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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number: 0-20900
COMPUWARE CORPORATION
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MI 48334-2564
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(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 355,370,874 shares of $.01 par value common stock outstanding as of
June 18, 1999. 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 18, 1999 of $30.0625 as reported on the Nasdaq Stock
Market, was approximately $9,716,210,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III.
The Exhibit Index is located on pages 41 and 42.
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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
7a. Quantitative and Qualitative Disclosure about Market Risk 18
8. Consolidated Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 37
PART III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 39
12. Security Ownership of Certain Beneficial Owners and Management 39
13. Certain Relationships and Related Transactions 39
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 40
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PART I
ITEM 1. BUSINESS
We provide software products and professional services designed to increase the
productivity of the information systems departments of our target market, the
20,000 largest enterprises worldwide. We have historically focused on the
testing and implementation environment in the mainframe market, where we have
extensive experience and have established long-term customer relationships. We
also operate in the client/server market, with products and professional
services in the application development, testing and implementation and systems
management environments.
We were incorporated in Michigan in 1973. Our executive offices are located at
31440 Northwestern Highway, Farmington Hills, Michigan 48334-2564, and our
telephone number is (248) 737-7300.
OUR BUSINESS STRATEGY
Our focus is to provide products and professional services to improve the
productivity of both mainframe and client/server programmers and analysts in our
target market, the 20,000 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 our product and professional services offerings.
We have developed software products and professional services for the mainframe
and client/server markets. We believe 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.
We have 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
We believe 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.
We intend to remain focused on developing, marketing and supporting high-quality
testing and implementation programmer productivity software and to work closely
with our customers to meet their evolving needs. In doing so, we believe we can
leverage our customer relationships, market presence and testing and
implementation expertise to better serve our mainframe clients, as well as the
faster-growing client/server market. In addition, we intend to bridge the
mainframe and client/server markets with integrated product offerings.
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MAINFRAME TESTING AND IMPLEMENTATION TOOLS
We currently offer 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.
Our testing and implementation products are functionally rich, focused on user
needs and require minimal user training. We strive to ensure a common "look and
feel" across our products and emphasize ease of use in all aspects of product
design and functionality. Most products can be used immediately without
modification of customer development practices and standards, can be quickly
integrated into day-to-day testing, debugging, and maintenance activities and
provide demonstrable benefits soon after installation.
Our mainframe testing and implementation products are grouped into the following
four product families:
File and Data Management. Our 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. Our 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. Our XPEDITER interactive debugging products
enable programmers to identify and resolve errors in complex software
efficiently and accurately. 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. Our 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 our testing products.
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. We believe our client/server products address these challenges and that
we are well positioned to successfully market client/server application
development, testing and implementation and systems management software to our
target market.
In the last five years, we have developed products and made acquisitions in the
application development, testing and implementation and systems management
environments of the client/server market. We believe we have made substantial
progress in penetrating the market in all three environments because of the
quality and visibility of our UNIFACE, EcoSystems, QA Center and DevPartner
Studio products.
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CLIENT/SERVER APPLICATION DEVELOPMENT TOOLS
Our 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 98, 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
Our 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.
Our 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 SQL Server, Informix, DB2 UDB and many other file and
database types.
NuMega. Our DevPartner Studio is the SmartDebuggingTM companion for Microsoft
(R) Visual StudioTM 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. Our XPEDITER/SQL provides interactive
analysis and resolution of SQL program errors.
Automated Testing. Our line of QA/Center products addresses the growing demand
for automated testing solutions for client/server and web applications. QARun is
our 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 our 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
We believe 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.
We offer a broad range of professional services, including business systems
analysis, design and programming, software conversion, systems planning and
systems consulting. Our 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 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. We believe we have a competitive advantage in the client/server
market by providing products as well as professional services. For an
organization implementing a client/server system, we offer software tools and
professional services to deliver complete client/server solutions. We have
trained a significant segment of our professional services staff in UNIFACE,
EcoSystems, QA Center and other major client/server technologies so that we 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. We
believe we have a competitive advantage by combining our products and services
offerings in order to provide clients with comprehensive, efficient Year 2000
solutions. Our PRODUCTION 2000 offerings demonstrate our unique capability to
respond to our customers' evolving, and sometimes transient, needs. We believe
that our long term success, however, will depend upon our ability to respond
effectively to changes in customer needs beyond the Year 2000.
Our objective in the professional services division is to create long-term
relationships with clients in which our 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 our Development Centers in Farmington
Hills, Michigan; Milwaukee, Wisconsin; Columbus, Ohio; Colorado Springs,
Colorado; Phoenix, Arizona; Cleveland, Ohio; Washington, D.C.; and Minneapolis,
Minnesota. We also have professional services operations in many of our
international locations.
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CUSTOMERS
Our 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, 1999, approximately 225,000 copies of our software products had
been licensed by over 14,000 customers.
None of our customers accounted for 10% or more of our total revenues during any
of the last three fiscal years.
SALES AND MARKETING
We market our 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 25 other
countries. Our combined products sales and marketing staff as of March 31, 1999
numbered 869 in the United States (including headquarters support for
international sales), 36 in Canada, 782 in Europe, 73 in Japan, 186 in Asia
/Pacific, 54 in Brazil, and 61 in South Africa, for a total of 2,061 worldwide.
We market our professional services primarily through account managers located
in offices throughout North America, Europe, Asia/Pacific and Brazil. Senior
professional services executives support branch marketing efforts by identifying
new business opportunities and making joint sales calls. This marketing
structure enables us to keep abreast of, and respond quickly to, the changing
needs of our clients and to call on the actual users of our professional
services on a regular basis. 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
We have been successful in developing acquired products and technologies into
marketable software for our distribution channels. We believe that our future
growth lies in part in continuing to identify promising technologies from all
potential sources, including independent software developers, customers, small
startup companies and internal research and development.
Our product development staff consisted of 606 employees as of March 31, 1999.
Product development is performed primarily at our headquarters in Farmington
Hills, Michigan, and at our offices in Campbell, California; Nashua, New
Hampshire and in Amsterdam, The Netherlands.
Total research and development costs incurred internally by Compuware were $76.8
million, $65.0 million and $54.3 million during fiscal 1999, 1998 and 1997,
respectively. Of these amounts, $11.9 million, $10.6 million and $9.8 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 income includes all expenditures for research and development net
of amounts capitalized.
Our software products are distributed as object code on standard magnetic
cartridges, diskettes and CD rom, together with printed documentation. We
purchase cartridges, diskettes, CDs and documentation printing from outside
vendors. The product duplication, packing and distribution to our customers is
performed at our production center in West Bloomfield, Michigan.
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PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
We believe that effective support of our customers and products during both the
trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide high levels of customer
support and periodic product upgrades to assure a continuing high level of
customer satisfaction. In fiscal year 1999, over 95% of our existing customers
renewed at least one of their maintenance arrangements. We had 288 employees as
of March 31, 1999 devoted to maintenance and customer support services.
All customers who subscribe to our maintenance and support services are entitled
to receive technical support and advice, including problem resolution services
and assistance in product installation, error corrections and any product
enhancements released by us during the maintenance period. Maintenance and
support services are provided primarily by telephone access to technical
personnel located in Farmington Hills, Michigan; Campbell, California; Nashua,
New Hampshire; and in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee 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 1999, 1998 and 1997,
maintenance fees represented approximately 20.4%, 21.4% and 25.8%, respectively,
of our total revenues.
COMPETITION
The markets for our software products are highly competitive and characterized
by continual change and improvement in technology. Our competitors include BMC
Software, Inc., Computer Associates International, Inc., Forte Software Inc.,
Informix Corporation, Mercury Interactive Corporation, Oracle Corporation,
Rational Software Corporation, Sybase, Inc. and VIASOFT, Inc. None of the
competitors competes in all of our product lines. Although we believe our
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 our
software products include: responsiveness to customer needs, functionality,
performance, reliability, ease of use, quality of customer support, vendor
reputation and price. We believe, based on our current market position, that we
have competed effectively in the software products marketplace. Nevertheless, a
variety of external and internal events and circumstances could adversely affect
our competitive capacity. Our ability to remain competitive will depend, to a
great extent, upon our performance in product development and customer support.
To be successful in the future, we must respond promptly and effectively to the
challenges of technological change and our competitors' innovations by
continually enhancing our own product offerings.
