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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
COMMISSION FILE NUMBER 0-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334-2564
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (248) 737-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 8, 2002, there were outstanding 375,904,601 shares of Common Stock,
par value $.01, of the registrant.
Page 1 of 22 pages
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2002 and March 31, 2002 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements 6
Independent Accountants' Report 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, MARCH 31,
2002 2002
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 270,470 $ 233,305
Investments 139,372 133,503
Accounts receivable, net 540,316 609,579
Deferred tax asset, net 35,042 41,811
Income taxes refundable, net 22,642 27,687
Prepaid expenses and other current assets 18,266 16,954
----------- -----------
Total current assets 1,026,108 1,062,839
----------- -----------
INVESTMENTS 65,139 55,566
----------- -----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 226,600 199,365
----------- -----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 65,794 68,998
----------- -----------
OTHER:
Accounts receivable 298,797 306,751
Deferred tax asset, net 47,499 44,884
Goodwill, net 212,141 211,792
Other 43,751 43,743
----------- -----------
Total other assets 602,188 607,170
----------- -----------
TOTAL ASSETS $ 1,985,829 $ 1,993,938
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,495 $ 28,646
Accrued expenses 148,453 186,477
Deferred revenue 338,070 341,024
----------- -----------
Total current liabilities 506,018 556,147
DEFERRED REVENUE 231,542 218,624
ACCRUED EXPENSES 27,415 29,316
----------- -----------
Total liabilities 764,975 804,087
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 3,759 3,758
Additional paid-in capital 678,831 676,617
Retained earnings 551,269 528,804
Accumulated other comprehensive loss (13,005) (19,328)
----------- -----------
Total shareholders' equity 1,220,854 1,189,851
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,985,829 $ 1,993,938
=========== ===========
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
2002 2001
--------- ---------
REVENUES:
Software license fees $ 57,153 $ 95,585
Maintenance fees 105,694 110,827
Professional services fees 183,752 244,063
--------- ---------
Total revenues 346,599 450,475
--------- ---------
OPERATING EXPENSES:
Cost of software license fees 7,627 8,663
Cost of professional services 167,369 216,086
Technology development and support 31,799 41,731
Sales and marketing 66,176 71,472
Administrative and general 44,768 51,693
Goodwill amortization 9,804
--------- ---------
Total operating expenses 317,739 399,449
--------- ---------
INCOME FROM OPERATIONS 28,860 51,026
--------- ---------
OTHER INCOME (EXPENSE):
Interest and investment income 6,694 6,924
Interest expense and other (1,516) (2,537)
--------- ---------
Total other income 5,178 4,387
--------- ---------
INCOME BEFORE INCOME TAXES 34,038 55,413
INCOME TAX PROVISION 11,573 21,057
--------- ---------
NET INCOME $ 22,465 $ 34,356
========= =========
Basic earnings per share $ 0.06 $ 0.09
========= =========
Diluted earnings per share $ 0.06 $ 0.09
========= =========
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
2002 2001
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 22,465 $ 34,356
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 12,995 25,106
Tax benefit from exercise of stock options 62 1,463
Acquisition tax benefits 1,768 1,802
Deferred income taxes 4,154 (259)
Other 6,295 1,145
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 77,217 49,323
Prepaid expenses and other current assets (1,312) (136)
Other assets (597) 1,305
Accounts payable and accrued expenses (41,993) (47,860)
Deferred revenue 9,964 29,526
Income taxes 5,045 (10,122)
--------- ---------
Net cash provided by operating activities 96,063 85,649
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of:
Property and equipment:
Headquarters building (42,911) (12,091)
Other (613) (2,349)
Capitalized software (3,012) (3,208)
Investments:
Proceeds from maturity 40,885 73,255
Purchases (56,899) (53,618)
--------- ---------
Net cash provided by (used in) investing activities (62,550) 1,989
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 327 2,942
Contribution to stock purchase plans 3,325 22
Payments on long term debt (88,000)
--------- ---------
Net cash provided by (used in) financing activities 3,652 (85,036)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 37,165 2,602
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 233,305 53,340
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 270,470 $ 55,942
========= =========
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, contingencies and results of operations. While management
has based their assumptions and estimates on the facts and circumstances known
at June 30, 2002, final amounts may differ from estimates.
