L. Fournier 45 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Douglas W. Barre 54 Senior Vice President, Enterprise Products
Stephen H. Fagan 43 Senior Vice President, Professional Services
Henry A. Jallos 49 Senior Vice President, Worldwide Sales
John N. Shevillo 62 Senior Vice President, Enterprise Solutions
Thomas Costello, Jr. 44 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/Chief Operating Officer since October
1994. From December 1990 through October 1994 Mr. Nathan was Senior Vice
President and Chief Operating Officer - Products Division.
Denise A. Knobblock has served as Executive Vice President, Human Resources and
Administration since February 1998 and as Senior Vice President, Administration
from January 1995 through January 1998. From January 1992 through December 1994,
Ms. Knobblock was Director of Facilities/Administration.
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W. James Prowse has served as Executive Vice President, Corporate Marketing and
Communications since February 1998 and as Senior Vice President from January
1992 through January 1998.
Eliot R. Stark has served as Executive Vice President, Finance since February
1998 and as Senior Vice President from June 1995 through January 1998. From 1976
through May 1995, Mr. Stark was employed by Comerica Incorporated serving as
Senior Vice President - Corporate Development and Planning, Director of
Information Technology Services and Director of Real Estate Development and
Management from 1988 through 1995.
Laura L. Fournier has served as Senior Vice President, Chief Financial Officer
and Treasurer since April 1998. Ms. Fournier was Corporate Controller from July
1995 through March 1998. From February 1990 through June 1995 Ms. Fournier was
Director of Internal Audit.
Douglas W. Barre has served as Senior Vice President since January 1998. From
October 1995 through January 1998 Mr. Barre was Vice President, General Manager,
Amsterdam Operations. From April 1994 through October 1995, Mr. Barre was
employed by BCE Mobile serving as Vice President, Business Transformation and
Chief Information Officer.
Stephen H. Fagan has served as Senior Vice President, Professional Services
since April 1997. From November 1994 through March 1997, Mr. Fagan was Senior
Vice President, Enterprise Systems. From 1987 through November 1994, Mr. Fagan
was Vice President, European Operations.
Henry A. Jallos has served as Senior Vice President, Worldwide Sales since
November 1994 and as Vice President, North American Sales from March 1988
through November 1994.
John N. Shevillo has served as Senior Vice President, Enterprise Solutions since
April 1997. From December 1991 through March 1997, Mr. Shevillo was Senior Vice
President, Professional Services.
Thomas Costello, Jr. has served as General Counsel of Compuware since January
1985. He has served as Vice President since January 1995 and Secretary since May
1995.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
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PART IV
ITEM 14. 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 22
Consolidated Balance Sheets as of March 31, 1998 and 1997 23
Consolidated Statements of Income for each of the years
ended March 31, 1998, 1997 and 1996 24
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 1998, 1997 and 1996 25
Consolidated Statements of Cash Flows for each of the years
ended March 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27-40
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 47
Schedule II - Valuation and Qualifying Accounts 48
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.
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3. EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
------- -----------------------
3.1 Restated Articles of Incorporation of Compuware Corporation, as amended. (1)
3.2 Certificate of Amendment to the Articles of Incorporation dated April 28, 1994. (3)
3.3 Certificate of Correction to the Articles of Incorporation dated May 9, 1994. (3)
3.4 Certificate of Restated Bylaws of Compuware Corporation, as amended. (1)
3.5 Certificate of Amendment to the Articles of Incorporation dated April 3, 1997. (9)
4.1 Fiscal 1998 Stock Option Plan (11)
4.7 Certificate of Amendment to the Restated Articles of Incorporation (11)
10.4 1992 Stock Option Plan. (1)
10.22 Promotion Agreement, dated March 1, 1990, and Amendment dated December 26, 1990, between Computer Hockey Corporation
and the Company. (1)
10.23 Agreement, dated October 28, 1982, between Compuware Hockey Club, L.P. and the Company, as amended. (1)
10.24 Promotion Agreement, dated September 8, 1992, between Compuware Sports Corporation and the Company. (1)
10.31 Compuware Corporation Shareholder Agreement, dated November 5, 1992, among the Company and certain of its shareholders.