The market for data processing professional services is highly competitive,
fragmented and characterized by low barriers to entry. Our principal competitors
in professional services include Andersen Consulting, Computer Sciences
Corporation, Electronic Data Systems Corporation, IBM Global Services, Analysts
International Corporation, Keane, Inc. and numerous other regional and local
firms in the markets in which we have professional services offices. Several of
these competitors have substantially greater financial, marketing, recruiting
and training resources than we do. The principal competitive factors affecting
the market for our professional services include responsiveness to customer
needs, breadth and depth of technical skills offered, availability and
productivity of personnel, ability to demonstrate achievement of results and
price.
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PROPRIETARY RIGHTS
We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable licenses. Under the general terms and
conditions of our standard product license agreement, the licensed software may
be used solely for the licensee's own internal operations on designated
computers at specific sites. Under certain circumstances, we make source code
for our products available to our customers under an escrow arrangement which
restricts access to and use of the source code. Although we take steps to
protect our trade secrets, there can be no assurance that misappropriation will
not occur. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States.
We seek to protect our software, documentation and other written materials under
copyright law, which affords only limited protection. We also assert trademark
rights in our product names. We have been granted three patents and have nine
patent applications pending for certain product technology and have plans to
seek additional patents in the future. However, because the industry is
characterized by rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are more important to establishing and maintaining a technology leadership
position than the various legal protections of our technology.
There can be no assurance that third parties will not assert infringement claims
against us in the future with respect to current and future products or that any
such assertion may not require us to enter into royalty arrangements or result
in costly litigation.
EMPLOYEES
As of March 31, 1999, we employed 10,908 people worldwide, with 2,061 in
products sales, sales support and marketing; 606 in research and development;
288 in product maintenance and customer support; 6,993 in professional services
marketing and delivery; and 960 in other general and administrative functions.
None of our domestic employees is represented by a labor union. We have
experienced no work stoppages and believe that our relations with our employees
are good. Our success will depend in part on our continued ability to attract
and retain highly qualified personnel in a competitive market for experienced
and talented software developers, professional services staff and sales and
marketing personnel.
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ITEM 2. PROPERTIES
Our 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 we own in an executive office
park in Farmington Hills, Michigan. We also lease approximately 80,000 square
feet in the same office park. In addition, we own approximately 40,000 square
feet in nearby West Bloomfield, Michigan which houses our production,
distribution and additional services facilities.
We operate 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
We currently are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on February 25, 1999 at our
headquarters, 31440 Northwestern Highway, Farmington Hills, Michigan to vote on
amending our Restated Articles of Incorporation. This amendment increased the
number of authorized shares of our Common Stock, $0.01 par value, from
400,000,000 shares to 1,600,000,000 shares, to permit a two-for-one stock split
which was previously approved by the Board of Directors. The results of the
vote, on a post-split basis, are as follows:
Number of Shares
----------------
For 218,664,714
Against 112,606,848
Abstain 1,757,250
Delivered Not Voted 1,056,500
The total number of our common shares issued and outstanding and entitled to be
voted at the Special Meeting, on a post-split basis, was 370,416,512. The total
number of shares voted at the Special Meeting, on a post-split basis, was
334,085,312 or 90.2% of the shares outstanding and eligible to vote.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded on the Nasdaq Stock Market under the symbol CPWR. As
of June 18, 1999, there were approximately 3,890 shareholders of record of
Compuware Common Stock. We have not paid any cash dividends on our Common Stock
since fiscal 1986, and we anticipate that for the foreseeable future, we will
continue to retain our earnings for use in our business. In March 1999, we
effected a two-for-one stock split by means of a 100% stock dividend payable to
shareholders of record as of January 26, 1999. The following table sets forth
the range of high and low trading sale prices for the our Common Stock for the
periods indicated, all as reported by Nasdaq. The information presented below
has been restated for the stock split.
FISCAL YEAR ENDED MARCH 31, 1999 HIGH LOW
First quarter $26.69 $20.56
Second quarter 31.50 21.50
Third quarter 39.91 17.94
Fourth quarter 39.13 20.88
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
First quarter $12.69 $ 7.75
Second quarter 16.34 11.31
Third quarter 19.75 13.81
Fourth quarter 25.63 15.56
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended March 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- ---------- ----------
(In thousands, except earnings per share data)
STATEMENT OF INCOME DATA:
Revenues:
Software license fees $ 683,354 $ 467,251 $ 318,907 $ 226,690 $ 223,589
Maintenance fees 334,371 244,273 209,521 184,039 153,828
Professional services fees 620,720 427,794 284,468 203,630 156,460
------------ ---------- ---------- ---------- ----------
Total revenues 1,638,445 1,139,318 812,896 614,359 533,877
------------ ---------- ---------- ---------- ----------
Operating expenses:
Cost of software license fees 28,097 22,874 20,881 20,146 14,894
Cost of maintenance 37,286 31,203 27,278 26,867 24,111
Cost of professional services 506,765 365,948 250,405 174,215 133,823
Software product development 64,957 54,416 44,494 42,792 31,825
Sales and marketing 418,019 325,793 256,139 204,403 174,829
Administrative and general 78,333 58,965 48,233 38,537 33,951
Restructuring and merger-related costs 3,606 10,688 10,547 (1)
Purchased research and development 4,350 3,160 21,790 24,943 11,990
------------ ---------- ---------- ----------- ----------
Total operating expenses 1,137,807 865,965 669,220 542,591 435,970
------------ ---------- ---------- ----------- ----------
Income from operations 500,638 273,353 143,676 71,768 97,907
Interest and investment income, net 29,403 17,417 5,710 7,015 5,805
------------ ---------- ---------- ----------- ----------
Income before merger costs-escrow claims 530,041 290,770 149,386 78,783 103,712
Merger costs-escrow claims 8,531 (1)
------------ ---------- ---------- ----------- ----------
Income before income taxes 530,041 290,770 149,386 78,783 95,181
Income tax provision 180,178 96,826 51,950 34,541 33,084
------------ ---------- ---------- ----------- ----------
Net income $ 349,863 $ 193,944 $ 97,436 $ 44,242 $ 62,097
============ ========== ========== =========== ==========
Basic earnings per share (2 and 3) $ 0.95 $ 0.55 $ 0.29 $ 0.13 $ 0.17
Diluted earnings per share (2 and 3) 0.87 0.50 0.27 0.12 0.16
Shares used in computing net income per share(3):
Basic earnings per share 366,734 352,274 340,770 347,516 358,058
Diluted earnings per share 402,036 387,426 359,740 358,950 381,476
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 550,586 $ 362,324 $ 179,508 $ 141,842 $ 195,941
Total assets 1,676,683 1,072,640 755,407 555,726 524,095
Long-term debt, less current maturities - 6,956 6,068 - -
Total shareholders' equity 1,079,522 708,296 445,636 318,985 336,201
(1) Reflects merger costs incurred in connection with the acquisition,
restructuring and integration of Uniface Holding B.V.
(2) See notes 1 and 7 of Notes to the Consolidated Financial Statements and
Exhibit 11.1 for the basis of computing earnings per share.
(3) Adjusted to reflect the 2-for-1 stock split effective March 1, 1999 (see
note 6 of Notes to Consolidated Financial Statements).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are identified by the use of
the words "believes", "expects", "anticipates", "will", "contemplates", "would"
and similar expressions that contemplate future events. Numerous important
factors, risks and uncertainties affect the Company's operating results,
including without limitation those contained in this report, and could cause the
Company's actual results to differ materially from the results implied by these
or any other forward looking statements made by, or on behalf of, the Company.
There can be no assurance that future results will meet expectations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of income as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
Percentage of Period-to-Period
Total Revenues Change
----------------------------------- -----------------------
Fiscal Year Ended 1998 1997
March 31, to to
-----------------------------------
1999 1998 1997 1999 1998
--------- ----------- ---------- ---------- -----------
Revenues:
Software license fees 41.7% 41.0% 39.2% 46.2% 46.5%
Maintenance fees 20.4 21.4 25.8 36.9 16.6
Professional services fees 37.9 37.6 35.0 45.1 50.4
--------- ----------- ----------
Total revenues 100.0 100.0 100.0 43.8 40.2
--------- ----------- ----------
Operating expenses:
Cost of software license fees 1.7 2.0 2.6 22.8 9.5
Cost of maintenance 2.3 2.7 3.4 19.5 14.4
Cost of professional services 30.9 32.1 30.8 38.5 46.1
Software product development 3.9 4.8 5.4 19.4 22.3
Sales and marketing 25.5 28.6 31.5 28.3 27.2
Administrative and general 4.8 5.2 5.9 32.8 22.3
Merger-related costs 0.3 (100.0)
Purchased research and development 0.3 0.3 2.7 37.7 (85.5)
--------- ----------- ----------
Total operating expenses 69.4 76.0 82.3 31.4 29.4
--------- ----------- ----------
Income from operations 30.6 24.0 17.7 83.1 90.3
Interest and investment income, net 1.8 1.5 0.7 68.8 205.0
--------- ----------- ----------
Income before income taxes 32.4 25.5 18.4 82.3 94.6
Income tax provision 11.0 8.5 6.4 86.1 86.4
--------- ----------- ----------
Net income 21.4% 17.0% 12.0% 80.4% 99.0%
========= =========== ==========
13
14
The Company operates in two business segments in the software industry: products
and professional services.
