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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 363,012,752 shares of $.01 par value common stock outstanding as of
June 09, 2000. 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 09, 2000 of $13.8125 as reported on the Nasdaq Stock
Market, was approximately $4,549,024,386.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III.
The Exhibit Index is located on pages 43 and 44.
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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 20
8. Consolidated Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 39
PART III
10. Directors and Executive Officers of the Registrant 40
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners and Management 41
13. Certain Relationships and Related Transactions 41
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 42
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PART I
ITEM 1
BUSINESS
We provide software products and professional services designed to increase the
productivity of the information technology departments of our target market, the
20,000 largest enterprises worldwide. In the early years of our company, we
focused first on the testing and implementation environment in the mainframe
market, where we gained extensive experience and established long-term customer
relationships. Over the past several years, we have expanded our presence into
the distributed and web systems markets, offering products and professional
services in the application development, integration, testing and performance
management areas.
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 mainframe, distributed and web developers, testers and
operations staff in our target market, the 20,000 largest users of information
technology worldwide. 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 services offerings.
We believe that the applications process includes four primary categories: 1)
the application development environment in which software code is created,
integrated with existing applications and modified over time 2) the testing
phase, in which application software is executed, debugged, tested and
maintained in a series of repetitive, ongoing cycles for the life of the
application; 3) the performance testing phase, when an application is tested
under simulated production conditions to ensure it will function well once
implemented and 4) the production environment in which the performance of
operating systems, databases, servers, applications and networks is monitored
and managed.
PRODUCTS DIVISION
MAINFRAME MARKET
We believe that the market for mainframe products is well-defined, and will
continue to thrive as the drive to e-business continues to emphasize the need
for reliable, high-volume servers.
We will remain focused on developing, marketing and supporting high-quality
software tools to support both traditional uses of the mainframe and to enhance
the efforts of IT staff who are working to web-enable their legacy applications
portfolio. We believe that our long-standing customer relationships and brand
equity in this arena will help us continue to improve the benefits our customers
receive from our mainframe products. In addition, we are actively pursuing
product integration to enhance the synergy among the functional groups working
on key application projects, and make the entire process more streamlined,
automated and repeatable.
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MAINFRAME TESTING 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. The File-AID products provide a consistent, familiar
and secure method for IT professionals to access data across all strategic
environments in order to automate the creation of test data, move and convert
large volumes of data between platforms, quickly resolve production data
problems and manage ongoing changes to data and databases.
Fault Management. Our Abend-AID products assist programmers in more quickly and
accurately analyzing and diagnosing software errors that occur during testing
and implementation. These errors, which result in the abnormal end of the
application execution, must be corrected before the program at fault can be
restarted.
Interactive Analysis and Debugging. Our XPEDITER interactive debugging products
enable programmers to identify and resolve errors in complex software
efficiently and accurately, to ensure that all of the software code actually has
executed during a test run, and to help web-enable legacy applications by
identifying and converting presentation and programming code.
Automated Testing. Our QAHiperstation product 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. QASolutions is a complete line of testing
services that supplements our testing products.
MAINFRAME APPLICATION MANAGEMENT TOOLS
Compuware mainframe application management tools address the critical problem of
business application performance. Compuware Application Performance Management
(APM) software enables enterprise IT organizations to develop and deliver
efficient and responsive applications and to maintain high standards of
application performance throughout the life of the application.
Compuware STROBE MVS Application Performance Measurement System and APMPOWER
Application Performance Analysis System product lines work together to help
clients locate and eliminate sources of excessive resource demands during every
phase of an application's life cycle. Features in both product lines support an
extensive array of subsystems, databases and languages. Customers can take
advantage of Compuware services offerings to learn how to get the most from
these products and to get help in planning and implementing an APM program.
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DISTRIBUTED SYSTEMS AND WEB MARKETS
In contrast to the mainframe market, the distributed systems market is
characterized by multiple hardware, software and network configurations.
Combined with the more recent push to "webify," IT organizations find themselves
under increasing pressure to rapidly create reliable, top-performing e-business
applications, despite this geometric increase in environment complexity. We
believe our distributed and web products address these challenges and that we
are well-positioned to successfully market distributed development, integration,
functional and performance testing and application management software to our
target markets.
In the last six years, we have developed products and made acquisitions in the
requirements management, development, testing and application management
categories of the distributed and web applications markets. We believe we have
made substantial progress in penetrating all of these markets because of the
quality and visibility of our UNIFACE, EcoSYSTEMS, QACenter and DevPartner
Studio products.
DISTRIBUTED SYSTEMS APPLICATION DEVELOPMENT TOOLS
Our distributed systems application development toolset, UNIFACE, is designed to
assist software developers in the creation, integration, deployment and
maintenance of complex distributed applications. UNIFACE enables software
developers to create applications that are not tied to any specific hardware
platform, operating system, database management system or graphical user
interface. Application objects are captured in a central repository, which
permits their re-use in the development of technology-independent applications
and allows for easier management and maintenance of applications. In addition,
UNIFACE insulates application development and deployment from the individual
technical components that comprise a computing environment. This reduces
development and maintenance costs and allows e-business applications to be
developed rapidly using existing, proven legacy code.
DISTRIBUTED AND WEB TESTING TOOLS
Our distributed and web applications toolset is rapidly evolving to improve the
productivity of programmers and analysts who work in the various distributed
systems 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 distributed systems 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 distributed systems 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.
NuMega. Our DevPartner Studio product suite 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 in stored procedures.
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Automated Testing. Our line of QACenter products addresses the growing demand
for automated testing solutions for distributed systems and web applications.
QARun is our enterprise-wide script development and test execution tool for
distributed systems 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.
APPLICATION PERFORMANCE MANAGEMENT TOOLS
EcoSYSTEMS is our suite of products for improving service level management of
enterprise and e-commerce networks, servers, distributed databases and
distributed systems applications in a variety of environments. 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 distributed application performance. EcoPROFILER provides response time
analysis capabilities for distributed applications before they are deployed on
the network. EcoPREDICTOR is a performance prediction tool that depicts the
effects of traffic or topology changes on the network before they happen. COMNET
III accurately predicts LAN, WAN, and enterprise network performance, enabling
users to reduce risk by experimenting with diverse network alternatives before
implementing their plans.
PROFESSIONAL SERVICES DIVISION
We believe that the demand for professional services will continue to be driven
by the need to control costs, the significant level of resources necessary to
support complex and rapidly changing hardware, software and communication
technologies, the need for a larger technical staff for ongoing maintenance, and
the ongoing talent shortage in the IT industry.
We offer a broad range of professional services, including e-business analysis,
design and programming, staff supplementation, and services that enhance the
value provided by our software products. Our business approach to professional
services delivery emphasizes hiring experienced staff, extensive ongoing
training, high staff utilization and immediate, productive deployment of new
personnel at client accounts.
The need to modify applications systems for e-commerce has created demand for
professional services and consulting to assist customers in designing,
integrating, testing and managing their e-commerce applications. Our Digital
Design Centers provide business-to-business and business-to-consumer e-commerce
services ranging from web site strategy, conceptualization, creation and design
to back-office architecture, legacy integration and load testing. We believe we
are gaining a competitive advantage in this market by combining our products and
services offerings in order to provide clients with comprehensive, efficient
e-commerce solutions.
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 technology 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 45 professional services offices
located throughout North America. 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.
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 software products 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 29 other countries. Our combined
products sales and marketing staff as of March 31, 2000 numbered 1,265 in the
United States (including headquarters support for international sales), 41 in
Canada, 908 in Europe, 99 in Japan, 257 in Asia/Pacific, 62 in Brazil, 24 in
Mexico and 24 in South Africa, for a total of 2,680 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.
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 759 employees as of March 31, 2000.