(2)
10.35 Fiscal 1993 Stock Option Plan. (1)
10.36 Stock Option Plan for Non-Employee Directors. (1)
10.50 Registration Rights Agreement dated as of March 16, 1994 by and among the Company, Uniface Holding B.V., the
Sellers listed therein and the Sellers' Agent. (3)
10.58 Stockholders' Agreement, dated August 1, 1990, by and among the Company and the Stockholders therein. (4)
10.59 Employment Agreement, dated as of April 1, 1995, between the Company and Peter Karmanos, Jr. (5)
10.60 Employment Agreement, dated as of April 1, 1995, between the Company and Joseph Nathan. (5)
10.61 Employment Agreement, dated as of April 1, 1995, between the Company and John Shevillo. (5)
10.64 Employment Agreement, dated as of April 1, 1995, between the Company and Stephen Fagan. (5)
10.65 Employment Agreement, dated as of April 1, 1995, between the Company and Henry Jallos. (5)
10.66 Employment Agreement, dated as of April 1, 1995, between the Company and Denise Knobblock. (5)
10.67 Employment Agreement, dated as of April 1, 1995, between the Company and W. James Prowse. (5)
10.68 Amended and Restated Revolving Loan Agreement. (5)
10.69 Agreement and Plan of Reorganization dated as of October 17, 1995 between CoroNet Systems, Inc. and the Company. (6)
10.70 Escrow Agreement made as of October 17, 1995 between CoroNet Systems, Inc., the Company and the Escrow Agent. (6)
10.71 Agreement and Plan of Merger, dated as of January 10, 1996, between the Company and Technalysis Corporation. (7)
10.72 Agreement and Plan of Merger, dated as of May 31, 1996, between Adams & Reynolds & Company and the Company. (8)
10.73 Agreement for the Sale and Purchase of the Issued Share Capital of Direct Technology Limited dated May 1996. (8)
10.74 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Peter Karmanos, Jr. (9)
44
45
10.75 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Joseph A. Nathan. (9)
10.76 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and John N. Shevillo. (9)
10.77 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and W. James Prowse. (9)
10.78 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Henry A. Jallos. (9)
10.79 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Stephen H. Fagan. (9)
10.80 Employment Agreement, dated as of April 1, 1995, between the Company and Laura Fournier.
11.1 Computation of Compuware Corporation and Subsidiaries net income per common share.
12.0 First Amendment to 1992 Stock Option Plan (10)
12.1 First Amendment to 1993 Stock Option Plan (10)
12.2 First Amendment to 1996 Stock Option Plan (10)
12.3 First Amendment to Stock Option Plan For Non-Employee Directors
12.4 First Amendment to 1990 Stock Option Plan
21.1 Subsidiaries of the Registrant. (4)
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule Fiscal 1998
27.2 Financial Data Schedule Fiscal 1997
---------------------------
(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 the corresponding exhibit to the Registration Statement on Form S-1, as
amended (Registration No. 33-63400).
(3) Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-4, as
amended (Registration No. 33-78822).
(4) Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-3, as
amended (Registration No. 33-82734).
(5 Incorporated by reference to the corresponding exhibit to the 1995 Annual Report on Form 10-K.
(6) Incorporated by reference to the corresponding exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995.
(7) Incorporated by reference to the corresponding exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1995.
(8) Incorporated by reference to the corresponding exhibit to the 1996 Annual Report on Form 10-K.
(9) Incorporated by reference to the corresponding exhibit to the 1997 Annual Report on Form 10-K.
(10) Incorporated by reference to the corresponding exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
(11) Incorporated by reference to the corresponding exhibit to the Registration Statement on Form S-8
(Registration Statement No. 333-37873).
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended March
31, 1998.
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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 24, 1998.
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 24, 1998
--------------------------------- and Director (Principal Executive Officer)
Peter Karmanos, Jr.
/S/ THOMAS THEWES Vice Chairman of the Board and Director June 24, 1998
---------------------------------
Thomas Thewes
/S/ JOSEPH A. NATHAN President, Chief Operating Officer and Director June 24, 1998
---------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 24, 1998
--------------------------------- (Chief Accounting Officer) and Treasurer
Laura L. Fournier
/S/ W. JAMES PROWSE Executive Vice President and Director June 24, 1998
---------------------------------
W. James Prowse
Director
---------------------------------
Elizabeth Chappell
Director
---------------------------------
Elaine Didier
/S/ BERNARD GOLDSMITH Director June 24, 1998
---------------------------------
Bernard Goldsmith
/S/ WILLIAM O. GRABE Director June 24, 1998
---------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 24, 1998
---------------------------------
William R. Halling
/S/ G. SCOTT ROMNEY Director June 24, 1998
---------------------------------
G. Scott Romney
Director
---------------------------------
Lowell Weicker, Jr.
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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, 1998 and 1997 and for each of the three years
in the period ended March 31, 1998, and have issued our report thereon dated May
4, 1998; 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 4, 1998
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COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(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, 1998 $ 6,941 $ 7,260 $ 5,389 $ 8,812
Year ended March 31, 1997 5,244 5,106 3,409 6,941
Year ended March 31, 1996 1,605 7,355 3,716 5,244
- --------------------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
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