Products Revenue
The Company's products are designed to support three key activities within the
application development process: building, testing and managing the application
to optimize performance in production. Products revenue consists of software
license fees and maintenance fees. Products revenue comprised 62.1%, 62.4% and
65.0% of total Company revenue during fiscal years 1999, 1998 and 1997,
respectively. Mainframe product revenue increased $253.2 million or 43.9% during
fiscal 1999 and $143.9 million or 33.2% during fiscal 1998. Client/server
revenue increased $53.0 million or 39.4% during fiscal 1999 and $39.2 million or
41.2% during fiscal 1998. These increases spanned all geographic regions and
were primarily a result of increased CPU or MIPS operating capacity of the
world's 15,000 largest enterprises.
Professional Services Revenue
The Company offers a broad range of data processing professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Revenue from professional services increased
$192.9 million or 45.1% during fiscal 1999 and $143.3 million or 50.4% during
fiscal 1998. More than 85% of the Company's total professional services revenue
is generated in North America; however, these increases spanned all geographic
regions. The Company plans to continue this growth naturally and through
acquisitions both in North America and internationally.
Operating Profit
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and development
expense, net interest income and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
1999 1998 1997
---------------- --------------- ---------------
Revenue $ 1,017,725 $ 711,524 $ 528,428
Operating expenses 548,359 434,286 348,792
---------------- --------------- ---------------
Products operating profit $ 469,366 $ 277,238 $ 179,636
================ =============== ===============
Products revenue by geographic location is presented in the table below (in
thousands):
1999 1998 1997
---------------- ---------------- ---------------
United States $ 654,011 $ 441,643 $ 296,733
European subsidiaries 252,964 179,950 159,483
Other international operations 110,750 89,931 72,212
---------------- ---------------- ---------------
Total products revenue $ 1,017,725 $ 711,524 $ 528,428
================ ================ ===============
The products segment generated operating margins of 46.1%, 39.0% and 34.0%
during fiscal years 1999, 1998 and 1997, respectively. Products expenses include
cost of software license fees, cost of maintenance, software product development
costs and sales and marketing expenses. The increase in the operating margins
year over year is primarily a result of economies associated with larger
transactions, more sales representatives in the field with increased sales
productivity, additional product offerings including the NuMega and QA products
acquired during fiscal 1998, and increased market penetration of our
client/server products.
Cost of software license fees includes amortization of capitalized software, the
cost of preparing and disseminating products to customers and the cost of author
royalties. The increase in these costs is due primarily to an increase in
amortization of internally developed software products, increased author
royalties and, to a lesser extent, increased packaging and distribution costs.
As a percentage of software license fees, these costs were 4.1%, 4.9% and 6.5%
in fiscal 1999, 1998 and 1997, respectively.
14
15
Cost of maintenance consists of the cost of maintenance programmers and product
support personnel and the computing, facilities and benefits costs allocated to
such personnel. The increase in cost of maintenance was due primarily to the
increase in maintenance and support staff in order to support the worldwide
growth of the installed base. As a percentage of maintenance fees, these costs
were 11.2%, 12.8% and 13.0% for fiscal years 1999, 1998 and 1997, respectively.
The Company will continue to look for ways to reduce this percentage while
maintaining superior service levels and high renewal rates.
Software product development costs consist of the cost of programming personnel,
the facilities, computing and benefits costs allocated to such personnel and the
costs of preparing user and installation guides for the Company's software
products, less the amount of software development costs capitalized during the
fiscal year. The increase in these costs was due primarily to an increase in
software development staff needed to meet the demand for new and enhanced
products. While continuing to support and enhance its traditional mainframe
products, the Company has significantly increased the resources allocated to
developing and enhancing its client/server product lines. Before the
capitalization of internally developed software products, total research and
development expenditures for fiscal 1999 increased $11.8 million, or 18.2%, to
$76.8 million from $65.0 million in fiscal year 1998. In fiscal 1998, total
research and development costs increased $10.7 million, or 19.8%, from $54.3
million in fiscal 1997. Those major development projects that achieved
technological feasibility for fiscal 1999 included two new interactive analysis
and debugging products, one new fault management product, three new file and
data management products, three automated testing products, seven systems
management products, four new application development products, and eleven new
Windows development tools.
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 245 to 2,061 people at the end of fiscal 1999,
as compared to 1,816 at the end of fiscal 1998 and 1,130 at the end of fiscal
1997.
Financial information for the Company's professional services segment is as
follows (in thousands):
1999 1998 1997
----------------- --------------- ---------------
Revenue $ 620,720 $ 427,794 $ 284,468
Operating expenses 506,765 365,948 250,405
----------------- --------------- ---------------
Professional services operating profit $ 113,955 $ 61,846 $ 34,063
================= =============== ===============
Professional services revenue by geographic location is presented in the table
below (in thousands):
1999 1998 1997
----------------- --------------- ---------------
United States $ 548,255 $ 384,346 $ 262,325
European subsidiaries 63,429 37,528 20,612
Other international operations 9,036 5,920 1,531
----------------- --------------- ---------------
Total professional services revenue $ 620,720 $ 427,794 $ 284,468
================== =============== ===============
The professional services segment generated operating margins of 18.4%, 14.5%
and 12.0% during fiscal years 1999, 1998 and 1997, respectively. The increase in
the professional services margin is primarily attributable to increased billable
staff and a movement toward higher margin lines of business. 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 1,723 professional billable staff to 6,278 in
fiscal 1999 from 4,555 people at the end of fiscal 1998. This compares to an
increase of 1,033 billable people in fiscal 1998 from 3,522 people at the end of
fiscal 1997.
Administrative and general expenses increased 32.8% during fiscal 1999 and 22.3%
during fiscal 1998. However, as a percentage of total revenue, these expenses
have been steadily decreasing at 4.8%, 5.2% and 5.9% of total revenue during
fiscal years 1999, 1998 and 1997, respectively. These decreases are primarily a
result of increased revenues with significantly smaller increases in corporate
expenditures.
15
16
During fiscal year 1999, the Company recognized $4.4 million of expense for
purchased research and development costs associated with the acquisition of
products from Centerline Software, Inc., Vireo Software, Inc. and Cardume
Software Limited. 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. The Company also incurred
$3.6 million of merger-related costs incurred in connection with the merger and
integration of NuMega Technologies, Inc. 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, these amounts were expensed in accordance
with Statement of Financial Accounting Standards No. 2.
Net interest and investment income for fiscal 1999 was $29.4 million as compared
to $17.4 million in fiscal 1998 and $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.
The Company's provision for income taxes was $180.2 million in fiscal 1999,
which represents an effective tax rate of 34.0%. This compares to a tax
provision of $96.8 million in fiscal 1998, which represents an effective tax
rate of 33.3%, and an income tax provision of $52.0 million in fiscal 1997,
which represents an effective tax rate of 34.8%. The fiscal 1999 increase in the
effective tax rate was due to the growth in pre-tax earnings, which dilutes the
effect of the tax credits on the effective tax rates. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had approximately $678.6 million in cash and
investments which resulted primarily from cash generated from operations. During
fiscal 1999, 1998 and 1997, Compuware generated $474.9 million, $207.4 million
and $112.5 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 $38.5
million, $41.8 million and $38.0 million, respectively.
In March 1999, the Company announced that its Board of Directors had approved a
stock repurchase program, pursuant to which the Company was authorized to
purchase up to $500 million of outstanding Company stock. The Company purchased
approximately 21.5 million shares representing the entire $500 million
authorized by the Board for this program. These shares were purchased ratably
from March through May 1999.
Compuware believes its available cash resources, together with cash flows from
operations, will be sufficient to meet its cash needs for the foreseeable
future. As of March 31, 1999 the Company has no long term debt. The Company
continues to evaluate business acquisition opportunities that fit the Company's
strategic plans.