Product development is performed primarily at our headquarters in Farmington
Hills, Michigan, and at our offices in Amsterdam, The Netherlands, Cambridge,
Massachusetts, Campbell, California, and in Nashua, New Hampshire.
Total research and development costs incurred internally by Compuware were $95.6
million, $76.8 million and $65.0 million during fiscal 2000, 1999 and 1998,
respectively. Of these amounts, $14.5 million, $11.9 million and $10.6 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.
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 2000, we continued to
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experience a high customer maintenance renewal rate. We had 207 employees as of
March 31, 2000 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 online, through our FrontLine technical support
web site, by telephone access to technical personnel located in Farmington
Hills, Michigan, Cambridge, Massachusetts, 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
longer terms, generally up to five years on a contractual basis. For fiscal
years 2000, 1999 and 1998, maintenance fees represented approximately 19.4%,
20.4% and 21.4%, 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., Informix Corporation,
Mercury Interactive Corporation, Oracle Corporation, Rational Software
Corporation, Sun Microsystems, Inc. and Sybase, Inc. None of these 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 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. In the e-business arena, we also face
competition from smaller organizations that are focused primarily on web site
development and implementation. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
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
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limited circumstances, Compuware may be required to make source code for our
products available to our customers under an escrow agreement, which restricts
access to and use of the source code. Although we take steps to protect our
trade secrets, there can be no assurance that misappropriation will not occur.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States.
In addition to trade secret protection, we seek to protect our software,
documentation and other written materials under copyright law, which affords
only limited protection. We also assert trademark rights in our product names.
We have been granted ten 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, 2000, we employed 15,356 people worldwide, with 2,680 in
products sales, sales support and marketing; 759 in research and development;
207 in product maintenance and customer support; 10,562 in professional services
marketing and delivery; and 1,148 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 lease approximately 120 professional services and sales offices, including 4
remote product research and development facilities, with a presence in 46
countries.
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
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded on the Nasdaq Stock Market under the symbol CPWR. As
of June 9, 2000, there were approximately 5,152 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 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, 2000 HIGH LOW
First quarter $32.50 $16.38
Second quarter 36.38 24.25
Third quarter 40.00 23.88
Fourth quarter 37.81 20.00
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
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended March 31,
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2000 1999 1998 1997 1996
------------- ------------- ----------- ----------- ----------
(In thousands, except earnings per share data)
STATEMENT OF INCOME DATA:
Revenues:
Software license fees $ 819,247 $ 683,354 $ 467,251 $ 318,907 $ 226,690
Maintenance fees 432,707 334,371 244,273 209,521 184,039
Professional services fees 978,674 620,720 427,794 284,468 203,630
------------- ------------- ----------- ----------- -----------
Total revenues 2,230,628 1,638,445 1,139,318 812,896 614,359
------------- ------------- ----------- ----------- -----------
Operating expenses:
Cost of software license fees 30,739 28,097 22,874 20,881 20,146
Cost of maintenance 45,367 37,286 31,203 27,278 26,867
Cost of professional services 946,710 506,765 365,948 250,405 174,215
Software product development 81,133 64,957 54,416 44,494 42,792
Sales and marketing 467,060 418,019 325,793 256,139 204,403
Administrative and general 90,386 78,333 58,965 48,233 38,537
Purchased research and development 17,900 4,350 3,160 21,790 24,943
Restructuring and merger-related costs 3,606 (2) 10,688 (1)
------------- ------------- ----------- ----------- -----------
Total operating expenses 1,679,295 1,137,807 865,965 669,220 542,591
------------- ------------- ----------- ----------- -----------
Income from operations 551,333 500,638 273,353 143,676 71,768
Interest and investment income, net 10,443 29,403 17,417 5,710 7,015
------------- ------------- ----------- ----------- -----------
Income before income taxes 561,776 530,041 290,770 149,386 78,783
Income tax provision 209,800 180,178 96,826 51,950 34,541
------------- ------------- ----------- ----------- -----------
Net income $ 351,976 $ 349,863 $ 193,944 $ 97,436 $ 44,242
============= ============= =========== =========== ===========
Basic earnings per share (3 and 4) $ 0.98 $ 0.95 $ 0.55 $ 0.29 $ 0.13
Diluted earnings per share (3 and 4) 0.91 0.87 0.50 0.27 0.12
Shares used in computing net income per
share(4):
Basic earnings per share 358,560 366,734 352,274 340,770 347,516
Diluted earnings per share 384,691 402,036 387,426 359,740 358,950
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 391,801 $ 550,586 $ 362,324 $ 179,508 $ 141,842
Total assets 2,415,907 1,676,683 1,072,640 755,407 555,726
Long-term debt, less current maturities 450,000 - 6,956 6,068 -
Total shareholders' equity 1,203,872 1,079,522 708,296 445,636 318,985
(1) Reflects merger costs incurred in connection with the acquisition,
restructuring and integration of Uniface Holding B.V.
(2) Reflects merger costs incurred in connection with the acquisition,
restructuring and integration of NuMega Technologies, Inc.
(3) See notes 1 and 7 of Notes to Consolidated Financial Statements and
Exhibit 11.1 for the basis of computing earnings per share.
(4) 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 1999 1998
March 31,
to to
------------------------------------
2000 1999 1998 2000 1999
----------- ---------- ----------- ---------- -----------
Revenues:
Software license fees 36.7% 41.7% 41.0% 19.9% 46.2%
Maintenance fees 19.4 20.4 21.4 29.4 36.9
Professional services fees 43.9 37.9 37.6 57.7 45.1
----------- ---------- -----------
Total revenues 100.0 100.0 100.0 36.1 43.8
----------- ---------- -----------
Operating expenses:
Cost of software license fees 1.4 1.7 2.0 9.4 22.8
Cost of maintenance 2.0 2.3 2.7 21.7 19.5
Cost of professional services 42.4 30.9 32.1 86.8 38.5
Software product development 3.6 3.9 4.8 24.9 19.4
Sales and marketing 20.9 25.5 28.6 11.7 28.3
Administrative and general 4.2 4.8 5.2 15.4 32.8
Purchased research and development 0.8 0.3 0.3 311.5 37.7
Merger-related costs 0.3 (100.0)
----------- ---------- -----------
Total operating expenses 75.3 69.4 76.0 47.6 31.4
----------- ---------- -----------
Income from operations 24.7 30.6 24.0 10.1 83.1
----------- ---------- -----------
Other Income (Expense):
Interest and investment income 1.6 1.8 1.6 15.7 62.5
Interest expense (1.1) (0.1) * (32.7)
----------- ---------- -----------
Total other income 0.5 1.8 1.5 (64.5) 68.8
----------- ---------- -----------
Income before income taxes 25.2 32.4 25.5 6.0 82.3
Income tax provision 9.4 11.0 8.5 16.4 86.1
----------- ---------- -----------
Net income 15.8% 21.4% 17.0% 0.6% 80.4%
=========== ========== ===========
*- Calculation is not meaningful.
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The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
as compared to prior periods after excluding special charges for purchased
research and development, merger-related costs and amortization of intangible
assets acquired as a result of acquisitions:
Percentage of Period-to-Period
Total Revenues Change
------------------------------------ ------------------------
Fiscal Year Ended 1999 1998
March 31, to to
------------------------------------
2000 1999 1998 2000 1999
---------- ----------- ----------- ----------- -----------
Income from operations 27.0% 31.2% 25.1% 17.9% 78.7%
Other income 0.5 1.8 1.5 (64.5) 68.8
---------- ----------- -----------
Income before taxes 27.5 33.0 26.6 13.4 78.1
Income tax provision 9.9 11.2 8.8 20.6 82.1
---------- ----------- -----------
Net income 17.6% 21.8% 17.8% 9.8% 76.2%
========== =========== ===========
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 four key activities within the
application development process: building, testing, performance testing and
managing the application to optimize performance in production. Products revenue
consists of software license fees and maintenance fees and comprised 56.1%,
62.1% and 62.4% of total Company revenue during fiscal years 2000, 1999 and
1998, respectively. S/390 product revenue (mainframe revenue) increased $201.0
million or 24.2% during fiscal 2000 and $253.2 million or 43.9% during fiscal
1999. Revenue from distributed software products increased $33.2 million or
17.7% during fiscal 2000 and $53.0 million or 39.4% during fiscal 1999. These
increases occurred across all product lines and reflect an increase in
enterprise license agreements (ELAs) which are defined as multi-year
transactions that generally consist of existing product, new product,
maintenance, growth capacity for a three to five year term and is greater than
$500,000.