In the opinion of management of the Company, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, that are necessary for a fair presentation
of the results for the interim periods presented. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 2002 included in the
Company's Annual Report to Shareholders and the Company's Form 10-K filed with
the Securities and Exchange Commission. The consolidated balance sheet at March
31, 2002 has been derived from the audited financial statements at that date but
does not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The results of
operations for interim periods are not necessarily indicative of actual results
achieved for full fiscal years.
Certain amounts in the fiscal 2002 financial statements have been reclassified
to conform to the fiscal 2003 presentation.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
NOTE 2 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
Three Months Ended
June 30,
-------------------
2002 2001
-------- --------
BASIC EPS:
Numerator: Net Income $ 22,465 $ 34,356
-------- --------
Denominator:
Weighted-average common shares outstanding 375,883 370,204
-------- --------
Basic EPS $ 0.06 $ 0.09
======== ========
DILUTED EPS:
Numerator: Net Income $ 22,465 $ 34,356
-------- --------
Denominator:
Weighted-average common shares outstanding 375,883 370,204
Dilutive effect of stock options 2,606 12,041
-------- --------
Total shares 378,489 382,245
-------- --------
Diluted EPS $ 0.06 $ 0.09
======== ========
NOTE 3 - COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation gains and
losses that have been excluded from net income and reflected instead in equity.
Total comprehensive income is summarized as follows (in thousands):
Three Months Ended
June 30,
-------------------------------
2002 2001
--------------- --------------
Net Income $ 22,465 $ 34,356
Foreign currency translation
adjustment, net of tax 6,323 1,154
--------------- --------------
Total comprehensive income $ 28,788 $ 35,510
=============== ==============
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
NOTE 4 -- SEGMENTS
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to IT organizations that help IT professionals efficiently develop, implement
and support the applications that run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
Three Months Ended
June 30,
----------------------
2002 2001
--------- ---------
Revenues:
Products:
Mainframe $ 128,063 $ 166,914
Distributed systems 34,784 39,498
--------- ---------
Total products revenue 162,847 206,412
Services 183,752 244,063
--------- ---------
Total revenues $ 346,599 $ 450,475
========= =========
Operating Expenses:
Products $ 105,602 $ 121,866
Services 167,369 216,086
Corporate staff 44,768 51,693
Goodwill amortization 9,804
--------- ---------
Total operating expenses $ 317,739 $ 399,449
========= =========
Income from operations before other income (expenses):
Products $ 57,245 $ 84,546
Services 16,383 27,977
Corporate staff (44,768) (51,693)
Goodwill amortization (9,804)
--------- ---------
Income from operations before other income 28,860 51,026
Other income 5,178 4,387
--------- ---------
Income before income taxes $ 34,038 $ 55,413
========= =========
Financial information regarding geographic operations are presented in the
table below (in thousands):
Three Months Ended
June 30,
-------------------
2002 2001
-------- --------
Revenues:
United States $264,985 $344,724
Europe and Africa 64,896 80,431
Other international operations 16,718 25,320
-------- --------
Total revenues $346,599 $450,475
======== ========
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
NOTE 5 -- RESTRUCTURING CHARGE
In the fourth quarter of fiscal 2002, Compuware adopted a restructuring plan to
reorganize its operating divisions, primarily the professional services segment.
These changes were designed to increase profitability by better aligning cost
structures with current market conditions.
The restructuring plan includes a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide will be terminated
as a result of the reorganization. As of June 30, 2002, 1,282 of the affected
employees had been terminated.