On June 24, 1999, Compuware announced it has entered into an agreement to
purchase all outstanding shares of common stock of Data Processing Resources
Corporation for an aggregate purchase price of $353 million. Compuware expects
to enter into a credit agreement with a financial institution for an unsecured
line of credit. It is expected that this purchase will be funded by cash on hand
and borrowings under the credit agreement.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
("AICPA") released SOP 98-9, which modified SOP 97-2 with respect to certain
transactions. SOP 98-9 provides guidance on recognizing revenue on software
transactions which involve multiple elements (such as license fees and
maintenance) and is effective for the Company beginning with the quarter ending
June 30, 1999. The Company is continuing to evaluate the effect of SOP 98-9 on
the Company's existing revenue recognition policies; however, the Company does
not currently believe there will be a material impact on its operating results
from implementation of the SOP.
16
17
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt this
statement for the year ending March 31, 2001. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
determined the effect, if any, that adoption will have on its financial position
or results of operations.
YEAR 2000
The Year 2000 problem is the result of the widespread practice of using only two
digits instead of four to represent the year in computing equipment and computer
software. Failure to address this problem could cause erroneous results in the
proper interpretation of years after 1999. The Company has instituted various
projects to address this issue which include three major areas: the software
products which the Company develops and markets, its internal information
technology (IT) assets and aspects not directly related to the Company's IT
assets or software products ("non-IT assets"). This last area includes such
items as embedded systems in infrastructure components (such as building
security and HVAC systems), as well as the business relationships the Company
has with its customers and suppliers, especially those third parties with whom
the Company has a systems interaction.
The Company undertook a project to inventory and assess the impact of the Year
2000 on its software products in the middle of 1994. As a part of this project
the Company identified the software products that would be supported beyond
December 31, 1999. Plans were put in place to complete the necessary changes to
make the identified software products Year 2000 compliant. The Company believes
that all of the Company's current product offerings as well as those products
the Company will continue to support are Year 2000 compliant.
The Company has established a web page to update customers on the Year 2000
status of the software products. This site assists the customers in
understanding the Year 2000 strategy. Part of the site gives customers access to
frequently asked Year 2000 questions. The Company is committed to supporting its
customers into the year 2000 and beyond. The strategy provides leadership and
tools needed to meet the challenge of the millennium change.
The Company has undertaken a project to inventory, assess and remediate its
significant internal software applications and other IT assets. Many of these
applications are essential for day-to-day operations. The Company believes it
has completed remediation, testing and implementation for all critical software.
The remediation and testing activities have been performed exclusively by
internal resources.
The Company is also in the process of assessing and remediating its other IT and
non-IT assets. These include areas such as PCs, networks, voice mail, e-mail,
building security, etc. This portion of the project is planned for completion by
October 1, 1999, and appears to be on schedule.
The Company has also undertaken a project to identify and assess its significant
third-party suppliers, and is developing a plan to address vendor or supplier
Year 2000 issues (through remediation, repair, replacement or upgrade) so as to
avoid any business disruption. In most cases, the Company is forced to rely on
third party representations, without any ability to do independent testing or
evaluation. Contingency plans are being developed for certain key third parties
which are deemed to be critical for the Company's operation. Based upon the
information received to date, the Company does not expect any material financial
impacts from third party vendors. Embedded systems and other non-IT systems are
being evaluated for Year 2000 compliance, and being repaired or replaced as
necessary.
The costs for Year 2000-related activities are being budgeted as necessary.
Costs of the Company's Year 2000 compliance activities have not been and are not
expected to have a material impact on the Company's results of operations or
financial position. This expectation assumes that the Company will not be
obligated to incur significant Year 2000 related costs on behalf of its
customers or suppliers, and that the Company's critical vendors will be able to
meet their commitments to the Company.
17
18
The Company will be adequately prepared to meet the challenges of the coming of
Year 2000 without significant impact to the Company's ability to carry on its
normal business operations. Management estimates that it is approximately 90%
complete with all remediation efforts, which includes 100% completion of all
critical business systems and supported software products. The balance of the
efforts yet to be expended are in the areas of non-IT assets, monitoring
supplier compliance and contingency planning.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates is limited
to its cash investments. Derivative financial instruments are not a part of the
Company's investment strategy. The Company places its investments with high
quality issuers and preserves its invested funds by limiting default and market
risk. In addition, the Company has classified all its marketable debt securities
and long term debt investments as "held to maturity" which does not expose the
consolidated statement of income or balance sheet to fluctuations in interest
rates. Information about the Company's investment portfolio is set forth in note
3 of Notes to Consolidated Financial Statements.
FOREIGN CURRENCY RISK
The Company has entered into forward foreign exchange contracts primarily to
hedge amounts due from select subsidiaries denominated in foreign currencies
(mainly in Europe and Asia-Pacific) against fluctuations in exchange rates. The
Company has not entered into forward foreign exchange contracts for speculative
or trading purposes. The Company's accounting policies for these contracts are
based on the Company's designation of the contracts as hedging transactions. The
criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on forward foreign
exchange contracts are recognized in income in the same period as gains and
losses on the underlying transactions. If the underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or loss on
the related forward foreign exchange contract would be recognized in income in
the same period. In addition, since the Company enters into forward contracts
only as a hedge, any change in currency rates would not result in any material
net gain or loss, as any gain or loss on the underlying foreign currency
denominated balance would be offset by the gain or loss on the forward contract.
The Company operates in certain countries in Latin America, and Asia-Pacific
where there are limited forward currency exchange markets and thus the Company
has unhedged transaction exposures in these currencies. At March 31, 1999, the
Company had contracts maturing through May 1999 to sell $27,993,000 in foreign
currencies, with a fair value of $28,088,000. Information about the Company's
foreign currency forward exchange contracts is set forth in note 1 of Notes to
Consolidated Financial Statements.
18
19
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, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
April 29, 1999
19
20
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS NOTES 1999 1998
----- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 193,128 $ 206,278
Investments 3 309,787 54,349
Accounts receivable, less allowance for doubtful
accounts of $12,152 and $8,812 526,469 388,573
Deferred tax asset, net 8 16,727 14,133
Income taxes refundable 2,594
Prepaid expenses and other current assets 25,979 10,348
---------- ----------
Total current assets 1,072,090 676,275
---------- ----------
INVESTMENTS 3 175,689 107,721
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 94,786 84,494
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $88,793 AND $70,243 48,095 50,455
---------- ----------
OTHER:
Accounts receivable 145,793 64,282
Deferred tax asset, net 8 11,347 12,926
Excess of cost of investment over fair value of net
assets acquired, less accumulated amortization
of $14,692 and $9,835 2 87,713 57,607
Other assets 41,170 18,880
---------- ----------
Total other assets 286,023 153,695
---------- ----------
TOTAL ASSETS $1,676,683 $1,072,640
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY NOTES 1999 1998
----- ---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 71,129 $ 19,985
Accrued expenses 101,705 71,104
Income taxes payable 27,153
Accrued bonuses and commissions 66,549 42,688
Deferred revenue 254,968 180,174
---------- ----------
Total current liabilities 521,504 313,951
LONG TERM DEBT 5 6,956
DEFERRED REVENUE 75,657 43,437
---------- ----------
Total liabilities 597,161 364,344
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
367,926,388 and 360,341,946 shares in 1999
and 1998, respectively 6 3,679 3,603
Additional paid-in capital 6 304,825 280,867
Retained earnings 777,318 427,455
Accumulated other comprehensive income (6,300) (3,629)
---------- ----------
Total shareholders' equity 1,079,522 708,296
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,676,683 $1,072,640
=========== ==========
See notes to consolidated financial statements.