The contract price is allocated between maintenance for the term of the deal and
license revenue. All license revenue associated with ELAs is recognized when the
customer commits unconditionally to the transaction and the software has been
shipped to the customer. ELAs often include multi-year payment terms for our
clients. 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 is deferred and recognized over the applicable maintenance period.
For more than five years the Company has supported clients with product
transactions covering multiple years and allowing deferred payment terms.
However, over the past year, the volume of ELAs has shown significant growth as
the practice expanded internationally and as the Company added additional sales
representatives focused exclusively on doing these types of transactions. In the
fourth quarter, and during fiscal year 2000, ELAs were approximately 66% and 63%
of license fee revenue, respectively.
14
15
During December 1999, the Company completed the acquisition of certain assets of
CACI Products Company from CACI International Inc. for $42.1 million. This
acquisition introduces three new products within the EcoSYSTEMS suite of
application performance management solutions: EcoPROFILER, EcoPREDICTOR and
COMNET III.
During September 1999, the Company acquired substantially all the assets and
certain liabilities of Programart Corporation for $126.2 million. This
acquisition introduces two new products, Strobe MVS Application Performance
Measurement System and APMpower Application Performance Analysis System, to the
Compuware Corporation suite of products. In-process research and development
associated with Programart is being incorporated into future product offerings
in the mainframe application performance management product line.
During May 1999, the Company acquired all outstanding common stock of Reliant
Data Systems for $10.1 million. The technology acquired is being used to enhance
existing and future product offerings in the file and data management product
line for distributed systems.
PROFESSIONAL SERVICES REVENUE
The Company offers 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 increased $358.0 million or 57.7% during fiscal 2000 and $192.9 million
or 45.1% during fiscal 1999. The Company's North American operations generated
92.3%, 88.3% and 89.8% of total professional services revenue during fiscal
years 2000, 1999 and 1998, respectively. Combined international services revenue
increased $3.1 million or 4.2% during fiscal 2000 and $29.0 million or 66.8%
during fiscal 1999.
In accordance with Compuware's growth strategy, the Company completed the
following acquisitions during fiscal year 2000. During the second quarter, the
Company acquired Data Processing Resources Corporation (DPRC) and Livernois
Staffing Services, LLC. During the fourth quarter, the Company acquired High
Plains Solutions, LLC, a consulting company, and BlairLake, Inc., a provider of
Internet consulting and web development services.
OPERATING PROFIT
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and development
expense, other income and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Revenue $ 1,251,954 $ 1,017,725 $ 711,524
Operating expenses 624,299 548,359 434,286
------------------- ------------------- -------------------
Products operating profit $ 627,655 $ 469,366 $ 277,238
=================== =================== ===================
15
16
Products revenue by geographic location is presented in the table below (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
United States $ 833,365 $ 654,011 $ 441,643
European subsidiaries 285,158 252,964 179,950
Other international operations 133,431 110,750 89,931
------------------- ------------------- -------------------
Total products revenue $ 1,251,954 $ 1,017,725 $ 711,524
=================== =================== ===================
The products segment generated operating margins of 50.1%, 46.1% and 39.0%
during fiscal years 2000, 1999 and 1998, 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 and increased market penetration of
our distributed software 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 capitalized software products, the majority of which relates to
the Programart acquisition. Increases in author royalties were offset, in part,
by decreased packaging and distribution costs. As a percentage of software
license fees, cost of software license fees were 3.8%, 4.1% and 4.9% in fiscal
2000, 1999 and 1998, respectively.
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 10.5%, 11.2% and 12.8% for fiscal years 2000, 1999 and 1998, respectively.
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 S/390
products, the Company has significantly increased the resources allocated to
developing and enhancing its distributed software products. Before the
capitalization of internally developed software products, total research and
development expenditures for fiscal 2000 increased $18.8 million, or 24.5%, to
$95.6 million from $76.8 million in fiscal year 1999. In fiscal 1999, total
research and development costs increased $11.8 million, or 18.2%, to $76.8
million from $65.0 million in fiscal 1998. The major development projects that
achieved technological feasibility during fiscal 2000 included 15 new
interactive analysis and debugging products, two new fault management products,
seven new file and data management products, 13 new automated testing products,
13 new systems management products, three new application development products,
three new application performance management products and 15 new Windows
development tools.
16
17
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 allocations of costs of corporate systems, offset,
in part, by decreased advertising expenditures. The direct sales and sales
support staff increased by 619 to 2,680 people at the end of fiscal 2000, as
compared to 2,061 at the end of fiscal 1999 and 1,816 at the end of fiscal 1998.
Financial information for the Company's professional services segment is as
follows (in thousands):
YEAR ENDED MARCH 31,
-------------------------------------------------------
2000 1999 1998
----------------- -------------------------------------
Revenue $ 978,674 $ 620,720 $ 427,794
Operating expenses 946,710 506,765 365,948
----------------- ------------------ ------------------
Professional services operating profit $ 31,964 $ 113,955 $ 61,846
================= =====================================
Professional services revenue by geographic location is presented in the table
below (in thousands):
YEAR ENDED MARCH 31,
------------------------------------------------------
2000 1999 1998
----------------- ------------------------------------
United States $ 903,146 $ 548,255 $ 384,346
European subsidiaries 66,269 63,429 37,528
Other international operations 9,259 9,036 5,920
----------------- ------------------ -----------------
Total professional services revenue $ 978,674 $ 620,720 $ 427,794
================= ====================================
The professional services segment generated operating margins of 3.3%, 18.4% and
14.5% during fiscal years 2000, 1999 and 1998, respectively. During fiscal year
2000, the professional services operating margin was 14.0%, 9.1%, 2.0% and a
negative 8.4%, during the first, second, third and fourth quarters,
respectively. The decrease in the professional services operating margin is
primarily attributable to billable staff currently off assignment, increased use
of subcontractors for special services and increased allocations of costs of
corporate systems. While off assignment, billable staff are participating in
training programs focused on e-commerce and distributed software systems to
better meet anticipated client needs in the future. 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 3,328 professional billable staff, primarily associated with the
DPRC acquisition, to 9,606 in fiscal 2000 from 6,278 people at the end of fiscal
1999. This compares to an increase of 1,723 billable people in fiscal 1999 from
4,555 people at the end of fiscal 1998.
Administrative and general expenses increased 15.4% during fiscal 2000 and 32.8%
during fiscal 1999. However, as a percentage of total revenue, these expenses
have been steadily decreasing at 4.2%, 4.8% and 5.2% of total revenue during
fiscal years 2000, 1999 and 1998, respectively. These decreases are primarily a
result of increased revenues with significantly smaller increases in corporate
expenditures and to allocations of costs of corporate systems to
17
18
the respective operating groups, offset by increased amortization of goodwill
associated with various acquisitions.
During fiscal year 2000, the Company recognized $17.9 million of expense for
purchased research and development costs associated with the acquisition of
products from Programart Corporation. 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.
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. During fiscal 1998, the Company also
incurred $3.6 million of merger-related costs in connection with the merger and
integration of NuMega Technologies, Inc.