The following table summarizes the restructuring charge taken in fiscal 2002,
and charges against the accrual during the first quarter of fiscal 2003 (in
thousands):
Charges against
Balance at the accrual during
March 31, the quarter ended Balance at
2002 June 30, 2002 June 30, 2002
---------- ------------------ -------------
Employee termination benefits $18,459 $11,259 $ 7,200
Facilities costs (primarily lease
abandonments) 25,665 2,774 22,891
Legal, consulting and
outplacement costs 1,299 521 778
Other 278 195 83
---------- ------------------ -------------
Total restructuring accrual $45,701 $14,749 $30,952
========== ================== =============
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
NOTE 6 -- GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
At June 30, 2002
---------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Amortized intangible assets:
Capitalized software $ 213,246 $ (147,452) $ 65,794
Other (1) 6,200 (3,808) 2,392
-------------- ------------ ------------
Total $ 219,446 $ (151,260) $ 68,186
============== ============ ============
At March 31, 2002
---------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Amortized intangible assets:
Capitalized software $ 209,017 $ (140,019) $ 68,998
Other (1) 6,200 (3,725) 2,475
-------------- ------------ ------------
Total $ 215,217 $ (143,744) $ 71,473
============== ============ ============
(1) Other amortized intangible assets include trademarks associated with past
product acquisitions. The amortization expense is reported in general and
administrative expense on the income statement.
Aggregate amortization expense on intangible assets was $6,298,000 and
$7,769,000 for the three months ended June 30, 2002 and 2001, respectively.
Annual amortization expense, based on identified intangible assets recorded
through June 30, 2002 is expected to be as follows (in thousands):
Year Ended March 31,
------------------------------------------------------------------
2003 2004 2005 2006 2007
-------- -------- -------- ------- -------
Capitalized software $ 24,644 $ 23,236 $ 14,959 $ 5,615 $ 2,761
Other 330 330 330 330 330
-------- -------- -------- ------- -------
Total $ 24,974 $ 23,566 $ 15,289 $ 5,945 $ 3,091
======== ======== ======== ======= =======
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. Changes in the carrying amounts of goodwill for the
quarter ended June 30, 2002 were as follows (in thousands):
Goodwill: Products Services Total
-------- --------- ---------
Balance at March 31, 2002, net $ 72,182 $ 139,610 $ 211,792
Effect of foreign currency translation 349 349
-------- --------- ---------
Balance as of June 30, 2002, net $ 72,182 $ 139,959 $ 212,141
======== ========= =========
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
The Company's reported net income and diluted earnings per share exclusive of
amortization of goodwill in the prior year on an after-tax basis were as follows
(in thousands except per share data):
Three Months Ended June 30,
-------------------------------
2002 2001
-------- --------
Reported net income $ 22,465 $ 34,356
Add goodwill amortization, net of tax 8,274
-------- --------
Adjusted net income $ 22,465 $ 42,630
======== ========
Diluted earnings per share $ 0.06 $ 0.11
======== ========
11
INDEPENDENT ACCOUNTANTS' REPORT
Compuware Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Compuware Corporation and subsidiaries (the "Company") as of June 30, 2002, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended June 30, 2002 and 2001. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of March 31, 2002, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated May 6, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of March 31, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
July 15, 2002
12
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates," "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect operating results, including, without limitation,
those contained in this report and in our 2002 Form 10-K filing with the
Securities and Exchange Commission, and could cause actual results to differ
materially from the results implied by these or any other forward-looking
statements made by, or on behalf of, the Company. There can be no assurance that
future results will meet expectations. While the Company believes that its
forward-looking statements are reasonable, you should not place undue reliance
on any such forward-looking statements, which speak only as of the date made.