20
21
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTES 1999 1998 1997
------------- ---------- ------------
REVENUES:
Software license fees $ 683,354 $ 467,251 $ 318,907
Maintenance fees 334,371 244,273 209,521
Professional services fees 620,720 427,794 284,468
------------- ---------- ------------
Total revenues 1,638,445 1,139,318 812,896
------------- ---------- ------------
OPERATING EXPENSES:
Cost of software license fees 28,097 22,874 20,881
Cost of maintenance 37,286 31,203 27,278
Cost of professional services 506,765 365,948 250,405
Software product development 64,957 54,416 44,494
Sales and marketing 418,019 325,793 256,139
Administrative and general 78,333 58,965 48,233
Merger-related costs 2 3,606
Purchased research and development 2 4,350 3,160 21,790
------------- ---------- ------------
Total operating expenses 1,137,807 865,965 669,220
------------- ---------- ------------
INCOME FROM OPERATIONS 500,638 273,353 143,676
OTHER INCOME 29,403 17,417 5,710
------------- ---------- ------------
INCOME BEFORE INCOME TAXES 530,041 290,770 149,386
INCOME TAX PROVISION 8 180,178 96,826 51,950
------------- ---------- ------------
NET INCOME $ 349,863 $ 193,944 $ 97,436
============= ========== ============
Basic earnings per share 7 $ 0.95 $ 0.55 $ 0.29
============= ========== ============
Diluted earnings per share 7 $ 0.87 $ 0.50 $ 0.27
============= ========== ============
See notes to consolidated financial statements.
21
22
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Foreign
Common Stock Additional Currency
-------------------------- Paid-In Retained Translation
Shares Amount Capital Earnings Adjustment
------------- ------------- ----------- ------------ ------------
BALANCE AT APRIL 1, 1996, as restated (Note 6) 338,384,184 $ 3,384 $ 182,388 $ 135,194 $ (1,016)
Net income 97,436
Foreign currency translation, net of tax (Note 1) 171
Realized gain on sale of marketable
securities
Comprehensive income
Issuance of common stock 320,000 4 2,326
Acquisition tax benefits 6,603
Exercise of employee stock options
and related tax benefit (Note 11) 5,022,896 50 19,096
------------- ------------- ----------- ------------ ------------
BALANCE AT MARCH 31, 1997 343,727,080 3,438 210,413 232,630 (845)
Net income 193,944
Foreign currency translation, net of tax (Note 1) (2,784)
Comprehensive income
NuMega acquisition (Note 2) 6,683,206 66 3,734 881
Issuance of common stock 1,450,616 14 12,731
Acquisition tax benefits 6,485
Exercise of employee stock options
and related tax benefit (Note 11) 8,481,044 85 47,504
------------- ------------- ----------- ------------ ------------
BALANCE AT MARCH 31, 1998 360,341,946 3,603 280,867 427,455 (3,629)
Net income 349,863
Foreign currency translation, net of tax (Note 1) (2,671)
Comprehensive income
M.I.S.I. acquisition (Note 2) 1,021,864 10 31,089
Issuance of common stock 1,367,818 14 24,457
Purchase and retirement of common stock (6,200,000) (62) (151,555)
Acquisition tax benefits 6,707
Exercise of employee stock options
and related tax benefit (Note 11) 11,394,760 114 113,260
------------- ------------- ------------ -------------- -------------
BALANCE AT MARCH 31, 1999 367,926,388 $ 3,679 $ 304,825 $ 777,318 $ (6,300)
============= ============= ============ ============== =============
Unrealized
Loss On Total
Marketable Shareholders' Comprehensive
Securities Equity Income
---------- ---------------- ---------------
BALANCE AT APRIL 1, 1996, as restated (Note 6) $ (965) $ 318,985
Net income 97,436 $ 97,436
Foreign currency translation, net of tax (Note 1) 171 171
Realized gain on sale of marketable
securities 965 965 (965)
----------
Comprehensive income $ 96,642
==========
Issuance of common stock 2,330
Acquisition tax benefits 6,603
Exercise of employee stock options
and related tax benefit (Note 11) 19,146
---------- ------------- ----------
BALANCE AT MARCH 31, 1997 - 445,636
Net income 193,944 $ 193,944
Foreign currency translation, net of tax (Note 1) (2,784) (2,784)
----------
Comprehensive income $ 191,160
==========
NuMega acquisition (Note 2) 4,681
Issuance of common stock 12,745
Acquisition tax benefits 6,485
Exercise of employee stock options
and related tax benefit (Note 11) 47,589
---------- -------------
BALANCE AT MARCH 31, 1998 - 708,296
Net income 349,863 $ 349,863
Foreign currency translation, net of tax (Note 1) (2,671) (2,671)
----------
Comprehensive income $ 347,192
==========
M.I.S.I. acquisition (Note 2) 31,099
Issuance of common stock 24,471
Purchase and retirement of common stock (151,617)
Acquisition tax benefits 6,707
Exercise of employee stock options
and related tax benefit (Note 11) 113,374
----------- --------------
BALANCE AT MARCH 31, 1999 $ - $ 1,079,522
=========== ==============
See notes to consolidated financial statements.
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23
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 349,863 $ 193,944 $ 97,436
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 41,537 36,504 31,401
Tax benefit from exercise of stock options 91,083 30,402 5,306
Issuance of common stock to Employee Stock Ownership Trust 4,558 3,500 2,330
Acquisition tax benefits 6,707 6,485 6,603
Deferred income taxes (1,015) (6,108) (4,256)
Other 160 240 (290)
Net change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (214,293) (104,702) (88,574)
Prepaid expenses and other current assets (18,215) (2,118) 1,361
Other assets (21,759) (6,255) 88
Accounts payable and accrued expenses 99,522 22,582 25,960
Deferred revenue 107,014 26,206 37,797
Income taxes 29,744 6,765 (2,618)
------------ ------------ ------------
Net cash provided by operating activities 474,906 207,445 112,544
------------ ------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (8,279) (2,038) (47,293)
Property and equipment (26,370) (28,006) (23,442)
Capitalized software (12,173) (13,823) (14,544)
Investments:
Proceeds from maturity 446,221 85,682 63,202
Purchases (774,350) (172,865) (74,491)
Other (246)
------------ ------------ ------------
Net cash used in investing activities (374,951) (131,050) (96,814)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (3,692) (3,890)
Net proceeds from sale of common stock 19,913 9,245
Repurchase of common stock (151,617)
Net proceeds from exercise of stock options 22,291 17,187 13,840
------------ ------------ ------------
Net cash (used in) provided by financing activities (113,105) 22,542 13,840
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,150) 98,937 29,570
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 206,278 107,341 77,771
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 193,128 $ 206,278 $ 107,341
============ ============ ============
See notes to consolidated financial statements.
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COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
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 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, 1999 and 1998 and the results of operations for the
years ended March 31, 1999, 1998 and 1997. While management has based their
assumptions and estimates on the facts and circumstances known at March 31,
1999, 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. Product maintenance fees are recognized
as revenue ratably over the contract period. Professional services fees are
recognized in the period the services are performed. 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 adopted
this pronouncement prospectively with its fiscal year ending March 31, 1999. The
adoption of SOP 97-2 did not have a material impact on the Company's financial
statements.
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, U.S. Government agencies and tax
free and advantage auction rate securities. All are classified as
held-to-maturity and carried at amortized cost. Those investments that mature
within one year from the balance sheet date are classified as 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 is stated at the lower of unamortized cost or net
realizable value. Net purchased software included in capitalized software at
March 31, 1999 and 1998 is $12,396,000 and $14,249,000, 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
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research and development, net of amounts capitalized. Total software development
costs incurred internally by the Company were $76,831,000, $65,015,000 and
$54,292,000 in fiscal 1999, 1998 and 1997, respectively, of which $11,874,000,
$10,599,000 and $9,798,000, respectively, were capitalized.
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, including the period being reported on.
Amortization begins when the product is available for general release to
customers. The amortization period for capitalized software generally
approximates five years. Capitalized software amortization is included in "Cost
of software license fees" in the Statement 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 and accounts payable 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 occurred.
Translation adjustments have been excluded from the results of operations and
are reported as accumulated other comprehensive income.
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 or buy
currencies at specified rates on specific dates. Market value gains and losses
on these contracts are recognized, offsetting foreign exchange gains or losses
on foreign receivables. The Company does not use foreign exchange contracts to
hedge anticipated transactions. The net foreign currency transaction loss was
$2,944,000, $627,000 and $1,446,000 for the fiscal years ended March 31, 1999,
1998 and 1997, respectively. These amounts are included in "Sales and marketing"
in the Statement of Income.
At March 31, 1999, the Company had contracts maturing through May 1999 to sell
$27,993,000 in foreign currencies. At March 31, 1998, the Company had contracts
maturing through May 1998 to sell $45,478,000 in foreign currencies.
Earnings Per Share - The Company calculates its earnings per share under the
provisions of SFAS No. 128, "Earnings per Share." Basic EPS is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS assumes the
issuance of common stock for all potentially dilutive equivalent shares
outstanding.
Business Segments - Effective March 31, 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not affect the results of operations or financial
position, but did affect the disclosure of
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segment information. Segment information for all periods has been presented to
conform to SFAS 131 requirements. See note 9.