Net interest and investment income for fiscal 2000 was $10.4 million as compared
to $29.4 million in fiscal 1999 and $17.4 million in fiscal 1998. This decrease
in net interest and investment income is primarily attributable to interest
expense associated with debt outstanding under the $900 million Senior Credit
Facility discussed in the Liquidity and Capital Resources section below, offset
by a gain on sale of investments during the third quarter of fiscal 2000.
The Company's provision for income taxes was $209.8 million in fiscal 2000,
which represents an effective tax rate of 37.3%. This compares to a tax
provision of $180.2 million in fiscal 1999, which represents an effective tax
rate of 34.0%, and an income tax provision of $96.8 million in fiscal 1998,
which represents an effective tax rate of 33.3%. The fiscal 2000 and fiscal 1999
increases in the effective tax rate were due to the growth in pre-tax earnings,
which dilutes the effect of tax credits on the effective tax rates,
nondeductible goodwill amortization associated with certain acquisitions and a
shift of our state apportionment to states with higher corporate income tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had approximately $266.5 million in cash and
investments, which is the level the Company has committed to maintaining while
utilizing the $900 million Senior Credit Facility. During fiscal 2000, 1999 and
1998, Compuware generated $165.4 million, $479.3 million and $210.6 million,
respectively, in operating cash flow. During these periods, the Company had
capital expenditures that included property and equipment, capitalized research
and software development, and purchased software of $50.6 million, $38.5 million
and $41.8 million, respectively.
The decrease in operating cash flow reflects the increase in ELAs during the
current fiscal year. These transactions often include extended payment terms
that are reflected in the increase of long-term accounts receivable from $145.8
million at March 31, 1999 to $399.9 million at March 31, 2000. A portion of
these receivables represents license fee revenue that is recognized in the
period when the transaction is completed. The remaining portion of these
receivables is related to the maintenance revenue and interest income, which is
recognized ratably over the term of the contract.
In addition to the growth in long-term accounts receivable, the cash flow from
operations has been adversely affected by the decrease in utilization of
professional services staff.
18
19
Professional services staff who are off assignment are not generating revenue
and cash flow, but are still paid while being retrained.
As of March 31, 2000 the Company had $450.0 million in long-term debt
representing borrowings under the $900 million Senior Credit Facility entered
into on August 31, 1999. This reflects net payments of $73.5 million during the
fourth quarter of fiscal 2000. Borrowings were used to help fund the
acquisitions discussed below. As of March 31, 1999 the Company had no long-term
debt. (See Note 5 of Notes to Consolidated Financial Statements.)
In accordance with Compuware's strategic growth plans, the Company completed the
following acquisitions during fiscal 2000:
Acquisitions associated with professional services included Data Processing
Resources Corporation ($495.1 million), BlairLake, Inc. ($18.5 million), High
Plains Solutions, LLC ($3.1 million) and Livernois Staffing Services, LLC ($1.5
million).
Product related acquisitions included certain assets or outstanding stock of
Programart Corporation ($126.2 million), CACI Products Company ($42.1 million),
Reliant Data Systems ($10.1 million) and Autotester ($2.8 million).
On May 10, 2000 the Company acquired Nomex, Inc., a privately held provider of
web design and development services located in Montreal, Canada, for $8.2
million. The Company continues to evaluate business acquisition opportunities
that fit the Company's strategic plans.
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 from March
through May 1999.
The Company plans to build an office tower with an estimated cost of $350.0
million within the city of Detroit. Funds expended to date are approximately
$2.2 million. Cash outlays over the next 12 months are expected to be $150.0
million, with the funds coming from the Senior Credit Facility.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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, 2002. 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.
19
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's cash investments and revolving credit facility.
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.
At March 31, 2000 the Company's outstanding variable rate debt was $450.0
million. Each 25 basis point increase or decrease in the level of interest rates
would have $1.1 million effect on variable rate debt interest based on the
balance of such debt at March 31, 2000. Information about the Company's
investment portfolio is set forth in Note 5 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, 2000, the
Company had contracts maturing through April 2000 to sell $39.3 million in
foreign currencies, with a fair value of $39.4 million. Information about the
Company's foreign currency forward exchange contracts is set forth in Note 1 of
Notes to Consolidated Financial Statements.
20
21
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, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 1, 2000
21
22
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS NOTES 2000 1999
---------- ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 30,480 $ 193,128
Investments 3 157,030 309,787
Accounts receivable, less allowance for doubtful
accounts of $15,466 and $12,152 728,629 526,469
Deferred tax asset, net 8 24,346 16,727
Income taxes refundable 22,125
Prepaid expenses and other current assets 25,248 25,979
----------- ------------
Total current assets 987,858 1,072,090
----------- ------------
INVESTMENTS 3 78,944 175,689
----------- ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 114,409 94,786
----------- ------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $109,405 AND $88,793 98,464 48,095
----------- ------------
OTHER:
Accounts receivable 399,911 145,793
Deferred tax asset, net 8 11,347
Excess of cost of investment over fair value of net
assets acquired, less accumulated amortization
of $39,944 and $14,692 2 659,391 87,713
Other assets 76,930 41,170
----------- ------------
Total other assets 1,136,232 286,023
----------- ------------
TOTAL ASSETS $2,415,907 $1,676,683
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY Notes 2000 1999
---------- ----------- ------------
CURRENT LIABILITIES:
Accounts payable $ 67,173 $ 71,129
Accrued expenses 135,129 101,705
Income taxes payable 27,153
Accrued bonuses and commissions 64,153 66,549
Deferred revenue 329,602 254,968
----------- -----------
Total current liabilities 596,057 521,504
LONG TERM DEBT 5 450,000
DEFERRED REVENUE 152,947 75,657
DEFERRED INCOME TAXES 8 13,031
----------- ----------
Total liabilities 1,212,035 597,161
----------- ----------
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
361,621,234 and 367,926,388 shares in 2000
and 1999, respectively 6 3,616 3,679
Additional paid-in capital 6 556,150 304,825
Retained earnings 654,976 777,318
Accumulated other comprehensive loss (10,870) (6,300)
----------- ----------
Total shareholders' equity 1,203,872 1,079,522
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,415,907 $1,676,683
=========== ==========
See notes to consolidated financial statements.
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23
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2000, 1999 and 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTES 2000 1999 1998
--------------- ---------------- ----------------
REVENUES:
Software license fees $ 819,247 $ 683,354 $ 467,251
Maintenance fees 432,707 334,371 244,273
Professional services fees 978,674 620,720 427,794
--------------- ---------------- ----------------
Total revenues 2,230,628 1,638,445 1,139,318
--------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of software license fees 30,739 28,097 22,874
Cost of maintenance 45,367 37,286 31,203
Cost of professional services 946,710 506,765 365,948
Software product development 81,133 64,957 54,416
Sales and marketing 467,060 418,019 325,793
Administrative and general 90,386 78,333 58,965
Purchased research and development 2 17,900 4,350 3,160
Merger-related costs 2 3,606
--------------- ---------------- ----------------
Total operating expenses 1,679,295 1,137,807 865,965
--------------- ---------------- ----------------
INCOME FROM OPERATIONS 551,333 500,638 273,353
--------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest and investment income 34,927 30,175 18,564
Interest expense (24,484) (772) (1,147)
--------------- ---------------- ----------------
Total other income 10,443 29,403 17,417
--------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 561,776 530,041 290,770
INCOME TAX PROVISION 8 209,800 180,178 96,826
--------------- ---------------- ----------------
NET INCOME $ 351,976 $ 349,863 $ 193,944
=============== ================ ================
Basic earnings per share 7 $ 0.98 $ 0.95 $ 0.55
=============== ================ ================
Diluted earnings per share 7 $ 0.91 $ 0.87 $ 0.50
=============== ================ ================
See notes to consolidated financial statements.