Except as required by applicable law, the Company does not undertake any
obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of income, in thousands, and as a
percentage of total revenues and the percentage change in such items compared to
the prior period:
Results of Percentage of
Operations Total Revenues
---------------------- ------------------
Three Months Ended Three Months Ended ----------
June 30, June 30, Period-
---------------------- ------------------ to-Period
2002 2001* 2002 2001* Change
--------- --------- -------- -------- ----------
REVENUE:
Software license fees $ 57,153 $ 95,585 16.5% 21.2% (40.2)%
Maintenance fees 105,694 110,827 30.5 24.6 (4.6)
Professional services fees 183,752 244,063 53.0 54.2 (24.7)
--------- --------- -------- --------
Total revenues 346,599 450,475 100.0 100.0 (23.1)
--------- --------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 7,627 8,663 2.2 1.9 (12.0)
Cost of professional services 167,369 216,086 48.3 48.0 (22.5)
Technology development and support 31,799 41,731 9.2 9.3 (23.8)
Sales and marketing 66,176 71,472 19.1 15.8 (7.4)
Administrative and general 44,768 51,693 12.9 11.5 (13.4)
Goodwill amortization 9,804 2.2 (100.0)
--------- --------- -------- --------
Total operating expenses 317,739 399,449 91.7 88.7 (20.5)
--------- --------- -------- --------
Income from operations 28,860 51,026 8.3 11.3 (43.4)
--------- --------- -------- --------
Other income (expense):
Interest and investment income 6,694 6,924 1.9 1.6 (3.3)
Interest expense and other (1,516) (2,537) (0.4) (0.6) 40.2
--------- --------- -------- --------
Total other income 5,178 4,387 1.5 1.0 18.0
--------- --------- -------- --------
Income before income taxes 34,038 55,413 9.8 12.3 (38.6)
Income tax provision 11,573 21,057 3.3 4.7 (45.0)
--------- --------- -------- --------
Net income $ 22,465 $ 34,356 6.5% 7.6% (34.6)%
========= ========= ======== ========
* Reclassified to conform to the June 2002 presentation.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. If goodwill had not been amortized in fiscal 2002, net
income in the first quarter of last year would have been $42.6 million, or 11
cents per diluted share.
Effective April 1, 2002, we reorganized our operations to better allow the
products and professional services organizations to focus on meeting customer
needs. We have reclassified certain expense items to better reflect our new
operating structure -- no longer allocating costs associated with the
facilities, finance and human resource departments to the various operating
groups. Instead, these costs are now included in administrative and general
expenses. All technology costs including costs associated with internal systems
are included in the technology development and support expense line. This
reclassification did not change total operating expenses. In accordance with
EITF No. 01-14, "Income Statement Characterization of Reimbursements Received
for `Out-of-pocket' Expenses Incurred", we have also reclassified travel expense
reimbursements paid by customers as revenue rather than as a reduction to the
related expense. This reclassification has resulted in a slight change to
professional services fees and cost of professional services without changing
income or loss from operations. The following table sets forth for the periods
indicated, certain operational data reclassified to conform to the current
presentation (dollars in thousands):
Three Months Ended
---------------------------------------------------
March 31, December 31, September 30, June 30,
2002 2001 2001 2001
--------- ------------ ------------- ---------
REVENUE:
Software license fees $ 109,477 $ 125,731 $ 86,838 $ 95,585
Maintenance fees 106,401 106,816 109,707 110,827
Professional services fees 192,650 221,233 231,216 244,063
--------- ------------ ------------- ---------
Total revenues 408,528 453,780 427,761 450,475
--------- ------------ ------------- ---------
OPERATING EXPENSES:
Cost of software license fees 8,621 8,380 8,438 8,663
Cost of professional services 203,750 207,794 212,519 216,086
Technology development and support 42,315 39,218 41,016 41,731
Sales and marketing 76,462 77,507 69,055 71,472
Administrative and general 45,699 59,805 49,969 51,693
Goodwill amortization and impairment 387,710 19,027 9,803 9,804
Restructuring costs 46,930
--------- ------------ ------------- ---------
Total operating expenses 811,487 411,731 390,800 399,449
--------- ------------ ------------- ---------
Income (loss) from operations (402,959) 42,049 36,961 51,026
--------- ------------ ------------- ---------
Other income (expense):
Interest and investment income 8,172 7,180 7,228 6,924
Interest expense and other (2,270) (1,182) (1,439) (2,537)
--------- ------------ ------------- ---------
Total other income 5,902 5,998 5,789 4,387
--------- ------------ ------------- ---------
Income (loss) before income taxes (397,057) 48,047 42,750 55,413
Income tax provision (benefit) (61,152) 18,258 16,245 21,057
--------- ------------ ------------- ---------
Net income (loss) $(335,905) $ 29,789 $ 26,505 $ 34,356
========= ============ ============= =========
Products contribution margin 41.0% 46.2% 39.7% 41.0%
Professional services contribution margin (5.8%) 6.1% 8.1% 11.5%
14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
We operate in two business segments in the technology industry: products and
professional services. We evaluate the performance of our segments based
primarily on segment contribution before corporate expenses. References to years
are to fiscal years ended March 31.