Comprehensive Income - During fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and presenting comprehensive income and its components in consolidated financial
statements. Comprehensive income is defined as net income plus the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources.
Recently Issued Accounting Pronouncements - In December 1998, the American
Institute of Certified Public Accountants ("AICPA") released SOP 98-9, which
modified SOP 97-2 with respect to certain transactions. SOP 98-9 provides
guidance on recognizing revenue on software transactions which involve multiple
elements (such as license fees and maintenance) and is effective for the
Company beginning with the quarter ending June 30, 1999. The Company is
continuing to evaluate the effect of SOP 98-9 on the Company's existing revenue
recognition policies; however, the Company does not currently believe there
will be a material impact on its operating results from implementation of the
SOP.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt this
statement for the year ending March 31, 2001. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
determined the effect, if any, that adoption will have on its financial position
or results of operations.
2. ACQUISITIONS
M.I.S. International, Inc. - In March 1999, the Company acquired M.I.S.
International, Inc. ("M.I.S.I.") a professional services firm, for approximately
$31,100,000 in Compuware stock. 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
$30,569,000 and is being amortized over a fifteen-year period on a straight-line
basis.
Other Fiscal 1999 Acquisitions - During fiscal 1999, the Company completed the
acquisition of certain software products for an aggregate cost of approximately
$9,250,000 in cash and notes payable that are due within one year. The companies
from which the software was purchased were Centerline Software ($2,900,000),
Vireo Software ($4,100,000) and Cardume Software ($2,250,000). The aggregate
amount by which the acquisition cost exceeded the fair value of the net assets
acquired was approximately $1,319,000 and is being amortized over a fifteen year
period on a straight-line basis. Of the total purchase price, $4,350,000 was
allocated to in-process research and development and in accordance with SFAS No.
2, "Accounting for Research and Development Costs," this amount was expensed as
of the purchase date.
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
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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 was Valuation Counselors.
NuMega Technologies, Inc. - In December 1997, the Company issued approximately
6,683,000 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 1,776,000 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.
Other Fiscal 1997 Acquisitions - 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 was Valuation Counselors.
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3. INVESTMENTS
A summary of securities classified as held to maturity at March 31, 1999 and
1998 is set forth below (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1999: Cost Gains Losses Value
------------- ---------- ---------- ---------
Municipal Obligations $ 305,451 $ 857 $ 324 $ 305,984
Tax Advantage Auction
Rate Securities 102,000 102,000
Tax Free Auction
Rate Securities 52,554 4 52,550
US Government Agencies 25,471 26 25,497
------------- ---------- ---------- ---------
Securities Classified as
Held to Maturity $ 485,476 $ 883 $ 328 $ 486,031
============= ========== ========== =========
March 31, 1998:
Municipal Obligations $ 162,070 $ 258 $ 137 $ 162,191
============= ========== ========== =========
Scheduled maturities of securities classified as held to maturity at March 31,
1999 were as follows (in thousands):
Amortized Fair
Cost Value
------------ ----------
Due in:
2000 $ 309,787 $ 309,870
2001 113,137 113,599
2002 59,922 59,932
2003 2,630 2,630
------------ ----------
Total $ 485,476 $ 486,031
============ ==========
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification (in thousands):
March 31,
--------------------------
1999 1998
----------- -----------
Land $ 1,776 $ 1,776
Buildings 28,788 28,777
Leasehold improvements 17,492 14,227
Furniture and fixtures 38,519 29,678
Computer equipment and software 69,368 59,279
----------- -----------
155,943 133,737
Less accumulated depreciation and
amortization 61,157 49,243
----------- -----------
Total $ 94,786 $ 84,494
=========== ===========
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5. CREDIT FACILITIES AND LONG-TERM DEBT
Cash paid for interest totaled approximately $687,000, $810,000 and $450,000 for
the years ended March 31, 1999, 1998 and 1997, 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,
2000. 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 1999 or 1998.
Long Term Debt - As of March 31, 1999, the Company has no long-term debt. As of
March 31, 1998, the Company's long term debt included $6,100,000 of
pound-denominated notes issued as part of the Direct Technology Limited
acquisition (see note 2 of Notes to Consolidated Financial Statements). The
Company also had 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).
6. 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.
On February 25, 1999 the Company's shareholders approved an increase in the
Company's authorized shares of common stock from 400,000,000 to 1,600,000,000
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 March 1, 1999 to holders of record January 26, 1999.
The effect of the stock splits has been retroactively reflected as of April 1,
1996. 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.
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7. EARNINGS PER COMMON SHARE AND CAPITAL STRUCTURE INFORMATION
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
Year Ended March 31,
------------------------------
1999 1998 1997
-------- -------- --------
BASIC EPS:
Numerator: Net Income $349,863 $193,944 $ 97,436
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 366,734 352,274 340,770
-------- -------- --------
Basic EPS $ 0.95 $ 0.55 $ 0.29
======== ======== ========
DILUTED EPS:
Numerator: Net Income $349,863 $193,944 $ 97,436
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 366,734 352,274 340,770
Dilutive effect of stock options 35,302 35,152 18,970
-------- -------- --------
Total Shares 402,036 387,426 359,740
-------- -------- --------
Diluted EPS $ 0.87 $ 0.50 $ 0.27
======== ======== ========
8. 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,
-----------------
1999 1998
------- -------
Deferred tax assets:
Accrued vacation $ 3,314 $ 2,582
Purchased software 10,593 9,410
Net operating loss carryforwards 31,130 35,139
Other 19,914 12,055
------- -------
64,951 59,186
Less valuation allowance 4,612 8,891
------- -------
Net deferred tax assets 60,339 50,295
Current portion 19,204 14,512
------- -------
Long-term portion $41,135 $35,783
======= =======
Deferred tax liabilities:
Capitalized research and development costs $ 9,536 $ 9,605
Purchased software 1,758 2,565
Other 20,971 11,066
------- -------
Total deferred tax liabilities 32,265 23,236
Current portion 2,477 379
------- -------
Long-term portion $29,788 $22,857
======= =======
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The income tax provision (benefit) includes the following (in thousands):
Year Ended March 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Current:
Federal $ 160,192 $ 96,629 $ 46,073
Foreign 6,210 4,316 6,506
State 14,790 5,800 4,500
--------- -------- --------
Total current tax provision 181,192 106,745 57,079
--------- -------- --------
Deferred:
Federal (4,131) 1,309 6,050
Foreign 3,117 (11,228) (11,179)
--------- -------- --------
Total deferred tax benefit (1,014) (9,919) (5,129)
--------- -------- --------
Total income tax provision $ 180,178 $ 96,826 $ 51,950
========= ======== ========
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,
----------------------------------
1999 1998 1997
--------- --------- --------
Federal income tax at statutory rates $ 185,514 $ 101,769 $ 52,285
Increase (decrease) in taxes:
Items related to acquisitions 1,792
Foreign Sales Corporation subsidiary (8,643) (6,462) (4,638)
State income taxes, net 9,613 2,925 2,210
Other, net (6,306) (1,406) 301
--------- --------- --------
Provision for income taxes $ 180,178 $ 96,826 $ 51,950
========= ========= ========
At March 31, 1999 the Company has net operating loss carryforwards for income
tax purposes of approximately $96,989,000 which expire as follows (in
thousands):
Year ending March 31:
2000 $ 3,413
2001 2,238
2002 5,564
2003 9,542
2004 7,480
2005 1,474
2006 1,990
2008 1,325
2009 1,147
2010 1,523
2011 274
Unlimited carryforward 61,019
Of this amount, approximately $3,472,000 is available to offset U.S. federal
income taxes and approximately $93,517,000 relates to various foreign
jurisdictions. In addition, approximately $957,000 of tax credits expiring
through the year 2009 are available to offset future U.S. federal income tax
liabilities.
Cash paid for income taxes totaled approximately $28,332,000, $55,481,000 and
$46,760,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
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9. SEGMENT INFORMATION
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
The Company's products are designed to support three key activities within the
application development process: building, testing and managing the application
to optimize performance in production.
The Company also offers a broad range of data processing professional services
including business systems analysis, design and programming, software conversion
and system planning and consulting.
The Company evaluates the performance of its segments based primarily on
operating profit before administrative and general expense, purchased research
and development expense and net other income. The allocation of income taxes is
not evaluated at the segment level.
No single customer provides more than 10% of the Company's revenue.