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24
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 and 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
----------------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Loss
-------------- -------------- -------------- -------------- ---------------
BALANCE AT APRIL 1, 1997 343,727,080 $ 3,438 $ 210,413 $ 232,630 $ (845)
Net income 193,944
Foreign currency translation, net of tax (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 (2,671)
Comprehensive income
MISI 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)
Net income 351,976
Foreign currency translation, net of tax (4,570)
Comprehensive income
Issuance of common stock 1,325,761 13 33,764
Purchase and retirement of common stock (15,335,259) (153) 126,098 (474,318)
Acquisition tax benefits 7,219
Exercise of employee stock options
and related tax benefit (Note 11) 7,704,344 77 79,844
Other 4,400
-------------- -------------- -------------- -------------- ---------------
BALANCE AT MARCH 31, 2000 361,621,234 $ 3,616 $ 556,150 $ 654,976 $ (10,870)
============== ============== ============== ============== ===============
Total
Shareholders' Comprehensive
Equity Income
---------------- -------------------
BALANCE AT APRIL 1, 1997 $ 445,636
Net income 193,944 $ 193,944
Foreign currency translation, net of tax (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 (2,671) (2,671)
-------------------
Comprehensive income $ 347,192
===================
MISI 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
Net income 351,976 $ 351,976
Foreign currency translation, net of tax (4,570) (4,570)
-------------------
Comprehensive income $ 347,406
===================
Issuance of common stock 33,777
Purchase and retirement of common stock (348,373)
Acquisition tax benefits 7,219
Exercise of employee stock options
and related tax benefit (Note 11) 79,921
Other 4,400
----------------
BALANCE AT MARCH 31, 2000 $ 1,203,872
================
See notes to consolidated financial statements.
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25
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 351,976 $ 349,863 $ 193,944
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 17,900 4,350 3,160
Depreciation and amortization 71,510 41,537 36,504
Tax benefit from exercise of stock options 45,962 91,083 30,402
Issuance of common stock to Employee Stock Ownership Trust 6,496 4,558 3,500
Acquisition tax benefits 7,219 6,707 6,485
Deferred income taxes (5,758) (1,015) (6,108)
Gain on sale of marketable securities (10,918)
Other 994 160 240
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (385,102) (214,293) (104,702)
Prepaid expenses and other current assets 2,962 (18,215) (2,118)
Other assets (27,716) (21,759) (6,255)
Accounts payable and accrued expenses (19,222) 99,522 22,582
Deferred revenue 137,954 107,014 26,206
Income taxes (28,858) 29,744 6,765
-------------- -------------- --------------
Net cash provided by operating activities 165,399 479,256 210,605
-------------- -------------- --------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (700,266) (12,629) (5,198)
Property and equipment (34,922) (26,370) (28,006)
Capitalized software (15,698) (12,173) (13,823)
Investments:
Proceeds from maturity 471,932 446,221 85,682
Proceeds from sales of securities 14,194
Purchases (230,554) (774,350) (172,865)
-------------- -------------- --------------
Net cash used in investing activities (495,314) (379,301) (134,210)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 533,000
Payment of long term debt (83,000) (3,692) (3,890)
Net proceeds from sale of common stock 31,681 19,913 9,245
Repurchase of common stock (348,373) (151,617)
Net proceeds from exercise of stock options 33,959 22,291 17,187
-------------- -------------- --------------
Net cash (used in) provided by financing activities 167,267 (113,105) 22,542
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (162,648) (13,150) 98,937
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 193,128 206,278 107,341
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,480 $ 193,128 $ 206,278
============== ============== ==============
See notes to consolidated financial statements.
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COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
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 distributed systems platforms.
Basis of Presentation - The consolidated financial statements include the
accounts of Compuware Corporation and its wholly owned subsidiaries after
elimination of all significant intercompany balances and transactions. The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, which require management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and the disclosure of contingencies at March 31, 2000 and 1999 and
the results of operations for the years ended March 31, 2000, 1999 and 1998.
While management has based their assumptions and estimates on the facts and
circumstances known at March 31, 2000, 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. The portion of
license fees associated with maintenance and enhancements is deferred and
recognized ratably over the maintenance period. Revenue from software
transactions that are financed are discounted to present value. Product
maintenance renewal fees are recognized as revenue ratably over the maintenance
term. Professional services fees are recognized in the period the services are
performed. The Company adopted American Institute of Certified Public
Accountant's (AICPA) Statement of Position (SOP) 98-9, which modified SOP 97-2
with respect to certain transactions, during the year ended March 31, 2000. The
adoption of SOP 98-9 did not have a material effect 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 tax 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 and
investment income.
Property and Equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
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, 2000 and 1999 is $60,029,000 and $12,396,000, respectively.
Capitalized software at March 31, 2000 includes $56,500,000 from the CACI and
Programart acquisitions
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(see Note 2). Capitalization of internally developed software products begins
when technological feasibility of the product is established. Software product
development includes all expenditures for research and development, net of
amounts capitalized. Total software development costs incurred internally by the
Company were $95,629,000, $76,831,000 and $65,015,000 in fiscal 2000, 1999 and
1998, respectively, of which $14,496,000, $11,874,000 and $10,599,000,
respectively, were capitalized.
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, including the period being reported on.
Amortization begins when the product is available for general release to
customers. The amortization period for capitalized software is generally five
years. Capitalized software amortization is included in "cost of software
license fees" in the consolidated statements of income.
Excess of Cost Over Fair Value of Net Assets Acquired ("goodwill") is being
amortized over periods ranging from 10 to 20 years using the straight-line
method. The Company regularly evaluates the period of amortization to determine
whether later events and circumstances warrant revised estimates of useful
lives. Goodwill amortization expense was approximately $25,252,000, $4,857,000
and $4,419,000, for the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. These amounts are included in "administrative and general" in the
consolidated statements of income.
Fair Value of Financial Instruments - The carrying value of cash equivalents,
current accounts receivable and accounts payable approximated fair values due to
the short-term maturities of these instruments. At March 31, 2000, the fair
value of long term receivables is approximately $371,145,000 compared to the
carrying amount of $399,911,000. The fair value of noncurrent accounts
receivable is estimated by discounting the future cash flows using the current
rate at which the Company would finance a similar transaction.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. Deferred income taxes are provided for the differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements.
Foreign Currency Translation - The Company's foreign subsidiaries use the local
currency as the functional currency. Accordingly, assets and liabilities in the
consolidated balance sheets have been translated at the rate of exchange at the
respective balance sheet dates, and revenues and expenses have been translated
at average exchange rates prevailing during the year the transactions occur.
Translation adjustments have been excluded from the results of operations and
are reported as accumulated other comprehensive loss.
Foreign Currency Transactions and Derivatives - Gains and losses from foreign
currency transactions are included in the determination of net income. To 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
$464,000, $2,944,000 and $627,000 for the fiscal years ended March 31, 2000,
1999 and 1998, respectively. These amounts are included in "sales and marketing"
in the consolidated statements of income.
At March 31, 2000, the Company had contracts maturing through April 2000 to sell
$39,286,000 in foreign currencies. At March 31, 1999, the Company had contracts
maturing through May 1999 to sell $27,993,000 in foreign currencies.
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Earnings Per Share - Basic EPS is computed by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS assumes the issuance of common stock for all
potentially dilutive equivalent shares outstanding.
Business Segments - The Company's two principal operating segments are products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
Recently Issued Accounting Pronouncements - In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
was subsequently amended by SFAS 137. The Company is required to adopt this
statement for the year ending March 31, 2002. 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
Fiscal 2000 Acquisitions:
During fiscal 2000, the Company completed the acquisition of certain
professional services companies for a combined total of $518,200,000 net cash
expended. The companies purchased were Data Processing Resources Corporation
($495,100,000), BlairLake, Inc ($18,500,000), High Plains Solutions LLC
($3,100,000), and Livernois Staffing Services, LLC ($1,500,000). The total
purchase amount includes third party expenses of approximately $2,400,000 in
addition to $115,000,000 of Data Processing Resources Corporation subordinated
debt that was paid by Compuware. 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 $493,500,000 and is being amortized on a straight-line basis,
principally over 20 years.