SOFTWARE PRODUCTS
REVENUE
Our products are designed to support four key activities within the application
development process: development and integration, quality assurance, production
readiness and performance management of the application to optimize performance
in production. Products revenue consists of software license fees and
maintenance fees and comprised 47.0% and 45.8% of total Company revenue during
the first quarter of 2003 and 2002, respectively. OS/390 product revenue
(mainframe revenue) decreased $38.8 million or 23.3% during the first quarter of
2003 to $128.1 million from $166.9 million during the first quarter of 2002.
Revenue from distributed software products decreased $4.7 million or 11.9%
during the first quarter of 2003 to $34.8 million from $39.5 million during the
first quarter of 2002.
The overall decline in product revenue from the first quarter of 2002 to 2003
was primarily attributable to decreases in license fees and maintenance fees
associated with decreased customer demand for our products due in part to the
continued softness in the economy as a whole and the IT industry in particular.
License revenue decreased $38.4 million or 40.2% during the first quarter of
2003 to $57.2 million from $95.6 million during the first quarter of 2002.
Maintenance fees decreased $5.1 million or 4.6% to $105.7 million during the
first quarter of 2003 from $110.8 million during the first quarter of 2002. The
decrease in maintenance fees was primarily attributable to lower license fees
during both 2003 and 2002 and to market pressure on pricing.
We support clients with product transactions covering multiple years and
allowing deferred payment terms. The contract price is allocated between
maintenance for the term of the deal and license revenue. All license revenue
associated with these perpetual license agreements is recognized when the
customer commits unconditionally to the transaction, the software products and
quantities are fixed and the software has been shipped to the customer. License
revenue associated with transactions that include an option to exchange or
select products in the future has been deferred and is recognized over the term
of the deal. When the license portion is paid over a number of years, the
license portion of the payment stream is discounted to its net present value.
Interest income is recognized over the payment term. The maintenance associated
with all sales has been deferred and is recognized over the applicable
maintenance period.
Products revenue by geographic location is presented in the table below (in
thousands):
Three Months Ended June 30,
---------------------------------
2002 2001*
--------------- ---------------
United States $ 98,185 $ 125,299
Europe and Africa 48,596 56,742
Other international operations 16,066 24,371
--------------- ---------------
Total products revenue $ 162,847 $ 206,412
=============== ===============
* Reclassified to conform to the June 2002 presentation.
15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
PRODUCTS CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Three Months Ended June 30,
---------------------------------
2002 2001*
--------------- ---------------
Revenue $ 162,847 $ 206,412
Expenses 105,602 121,866
--------------- ---------------
Products contribution $ 57,245 $ 84,546
=============== ===============
* Reclassified to conform to the June 2002 presentation
The products segment generated contribution margins of 35.2% and 41.0% during
the first quarter of 2003 and 2002, respectively. Products expenses include cost
of software license fees, technology development and support costs, and sales
and marketing expenses. The decrease in margin in the first quarter of 2003 was
primarily a result of the decrease in software license revenue.
Cost of license fees includes amortization of capitalized software, the cost of
preparing and disseminating products to customers and the cost of author
royalties. The decrease in these costs in the first quarter of 2003 was due
primarily to decreased amortization of purchased software, decreased cost of
printing and materials, and decreased salary and benefits associated with lower
employee headcount. As a percentage of software license fees, cost of software
license fees were 13.3% and 9.1% in the first quarter of 2003 and 2002,
respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives are also
included here. The decrease in these costs in the first quarter of 2003 was
primarily attributable to a decrease in salaries and bonuses associated with
lower employee headcount and to reduced travel costs. As a percentage of product
revenue, costs of technology development and support were 19.5% and 20.2% in the
first quarter of 2003 and 2002, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total research and
development expenditures for the first quarter of 2003 decreased $10.0 million,
or 22.3%, to $34.8 million from $44.8 million in the first quarter of 2002.
Though we continue to place significant emphasis on direct sales through our own
sales force, we also market our products through indirect channels. Sales and
marketing costs consist primarily of personnel related costs associated with
products direct sales and sales support, marketing for all Company offerings,
and personnel costs associated with new sales initiatives. The decrease in sales
and marketing costs from the first quarter of 2002 to the first quarter of 2003
was primarily attributable to decreased salaries and benefits, and decreased
travel expenses, offset by increased bonuses and commissions. As a percentage
of license fees, sales and marketing costs were 115.8% and 74.8% in the first
quarter of 2003 and 2002, respectively.