Financial information for the Company's business segments is as follows (in
thousands):
1999 1998 1997
----------- ----------- -----------
Revenue:
Products:
Mainframe $ 830,256 $ 577,048 $ 433,185
Client/Server 187,469 134,476 95,243
Services 620,720 427,794 284,468
----------- ----------- -----------
Total revenues $ 1,638,445 $ 1,139,318 $ 812,896
=========== =========== ===========
Operating Expenses:
Products $ 548,359 $ 434,286 $ 348,792
Services 506,765 365,948 250,405
Administrative and general 78,333 58,965 48,233
----------- ----------- -----------
Total operating expenses $ 1,133,457 $ 859,199 $ 647,430
=========== =========== ===========
Income from operations, before other income, purchased research and
development charges and merger-related costs:
Products $ 469,366 $ 277,238 $ 179,636
Services 113,955 61,846 34,063
Administrative and general (78,333) (58,965) (48,233)
----------- ----------- -----------
Income from operations, before other income,
purchased research and development charges and
merger-related costs 504,988 280,119 165,466
Merger-related costs (3,606)
Purchased research and development charges (4,350) (3,160) (21,790)
Other income 29,403 17,417 5,710
----------- ----------- -----------
Income before income taxes $ 530,041 $ 290,770 $ 149,386
=========== =========== ===========
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Financial information regarding geographic operations are presented in the table
below (in thousands):
1999 1998 1997
---------------- -------------- ---------------
Revenue:
United States $ 1,202,266 $ 825,989 $ 559,058
European subsidiaries 316,393 217,478 180,095
Other international operations 119,786 95,851 73,743
---------------- -------------- ---------------
Total revenue $ 1,638,445 $ 1,139,318 $ 812,896
================ ============== ===============
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than ten percent
of the Company's long-lived assets, other than financial instruments, are
located outside of the United States
10. 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:
2000 $ 28,648
2001 23,452
2002 18,118
2003 13,894
2004 11,128
Thereafter 6,519
------------
Total $ 101,759
============
Lease expense for the years ended March 31, 1999, 1998 and 1997 under all
operating leases amounted to approximately $27,720,000, $19,193,000 and
$16,815,000, 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.
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11. 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
$4,558,000, $3,500,000 and $2,330,000 in fiscal 1999, 1998 and 1997,
respectively. 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 eight million shares of common stock to eligible
employees. Each offering period is limited to six months and a maximum number of
1,000,000 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% 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 % of the
first or last day's closing market price for each offering period, whichever is
lower. During fiscal 1999 and 1998, the Company sold approximately 1,177,000 and
1,250,000 shares, respectively, to eligible employees under the plan.
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 1,776,000 shares of the Company's common stock were
exchanged for all outstanding NuMega incentive and nonqualified stock options,
of which approximately 372,000 were outstanding at March 31, 1999. The option
prices range from $1.32 to $11.83 and expire in 9 years.
Employee Stock Option Plans - The Company adopted five Employee Stock Option
Plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees of the
Company, of which approximately 46,614,000 were outstanding at March 31, 1999.
Under the terms of the plans, the Company may grant nonqualified options at the
fair market value of the stock on the date of grant. During fiscal 1999, the
Company granted approximately 11,840,000 options under the five different
Employee Stock Option Plans.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming
director. Non-employee directors receive a one-time grant of options to purchase
20,000 shares of common stock and an annual grant of 40,000 option shares.
Further, effective April 1, 1999, each non-employee director will receive
options to purchase 2,000 option shares for each Board of Directors meeting
attended in person, 1,000 option shares for each Board of Directors Committee
meeting attended in person, 500 option shares for each Board of Directors
meeting attended by telephone, and 250 option shares for each Board of Directors
Committee meeting attended by telephone. All option shares become exercisable
over a four-year period. During fiscal 1999, approximately 343,000 options were
granted under the Non-Employee Director Stock Option Plan. Approximately
1,603,000 options were outstanding at March 31, 1999.
Options generally vest in cumulative annual installments over a three-to-five
year period. All options were granted at fair market value and expire ten years
from the date of grant.
At March 31, 1999, a total of 213,284 options were outstanding under plans that
were terminated by the Company, all of which are fully vested. All outstanding
options under the terminated plans remain in effect in accordance with the terms
under which they were granted.
34
35
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction.
Approximately 2,538,000 shares were exercised under the Replacement Stock Option
Award program for which approximately 1,069,000 replacement options were
granted.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Stock options are granted at current market prices at the date of
grant, therefore, no compensation cost has been recognized for its fixed stock
option plans and its stock purchase plan.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for fiscal 1999, 1998 and
1997 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,
-------------------------------------------
1999 1998 1997
------------ ----------- -----------
Net Earnings
As reported $ 349,863 $ 193,944 $ 97,436
Pro forma 297,490 172,394 85,319
Earnings per Share
As reported:
Basic earnings per share 0.95 0.55 0.29
Diluted earnings per share 0.87 0.50 0.27
Pro forma:
Basic earnings per share 0.81 0.49 0.25
Diluted earnings per share 0.74 0.44 0.24
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 1999, 1998 and 1997, respectively:
expected volatility of 66.88, 51.50 and 55.22 percent; risk-free interest rates
of 5.3, 5.7 and 6.6 percent; and expected lives at date of grant of 4.9, 4.9 and
4.3 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' stock 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 4.93 percent for
fiscal 1999, and expected volatilities of 54.25 and 66.21 for the first and
second offering periods, respectively, were consistent with those used for the
Company's stock option plans described above. The weighted-average fair value of
those purchase rights granted in fiscal 1999 were $6.48.
35
36
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 1999, 1998 and 1997, and changes
during the years ending on those dates is as follows (shares in thousands):
1999 1998 1997
--------------------------- -------------------------- --------------------------
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 52,102 $ 6.13 50,636 $ 3.83 40,416 $ 2.31
NuMega acquisition 1,776 1.66
Granted 12,183 25.33 10,540 14.90 17,696 6.90
Exercised (11,395) 2.41 (8,481) 2.07 (5,023) 2.75
Exchanged (1,069) 28.07
Forfeited (3,020) 11.47 (2,369) 7.43 (2,453) 2.74
------- ------ ------
Outstanding at end
of year 48,801 $ 11.21 52,102 $ 6.13 50,636 $ 3.83
======= ====== ======
Options exercisable
at year end 12,655 $ 5.71 17,090 $ 2.71 21,290 $ 2.02
======= ====== ======
Weighted-average
fair value of options
granted during the
year $ 15.40 $ 7.58 $ 3.68
======= ====== ======
The following table summarizes information about fixed stock options outstanding
at March 31, 1999 (shares in thousands):
---------------------------------------------- -----------------------------
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Shares Shares
Under Weighted-Avg. Weighted-Avg. Under Weighted-Avg.
Option Remaining Life Exercise Price Option Exercise Price
---------- -------------- -------------- ---------- --------------
Range of Exercise Prices
$ 0.01 TO $10.00 29,848 6.47 $ 4.92 11,110 $ 3.02
10.01 TO 20.00 7,950 8.50 15.09 484 17.39
20.01 TO 30.00 9,842 8.45 24.70 905 27.59
30.01 TO 42.00 1,161 9.37 31.96 156 34.24
---------- ----------
48,801 7.27 11.21 12,655 5.71
========== ===========
The maximum number of shares for which additional options may be granted was
13,306,421 at March 31, 1999, 13,401,204 at March 31,1998 and 5,440,736 at March
31, 1997. At March 31, 1999, a total of 62,107,843 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.
36
37
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 1999 and 1998 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------- ------------- ------------- ------------- ------------
Fiscal 1999:
Revenues $ 338,623 $ 366,569 $ 433,118 $ 500,135 $ 1,638,445
Operating income 82,789 99,428 139,720 178,701 500,638
Pre-tax income 88,625 106,222 147,364 187,830 530,041
Net income 58,847 69,788 97,260 123,968 349,863
Basic earnings per share 0.16 0.19 0.26 0.33 0.95
Diluted earnings per share 0.15 0.17 0.24 0.31 0.87
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 28,272 34,650 54,471 76,551 193,944
Basic earnings per share 0.08 0.10 0.15 0.21 0.55
Diluted earnings per share 0.08 0.09 0.14 0.19 0.50
13. SUBSEQUENT EVENTS (UNAUDITED)
Business Combinations - In June 1999, the Company extended a cash tender offer
to purchase all outstanding shares of common stock of Data Processing Resources
Corporation ("DPRC"), a professional services company, for approximately $353
million in cash. DPRC reported audited revenues of $211 million for the fiscal
year ended July 31, 1998, and has reported revenues of $355 million for the
twelve months ended April 30, 1999. The acquisition will be accounted for under
the purchase method of accounting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
38
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 May 25,
1999:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 56 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 46 President and Chief Operating Officer
Denise A. Knobblock 43 Executive Vice President, Human Resources and
Administration
Eliot R. Stark 46 Executive Vice President, Finance
Henry A. Jallos 50 Executive Vice President, Products Division
Laura L. Fournier 46 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Phyllis Recca 45 Senior Vice President, Professional Services
Stephen H. Fagan 44 Senior Vice President, Strategic Relationships, Europe
John N. Shevillo 63 Senior Vice President, Enterprise Systems
Thomas Costello, Jr. 45 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 February 1995 through January 1998. From January 1992 through January 1995,
Ms. Knobblock was Director of Facilities/Administration.