The Company also completed four product-related acquisitions during the year. It
acquired certain assets of CACI Products Company for $42,100,000, Autotester for
$2,750,000 and Programart Corporation for $126,200,000 and all of the
outstanding stock of Reliant Data Systems for $10,100,000. This amount includes
third party expenses of approximately $160,000. The acquisitions have been
accounted for as purchases and, accordingly, assets and liabilities acquired
have been recorded at fair value as of the date of acquisition. Of the total
purchase price, $56,500,000 was capitalized as purchased software and
$11,200,000 was allocated to other intangible assets. The aggregate amount by
which the acquisition cost exceeded the fair value of the net assets acquired
was approximately $102,700,000 and is being amortized over periods ranging from
15 to 20 years on a straight-line basis. Of the total purchase price for
Programart, $17,900,000 was allocated to in-process research and development
based upon an independent valuation by Valuation Counselors of the expected
future cash flows of the future product, less costs to complete development. In
accordance with SFAS No. 2 "Accounting for Research and Development Costs," this
amount was expensed as of the purchase date.
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The following pro forma unaudited consolidated results of operations assume
the acquisitions occurred as of the beginning of each of the periods
presented (in thousands, except per share amounts):
Year Ended
March 31,
------------------------------------
2000 1999
------------------ -----------------
Revenues $2,394,482 $ 2,030,594
Net income 341,508 327,171
Diluted earnings per share 0.89 0.81
The pro forma results include the amortization of the goodwill and interest
expense on debt assumed to finance these purchases. These amounts do not
reflect any benefit from the reduction in costs for certain corporate
functions from combined operations. The pro forma results are not
necessarily indicative of what actually would have occurred if the
acquisitions had been completed as of the beginning of each of the fiscal
years presented, nor are they necessarily indicative of future consolidated
results.
Fiscal 1999 Acquisitions:
In March 1999, the Company acquired M.I.S. International, Inc. 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 15-year period on a straight-line
basis.
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
15-year period on a straight-line basis. Of the total purchase price,
$4,350,000 was allocated to in-process research and development based upon
an independent valuation by Valuation Counselors of the expected future
cash flows from the future product, less costs to complete development. In
accordance with SFAS No. 2 this amount was expensed as of the purchase
date.
Fiscal 1998 Acquisitions:
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 15-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 an independent valuation by Valuation Counselors of
the expected future cash flows, less costs to complete the development. In
accordance with SFAS No. 2 this amount was expensed as of the purchase
date.
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
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30
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.
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, all of which were paid as of June 1999. 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
15-year period on a straight-line basis.
3. INVESTMENTS
A summary of securities classified as held to maturity at March 31, 2000
and 1999 is set forth below (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2000:
Municipal Obligations $ 195,374 $ 3 $ 769 $ 194,608
Tax Advantage Auction
Rate Securities 29,450 29,450
Tax Free Auction
Rate Securities 11,150 11,150
--------- ---------- ---------- ---------
Securities Classified as
Held to Maturity $ 235,974 $ 3 $ 769 $ 235,208
========= ========== ========== =========
March 31, 1999:
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
========= ========== ========== ==========
Scheduled maturities of securities classified as held to maturity at March
31, 2000 were as follows (in thousands):
Amortized Fair
Cost Value
--------- ---------
Due in:
2001 $ 157,030 $ 156,804
2002 76,695 76,208
2003 2,249 2,196
--------- ---------
Total $ 235,974 $ 235,208
--------- ---------
Marketable Securities - During fiscal 2000, the Company sold securities
that had been classified as available-for-sale for approximately $14.2
million. The gain realized on this transaction was approximately $10.9
million. The Company uses the specific identification method as a basis for
determining cost and calculating realized gains.
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4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows
(in thousands):
March 31,
-------------------------
2000 1999
---------- ----------
Land $ 1,776 $ 1,776
Buildings 31,007 28,788
Leasehold improvements 23,794 17,492
Furniture and fixtures 50,083 38,519
Computer equipment and software 93,940 69,368
---------- ----------
200,600 155,943
Less accumulated depreciation and
amortization 86,191 61,157
---------- ----------
Total $ 114,409 $ 94,786
========== ==========
5. LONG TERM DEBT
Senior Credit Facility - In fiscal 2000, the Company entered into a $900
million unsecured Senior Credit Facility (credit facility) maturing in
August 2003. The credit facility provides the Company the option of
borrowing at a spread over the base rate (as defined) for base rate loans
or the Adjusted London Interbank Offer Rate (LIBOR) for Eurodollar loans.
The Company currently pays a commitment fee of .25% per annum for any
unused portion of the credit facility. During fiscal 2000, the maximum
borrowings under the credit facility were $533 million; average borrowings
were $428 million and at March 31, 2000, there was $450 million
outstanding. The weighted average interest rate for the year was 7.25%.
The total commitment under the credit facility of $900 million will be
permanently reduced on the second, third and fourth anniversaries of the
closing date in the amounts of $100 million, $100 million and $700 million,
respectively. The terms of the credit facility contain, among other
provisions, certain financial covenants including minimum interest coverage
and minimum net worth requirements, and specific limitations on additional
indebtedness, liens and merger activity.
As a result of the variable nature of the credit facility's interest rate,
the fair value of the Company's revolving credit debt approximates its
carrying value.
Cash paid for interest totaled approximately $21,861,000, $687,000 and
$810,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
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.
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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.
All references throughout the consolidated financial statements to number
of shares, per share amounts and stock option data reflect the stock
splits.
7. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in
thousands, except for per share data):
Year Ended March 31,
----------------------------------------
2000 1999 1998
---- ---- ----
BASIC EPS:
Numerator: Net income $ 351,976 $ 349,863 $ 193,944
---------- ---------- ----------
Denominator:
Weighted-average common shares outstanding 358,560 366,734 352,274
---------- ---------- ----------
Basic EPS $ 0.98 $ 0.95 $ 0.55
========== ========== ==========
DILUTED EPS:
Numerator: Net income $ 351,976 $ 349,863 $ 193,944
---------- ---------- ----------
Denominator:
Weighted-average common shares outstanding 358,560 366,734 352,274
Dilutive effect of stock options 26,131 35,302 35,152
---------- ---------- ----------
Total shares 384,691 402,036 387,426
---------- ---------- ----------
Diluted EPS $ 0.91 $ 0.87 $ 0.50
========== ========== ==========
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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,
-----------------------------
2000 1999
------------ ------------
Deferred tax assets:
Accrued vacation $ 4,915 $ 3,314
Deferred maintenance 4,582 1,776
Purchased software 16,433 10,593
Allowance for doubtful accounts 4,636 3,277
Net operating loss carryforwards 31,964 31,130
Other 23,990 14,861
------------ ------------
86,520 64,951
Less valuation allowance 5,877 4,612
------------ ------------
Net deferred tax assets 80,643 60,339
Current portion 26,676 19,204
------------ ------------
Long term portion $ 53,967 $ 41,135
============ ============
Deferred tax liabilities:
Capitalized research and development costs $ 10,278 $ 9,536
Depreciation 3,891 2,681
Other 55,159 20,048
------------ ------------
Total deferred tax liabilities 69,328 32,265
Current portion 2,330 2,477
------------ ------------
Long term portion $ 66,998 $ 29,788
============ ============
The income tax provision (benefit) includes the following (in thousands):
Year Ended March 31,
-----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ 181,664 $ 160,192 $ 96,629
Foreign 9,268 6,210 4,316
State 24,626 14,790 5,800
-------------- -------------- --------------
Total current tax provision 215,558 181,192 106,745
-------------- -------------- --------------
Deferred:
Federal (4,120) (4,131) 1,309
Foreign (1,638) 3,117 (11,228)
-------------- -------------- --------------
Total deferred tax benefit (5,758) (1,014) (9,919)
-------------- -------------- --------------
Total income tax provision $ 209,800 $ 180,178 $ 96,826
============== ============== ==============
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34
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,
--------------------------------------------
2000 1999 1998
------------- -------------- -------------
Federal income tax at statutory rates $ 196,622 $ 185,514 $ 101,769
Increase (decrease) in taxes:
Foreign Sales Corporation subsidiary (9,537) (8,643) (6,462)
State income taxes, net 16,007 9,613 2,925
Other, net 6,708 (6,306) (1,406)
------------- -------------- -------------
Provision for income taxes $ 209,800 $ 180,178 $ 96,826
============= ============== =============
At March 31, 2000 the Company has net operating loss carryforwards for
income tax purposes of approximately $101,099,000 which expire as follows
(in thousands):
Year ending March 31:
2001 $ 2,165
2002 5,539
2003 7,983
2004 7,480
2005 6,472
2006 1,990
2008 518
2009 146
2010 3,112
2011 274
Unlimited carryforward 65,420
Of this amount, approximately $1,711,000 is available to offset U.S.