16
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of information technology professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Revenue from professional services decreased
$60.3 million or 24.7% during the first quarter of 2003 to $183.8 million
compared to $244.1 million in the first quarter of 2002. The decrease in revenue
for 2003 was due, primarily, to a reduction in customer demand for professional
services, the January 2002 assignment of our prime contract with a client to a
company in which we have a minority equity investment, and to a lesser extent,
the transfer of our engineering business to an unrelated third party in December
2001.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended June 30,
-------------------------------------------
2002 2001*
-------------------- --------------------
United States $ 166,800 $ 219,425
Europe and Africa 16,300 23,689
Other international operations 652 949
-------------------- --------------------
Total professional services revenue $ 183,752 $ 244,063
==================== ====================
* Reclassified to conform to the June 2002 presentation.
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
Three Months Ended June 30,
--------------------------------------------
2002 2001*
-------------------- ---------------------
Revenue $ 183,752 $ 244,063
Expenses 167,369 216,086
-------------------- ---------------------
Professional services contribution $ 16,383 $ 27,977
==================== =====================
* Reclassified to conform to the June 2002 presentation.
During the first quarter of 2003, the professional services segment generated a
contribution margin of 8.9%, compared to 11.5% during the first quarter of 2002.
The decrease in professional services margin is primarily due to lower billing
rates and reduced customer demand for our services associated with the decline
of the economy as a whole and the IT sector specifically.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. The decrease in these costs from the first quarter of 2002 to the
first quarter of 2003 is due, primarily, to reductions in staff, resulting in
lower salaries and benefits, and decreased use of subcontractors for special
services. The professional billable staff decreased 1,746 people to 5,777 people
as of June 30, 2002 from 7,523 people at June 30, 2001.
17
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
CORPORATE AND OTHER EXPENSES
Administration and general expenses consist of all costs associated with the
operations and administration of the company. These costs include the corporate
executive, finance, human resources, legal and corporate communications
departments. In addition, administrative and general costs include all
facility-related costs, such as rent, maintenance, utilities, etc, associated
with our local sales and professional services offices. Administrative and
general expenses decreased $6.9 million, or 13.4% during the first quarter of
2003 to $44.8 million from $51.7 million during the first quarter of 2002. The
decrease in administrative and general expenses was primarily attributable to
decreased building rent and decreased salaries resulting from the restructuring
discussed below.
Interest and investment income for the first quarter of 2003 was $6.7 million as
compared to $6.9 million in the first quarter of 2002. This decrease was due to
decreased interest related to customers' deferred installments. Interest expense
for the first quarter of 2003 was $1.5 million as compared to $2.5 million in
the first quarter of 2002. Interest expense includes amortization of the initial
financing fees and fees associated with the unutilized balance of the Senior
Credit Facility (the credit facility) discussed in the Liquidity and Capital
Resources section below. The decrease in interest expense from 2002 to 2003 was
primarily attributable to the payoff of debt previously outstanding under the
credit facility.
We account for income taxes using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax provision was $11.6 million in the first quarter of 2003, which represents
an effective tax rate of 34%. This compares to an income tax provision of $21.1
million in the first quarter of 2002, which represents an effective tax rate of
38%. The decrease in the effective tax rate is a result of no longer amortizing
goodwill for financial statement purposes. Much of the goodwill amortization in
the prior year was not deductible for income tax purposes.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability in the future by better aligning cost
structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide will be terminated
as a result of the reorganization. The restructuring is proceeding as planned.
As of June 30, 2002 and July 15, 2002, 1,282 and 1,367 employees, respectively,
had been terminated as a result of the reorganization.