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
38
39
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.
Henry A. Jallos has served as Executive Vice President, Products Division since
September 1998. From August 1994 through August 1998, Mr. Jallos served as
Senior Vice President, Worldwide Sales.
Laura L. Fournier has served as Senior Vice President, Chief Financial Officer
and Treasurer since April 1998. Ms. Fournier was Corporate Controller from June
1995 through March 1998. From February 1990 through May 1995 Ms. Fournier was
Director of Internal Audit.
Phyllis Recca has served as Senior Vice President, Professional Services
Division since January 1999. From January 1995 through December 1998, Ms. Recca
served as Vice President, Professional Services Division, Mideast Region.
Stephen H. Fagan has served as Senior Vice President, Strategic Relationships,
Europe, since April 1999. From November 1997 through March 1999, Mr. Fagan
served as Senior Vice President, Professional Services. From 1994 through
October 1997, Mr. Fagan served as Vice President, Enterprise Products.
John N. Shevillo has served as Senior Vice President, Enterprise Systems since
April 1997. From April 1994 through March 1997, Mr. Shevillo served as 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.
39
40
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 19
Consolidated Balance Sheets as of March 31, 1999
and 1998 20
Consolidated Statements of Income for each of
the years ended March 31, 1999, 1998 and 1997 21
Consolidated Statements of Shareholders' Equity
for each of the years ended March 31, 1999, 1998
and 1997 22
Consolidated Statements of Cash Flows for each
of the years ended March 31, 1999, 1998 and 1997 23
Notes to Consolidated Financial Statements 24-37
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 44
Schedule II - Valuation and Qualifying Accounts 45
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.
40
41
3. EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
2.2 Agreement and Plan of Merger, dated February 23, 1999, among
Compuware Corporation, CPWRT1, Inc., CPWRT2, Inc., M.I.S.
International, Inc., Simco International, Inc., Autoflex,
Inc., and Michael M.Bahn, Mary C. Bahn 1999 Qualified Annuity
Trust, Michael M. Bahn Revocable Trust Dated January 23, 1995,
Mary C. Bahn Revocable Trust Dated January 23, 1995, Michael
J. Bahn, Marisa R. Bahn, and Renee C. Phillips 1999 Qualified
Annuity Trust (13)
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)
3.6 Certificate of Amendment to the Articles of Incorporation
dated March 12, 1999. (14)
4.1 Fiscal 1998 Stock Option Plan (11)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (11)
4.8 Registration Rights Agreement, dated February 23, 1999, by and
among Compuware Corporation, Michael J. Bahn, Marisa R. Bahn,
Renee C. Phillips 1999 Qualified Annuity Trust, Michael M.
Bahn Revocable Trust dated January 23, 1995, mary C. Bahn 1999
Qualified Annuity Trust and Mary C. Bahn Revocable Trust dated
January 23, 1995 (13)
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)
10.35 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)
10.59 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)
10.68 Amended and Restated Revolving Loan Agreement. (5)
10.74 Amendment to Employment Agreement, dated as of April 1, 1996,
between the Company and Peter Karmanos, Jr. (9)
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)
41
42
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. (12)
10.81 Employment Agreement, dated as of April 1, 1995, between the
Company and Phyllis Recca. (13)
10.83 Fiscal 1999 Stock Option Plan (13)
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)
21.1 Subsidiaries of the Registrant. (4)
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule Fiscal 1999
27.2 Financial Data Schedule Fiscal 1998
---------------------------
(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).
(12) Incorporated by reference to the corresponding exhibit
to the 1998 Annual Report on Form 10-K.
(13) Incorporated by reference to the corresponding exhibit
to the Registration Statement on Form S-1 (Registration
Statement No. 333-76097).
(14) Incorporated by reference to exhibit 4.8 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-79821).
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 1999.
42
43
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Farmington Hills, State of Michigan on June 23, 1999.
COMPUWARE CORPORATION
By: /S/ PETER KARMANOS, JR.
-----------------------------
Peter Karmanos, Jr.
Chairman of the Board, Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ PETER KARMANOS, JR. Chairman of the Board, Chief Executive Officer June 23, 1999
--------------------------------- and Director (Principal Executive Officer)
Peter Karmanos, Jr.
Vice Chairman of the Board and Director
---------------------------------
Thomas Thewes
/S/ JOSEPH A. NATHAN President, Chief Operating Officer and Director June 23, 1999
---------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 23, 1999
--------------------------------- (Chief Accounting Officer) and Treasurer
Laura L. Fournier
/S/ ELIZABETH A. CHAPPELL Director June 23, 1999
---------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 23, 1999
---------------------------------
Elaine K. Didier
/S/ BERNARD M. GOLDSMITH Director June 23, 1999
---------------------------------
Bernard M. Goldsmith
/S/ WILLIAM O. GRABE Director June 23, 1999
---------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 23, 1999
---------------------------------
William R. Halling
/S/ W. JAMES PROWSE Director June 23, 1999
---------------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director June 23, 1999
---------------------------------
G. Scott Romney
/S/ LOWELL WEICKER, JR Director June 23, 1999
---------------------------------
Lowell Weicker, Jr.
43
44
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, 1999 and 1998 and for each of the three years
in the period ended March 31, 1999, and have issued our report thereon dated
April 29, 1999; 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
April 29, 1999
44
45
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(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, 1999 $ 8,812 $ 6,396 $ 3,056 $ 12,152
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
- -----------------------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
45
46
EXHIBIT INDEX
Exhibit
Number Description of Document
2.2 Agreement and Plan of Merger, dated February 23, 1999, among
Compuware Corporation, CPWRT1, Inc., CPWRT2, Inc., M.I.S.
International, Inc., Simco International, Inc., Autoflex,
Inc., and Michael M.Bahn, Mary C. Bahn 1999 Qualified Annuity
Trust, Michael M. Bahn Revocable Trust Dated January 23, 1995,
Mary C. Bahn Revocable Trust Dated January 23, 1995, Michael
J. Bahn, Marisa R. Bahn, and Renee C. Phillips 1999 Qualified
Annuity Trust (13)
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)
3.6 Certificate of Amendment to the Articles of Incorporation
dated March 12, 1999. (14)
4.1 Fiscal 1998 Stock Option Plan (11)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (11)
4.8 Registration Rights Agreement, dated February 23, 1999, by and
among Compuware Corporation, Michael J. Bahn, Marisa R. Bahn,
Renee C. Phillips 1999 Qualified Annuity Trust, Michael M.
Bahn Revocable Trust dated January 23, 1995, mary C. Bahn 1999
Qualified Annuity Trust and Mary C. Bahn Revocable Trust dated
January 23, 1995 (13)
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)
10.35 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)
10.59 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)
10.68 Amended and Restated Revolving Loan Agreement. (5)
10.74 Amendment to Employment Agreement, dated as of April 1, 1996,
between the Company and Peter Karmanos, Jr. (9)
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)
46
47
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. (12)
10.81 Employment Agreement, dated as of April 1, 1995, between the
Company and Phyllis Recca. (13)
10.83 Fiscal 1999 Stock Option Plan (13)
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)
21.1 Subsidiaries of the Registrant. (4)
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule Fiscal 1999
27.2 Financial Data Schedule Fiscal 1998
---------------------------
(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).
(12) Incorporated by reference to the corresponding exhibit
to the 1998 Annual Report on Form 10-K.
(13) Incorporated by reference to the corresponding exhibit
to the Registration Statement on Form S-1 (Registration
Statement No. 333-76097).
(14) Incorporated by reference to exhibit 4.8 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-79821).
47