federal income taxes and approximately $99,388,000 relates to various
foreign jurisdictions. In addition, approximately $1,065,000 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 $136,838,000, $28,332,000
and $55,481,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
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 IT
professionals efficiently develop, implement and support the applications
that run their businesses.
The Company's products are designed to support four key activities within
the application development process: building, testing, performance 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.
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35
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and
development expense and net interest 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):
Year Ended March 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- ------------
Revenue:
Products:
Mainframe $ 1,031,273 $ 830,256 $ 577,048
Distributed systems 220,681 187,469 134,476
----------- ----------- -------------
Total products revenue 1,251,954 1,017,725 711,524
Services 978,674 620,720 427,794
----------- ----------- -------------
Total revenues $ 2,230,628 $ 1,638,445 $ 1,139,318
=========== =========== =============
Operating Expenses:
Products $ 624,299 $ 548,359 $ 434,286
Services 946,710 506,765 365,948
Corporate Staff 90,386 78,333 58,965
----------- ----------- -------------
Total operating expenses $ 1,661,395 $ 1,133,457 $ 859,199
=========== =========== =============
Income from operations, before other income
(expenses), purchased research and development
charges and merger-related costs:
Products $ 627,655 $ 469,366 $ 277,238
Services 31,964 113,955 61,846
Corporate Staff (90,386) (78,333) (58,965)
----------- ----------- -------------
Income from operations, before other income
(expenses), purchased research and development
charges and merger-related costs: 569,233 504,988 280,119
Merger-related costs (3,606)
Purchased research and development charges (17,900) (4,350) (3,160)
Other income 10,443 29,403 17,417
----------- ----------- -------------
Income before income taxes $ 561,776 $ 530,041 $ 290,770
=========== =========== =============
Financial information regarding geographic operations are presented in the
table below (in thousands):
Year Ended March 31,
---------------------------------------------
2000 1999 1998
------------ ------------ -----------
Revenue:
United States $ 1,736,511 $ 1,202,266 $ 825,989
Europe 351,427 316,393 217,478
Other international operations 142,690 119,786 95,851
------------ ------------ -----------
Total revenue $ 2,230,628 $ 1,638,445 $1,139,318
============ ============ ===========
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than 10% of
the Company's long lived assets, other than financial instruments, are
located outside of the United States.
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10. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases building and office space and computer, office
and transportation equipment under various operating lease agreements
extending through fiscal 2006. 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:
2001 $ 41,807
2002 37,901
2003 31,760
2004 23,938
2005 15,626
Thereafter 17,404
-------------
Total $ 168,436
=============
Lease expense for the years ended March 31, 2000, 1999 and 1998 under all
operating leases amounted to approximately $34,180,000, $27,720,000 and
$19,193,000, respectively.
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 $6,497,000, $4,558,000 and $3,500,000 in
fiscal 2000, 1999 and 1998, respectively. This is a non-leveraged ESOP
plan.
Employee Stock Purchase Plan - During fiscal 1996, the Company adopted and
the shareholders approved the Global Employee Stock Purchase Plan (GESPP)
under which the Company is authorized to issue up to eight million shares
of common stock to eligible employees. The Company's initial offering
periods were (i) October 1, 1995 through June 30, 1996 and (ii) July 1,
1996 through December 31, 1996. Thereafter, offering periods have commenced
on January 1st and July 1st each year. Under the terms of the plan,
employees may 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 2000, 1999 and 1998, the Company sold approximately 1,009,000,
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 183,000 were
outstanding at March 31, 2000. The option prices range from $1.32 to $11.83
and expire in eight 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 42,875,000 were
outstanding at March 31, 2000. Under the terms of the plans, the Company
may grant nonqualified
36
37
options at the fair market value of the stock on the date of grant. During
fiscal 2000, the Company granted approximately 7,830,000 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. In March 1999, the Committee amended the
provisions of this plan effective April 1, 1999 to provide for annual
grants of 40,000 option shares to each non-employee director with
additional grants based on board and committee meeting attendance. During
fiscal 2000, approximately 561,000 options were granted under the
Non-Employee Director Stock Option Plan. Approximately 1,841,000 options
were outstanding at March 31, 2000.
Under the current amendment to the Plan, which became effective in February
2000, each non-employee director will receive an annual grant of 20,000
options beginning April 1, 2000. In addition, each non-employee director
may receive an additional grant of 10,000 or 20,000 options if
pre-established earnings targets are achieved by the Company. The option
grants for board and committee meeting attendance remain in effect.
Options generally vest in cumulative annual installments over a three to
five year period. All options were granted at fair market value and expire
10 years from the date of grant.
At March 31, 2000, a total of 65,898 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.
During fiscal 1999, the Company implemented a Replacement Stock Option
Award program. The program allows selected participants to pay the option
exercise price with shares of currently owned Company stock. The Company
grants a new stock option award to replace the shares exchanged in the
transaction. During fiscal 2000, approximately 3,400,000 shares were
exercised under the Replacement Stock Option Award program for which
approximately 1,704,000 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 2000,
1999 and 1998 consistent with the method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," Compuware's net earnings and
earnings per share would have been adjusted to the pro forma amounts
indicated below:
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38
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998
------------------ -------------- ---------------
Net Earnings:
As reported $ 351,976 $ 349,863 $ 193,944
Pro forma 286,403 297,490 172,394
Earnings per Share:
As reported:
Basic earnings per share 0.98 0.95 0.55
Diluted earnings per share 0.91 0.87 0.50
Pro forma:
Basic earnings per share 0.80 0.81 0.49
Diluted earnings per share 0.75 0.74 0.44
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 fiscal 2000, 1999 and
1998, respectively: expected volatility of 85.85, 66.88 and 51.50 percent;
risk-free interest rates of 6.4, 5.3 and 5.7 percent; and expected lives at
date of grant of 4.8, 4.9 and 4.9 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
acquired by participation in the GESPP 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 6.35 percent for fiscal 2000,
and expected volatilities of 84.24 and 73.01 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 2000 were $12.00.