18
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table summarizes the restructuring charge taken in 2002 (in
thousands):
Charges against
Balance at the accrual during
March 31, the quarter ended Balance at
2002 June 30, 2002 June 30, 2002
---------- ------------------ -------------
Employee termination benefits $ 18,459 $ 11,259 $ 7,200
Facilities costs (primarily lease
abandonments) 25,665 2,774 22,891
Legal, consulting and
outplacement costs 1,299 521 778
Other 278 195 83
---------- ------------------ -------------
Total restructuring accrual $ 45,701 $ 14,749 $ 30,952
========== ================== =============
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Our assumptions and
estimates were based on the facts and circumstances known at June 30, 2002,
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. The accounting policies discussed in Item 7 of our
Annual Report on Form 10-K are considered by management to be the most important
to an understanding of our financial statements, because their application
places the most significant demands on management's judgment and estimates about
the effect of matters that are inherently uncertain. These policies are also
discussed in note 1 of the Notes to Consolidated Financial Statements included
in Item 8 of that report. There have been no material changes to that
information during the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, cash and investments totaled approximately $475.0 million.
During the first quarter of 2003 and the first quarter of 2002, we generated
$96.1 million and $85.6 million, respectively, in operating cash flow. The
increased operating cash flow is generated, in part, from the collection of the
current portion of prior years' installment receivables as reflected in the
decrease in total accounts receivable. During these periods, we had capital
expenditures that included property and equipment, capitalized research and
software development, and purchased software of $46.5 million and $17.6 million,
respectively.
As of June 30, 2002, there was no long-term debt, compared to $52.0 million as
of June 30, 2001. This balance represented borrowings under the credit facility.
There is currently $500 million available for borrowing under the credit
facility. Interest may be determined on a Eurodollar or base rate (as defined in
the credit facility) basis at our option. The credit agreement contains
restrictive covenants and requires commitment fees in accordance with standard
banking practice.
19
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
We believe available cash resources including the amount available under the
credit facility, together with cash flow from operations, will be sufficient to
meet our cash needs for the foreseeable future.
Although there were no acquisitions during the first quarter of 2003, we
continue to evaluate business acquisition opportunities that fit our strategic
plans.
We are building a new corporate headquarters building with a current estimated
cost of $350 million for the building and an estimated $50 million for furniture
and fixtures. Cash outlays will have no impact on the results of operations
until the building is ready for occupancy. When fully occupied, in calendar
2003, the depreciation will result in an annual expense of approximately $17
million. This will be partially offset by the savings realized by the
consolidation of offices. Capital expenditures to date total $149.7 million.
Cash outlays for the next twelve months are expected to be approximately $247.5
million. Currently, we intend to fund the building using cash on hand and cash
flow from operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed primarily to market risks associated with movements in
interest rates and foreign currency exchange rates. There have been no material
changes to foreign exchange risk management strategy or marketable securities
subsequent to March 31, 2002, therefore the market risks remain substantially
unchanged since the Company filed its Annual Report on Form 10-K for the fiscal
year ending March 31, 2002.
20
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description of Document
15 Independent Accountants' Awareness Letter
99.1 Certification by the Chief Executive Officer of this form 10-Q of Compuware
Corporation for the quarter ended June 30, 2002
99.2 Certification by the Chief Financial Officer of this form 10-Q of Compuware
Corporation for the quarter ended June 30, 2002
99.3 Certification by the Chief Executive Officer of form 10-K for the year ended March 31,
2002 and Subsequent filings of Compuware Corporation
99.4 Certification by the Chief Financial Officer of form 10-K for the year ended March 31,
2002 and Subsequent filings of Compuware Corporation
(b) Reports on Form 8-K.
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: August 12, 2002 By: /s/ Joseph A. Nathan
--------------- ---------------------
Joseph A. Nathan
President
(duly authorized officer)
Date: August 12, 2002 By: /s/ Laura L. Fournier
--------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
22
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
15 Independent Accountants' Awareness Letter
99.1 Certification by the Chief Executive Officer of this form 10-Q of Compuware
Corporation for the quarter ended June 30, 2002
99.2 Certification by the Chief Financial Officer of this form 10-Q of Compuware
Corporation for the quarter ended June 30, 2002
99.3 Certification by the Chief Executive Officer of form 10-K for the year ended
March 31, 2002 and Subsequent filings of Compuware Corporation
99.4 Certification by the Chief Financial Officer of form 10-K for the year ended
March 31, 2002 and Subsequent filings of Compuware Corporation