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2000, 1999 and 1998, and
changes during the years ending on those dates is as follows (shares in
thousands):
2000 1999 1998
------------------------ -------------------------- -------------------------
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 48,801 $ 11.21 52,102 $ 6.13 50,636 $ 3.83
Granted 8,392 20.90 12,183 25.33 10,540 14.90
Exercised (7,704) 4.77 (11,395) 2.41 (8,481) 2.07
Exchanged (1,703) 22.58 (1,069) 28.07
Forfeited (2,821) 17.20 (3,020) 11.47 (2,369) 7.43
NuMega acquisition 1,776 1.66
-------- ------- --------
Outstanding at
year end 44,965 $ 13.93 48,801 $ 11.21 52,102 $ 6.13
======== ======= ========
Options exercisable
at year end 14,769 $ 8.79 12,655 $ 5.71 17,090 $ 2.71
======== ======= ========
Weighted-average
fair value of options
granted during the
year $ 15.52 $ 15.40 $ 7.58
======== ======= ========
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The following table summarizes information about fixed stock options
outstanding at March 31, 2000 (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 20,798 6.08 $ 5.60 11,950 $ 5.20
10.01 TO 20.00 11,308 7.91 16.19 712 18.19
20.01 TO 30.00 11,257 7.54 24.51 1,863 24.97
30.01 TO 42.00 1,602 8.52 31.89 244 33.63
------ ------
44,965 7.00 13.93 14,769 8.79
====== ======
The maximum number of shares for which additional options may be granted
was 9,437,993 at March 31, 2000, 13,306,421 at March 31,1999 and 13,401,204
at March 31, 1998. At March 31, 2000, a total of 54,403,499 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.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2000 and 1999
is as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------- -------------- -------------- -------------- -------------
Fiscal 2000:
Revenues $ 443,051 $ 568,149 $ 637,368 $ 582,060 $2,230,628
Operating income 135,915 146,878 190,615 77,925 551,333
Pre-tax income 141,761 147,559 197,646 74,810 561,776
Net Income 90,727 91,782 122,936 46,531 351,976
Basic earnings per share 0.25 0.26 0.34 0.13 0.98
Diluted earnings per share 0.24 0.24 0.32 0.12 0.91
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
Executive Officers of the Registrant
The executive officers of the Company, who are elected by and serve at the
discretion of the Company's Board of Directors, are as follows as of June
9, 2000:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 57 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 47 President and Chief Operating Officer
Elizabeth A. Chappell 42 Executive Vice President, Corporate Communications and
Investor Relations
Henry A. Jallos 51 Executive Vice President, Products Division
Denise A. Knobblock 44 Executive Vice President, Human Resources and
Administration
Eliot R. Stark 47 Executive Vice President, Finance
Thomas A. Vadnais 52 Executive Vice President, Professional Services
Laura L. Fournier 47 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas Costello, Jr. 46 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.
Elizabeth A. Chappell has served as Executive Vice President, Corporate
Communications and Investor Relations since January 2000 and as a director
of the Company since October 1997. From September 1994 through December
1999, Ms. Chappell served as the Chief Executive Officer of The Chappell
Group, Inc., a consulting firm.
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41
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.
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 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.
Thomas A. Vadnais was named Executive Vice President, Professional Services
in May 2000. Prior to his appointment as Executive Vice President, Mr.
Vadnais was Senior Vice President, Integration, Professional Services
Division at Compuware. He has also served as President and Chief Operating
Officer of Data Processing Resources Corporation (DPRC), a leading national
professional services company acquired by Compuware in August 1999. Prior
to joining DPRC, Mr. Vadnais spent six years at Norrell Corporations,
serving as President and Chief Operating Officer of Tascor, Inc. the
outsourcing division of Norrell Corporations. Prior to Norrell, Mr. Vadnais
spent 23 years with IBM in a variety of sales, marketing and customer
service roles.
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.
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.
41
42
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 21
Consolidated Balance Sheets as of March 31, 2000 and 1999 22
Consolidated Statements of Income for each of the years
ended March 31, 2000, 1999 and 1998 23
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2000, 1999 and 1998 24
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2000, 1999 and 1998 25
Notes to Consolidated Financial Statements 26-39
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 46
Schedule II - Valuation and Qualifying Accounts 47
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.
42
43
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 (8)
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. (2)
3.3 Certificate of Correction to the Articles of Incorporation dated May 9,
1994. (2)
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. (4)
3.6 Certificate of Amendment to the Articles of Incorporation dated March
12, 1999. (9)
3.7 Certificate of Correction to the Articles of Incorporation dated May 9,
2000.
4.1 Fiscal 1998 Stock Option Plan (6)
4.7 Certificate of Amendment to the Restated Articles of Incorporation (6)
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 (8)
10.4 1992 Stock Option Plan. (1)
10.24 Promotion Agreement, dated September 8, 1992, between Compuware Sports
Corporation and the Company. (1)
10.35 Fiscal 1993 Stock Option Plan. (1)
10.36 Stock Option Plan for Non-Employee Directors. (1)
10.50 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)
10.51 Fiscal 1996 Stock Option Plan
10.52 Advertising Agreement, dated December 1, 1996, between Arena Management
Company and the Company
10.83 Fiscal 1999 Stock Option Plan (8)
10.84 Agreement and Plan of Merger, dated June 23, 1999, among the Company,
DPRC and COMP Acquisition Co. (10)
11.1 Computation of Compuware Corporation and Subsidiaries net income per
common share.
12.0 First Amendment to 1992 Stock Option Plan (5)
12.1 First Amendment to 1993 Stock Option Plan (5)
12.2 First Amendment to 1996 Stock Option Plan (5)
12.3 First Amendment to Stock Option Plan For Non-Employee Directors (7)
21.1 Subsidiaries of the Registrant. (3)
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule Fiscal 2000
27.2 Financial Data Schedule Fiscal 1999
27.3 Financial Data Schedule Fiscal 1998
---------------------------
43
44
(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-4, as amended (Registration
No. 33-78822).
(3) Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-3, as amended (Registration
No. 33-82734).
(4) Incorporated by reference to the corresponding exhibit to the
1997 Annual Report on Form 10-K.
(5) Incorporated by reference to the corresponding exhibit to the
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997.
(6) Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-8 (Registration Statement
No. 333-37873).
(7) Incorporated by reference to the corresponding exhibit to the
1998 Annual Report on Form 10-K.
(8) Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-1 (Registration Statement
No. 333-76097).
(9) Incorporated by reference to exhibit 4.8 to the Registration
Statement on Form S-8 (Registration Statement No. 333-79821).
(10) Incorporated by reference to the corresponding exhibit to the
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999.
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2000.
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45
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 9, 2000.
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 9, 2000
---------------------------------
Peter Karmanos, Jr. and Director (Principal Executive Officer)
/S/ THOMAS THEWES Vice Chairman of the Board and Director June 9, 2000
---------------------------------
Thomas Thewes
/S/ JOSEPH A. NATHAN President, Chief Operating Officer and Director June 9, 2000
---------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 9, 2000
---------------------------------
Laura L. Fournier (Chief Accounting Officer) and Treasurer
/S/ ELIZABETH A. CHAPPELL Director June 9, 2000
---------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 9, 2000
---------------------------------
Elaine K. Didier
Director
---------------------------------
Bernard M. Goldsmith
Director
---------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 9, 2000
---------------------------------
William R. Halling
/S/ W. JAMES PROWSE Director June 9, 2000
---------------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director June 9, 2000
---------------------------------
G. Scott Romney
Director
---------------------------------
Lowell Weicker, Jr.
45
46
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, 2000 and 1999 and for each of the three years
in the period ended March 31, 2000, and have issued our report thereon dated May
1, 2000; such report is included elsewhere in this Annual Report on Form 10-K.
Our audits also included the financial statement schedule of Compuware
Corporation and subsidiaries, listed in Item 14(a)2. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 1, 2000
46
47
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(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, 2000 $ 12,152 7,692 4,378 15,466
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
- -----------------------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
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48
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ -----------
EX-3.7 Certificate of Correction to the Articles of Incorporation
dated May 9, 2000.
EX-10.51 Fiscal 1996 Stock Option Plan.
EX-10.52 Advertising Agreement, dated December 1, 1996, between
Arena Management Company and the Company.
EX-11.1 Computation of Compuware Corporation and subsidiaries
net income per common share.
EX-23.1 Independent Auditors' Consent.
EX-27.1 FDS 2000
EX-27.2 FDS 1999
EX-27.3 FDS 1998