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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-20900
COMPUWARE CORPORATION
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MI 48334-2564
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (248) 737-7300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 370,316,782 shares of $.01 par value common stock outstanding as of
June 15, 2001. 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 15, 2001 of $11.65 as reported on the Nasdaq Stock Market,
was approximately $3,950,874,834. For purposes of this computation, all
officers, directors and 10% beneficial owners of the registrant are assumed to
be affiliates. Such determination should not be deemed an admission that such
officers, directors and beneficial owners are, in fact, affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2001 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
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COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Item
Number Page
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PART I
1. Business 3
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 13
6. Selected Consolidated Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
7A. Quantitative and Qualitative Disclosure About Market Risk 22
8. Consolidated Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 44
PART III
10. Directors and Executive Officers of the Registrant 45
11. Executive Compensation 45
12. Security Ownership of Certain Beneficial Owners and Management 45
13. Certain Relationships and Related Transactions 45
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 46
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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 businesses worldwide.
In the early years of our company, we focused on offering professional services
and mainframe products in the testing and implementation environment where we
gained extensive experience and established long-term customer relationships.
Over the past several years, we have expanded our presence into the distributed
and web systems markets, offering products and professional services in the
application development, 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.
We operate in two business segments in the software industry: products and
services. See note 10 of Notes to Consolidated Financial Statements.
The following discussion may contain certain forward looking statements within
the meaning of the federal securities laws. Numerous important factors,
including those discussed under Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption "Forward
Looking Statements" could cause actual results to differ materially from those
indicated by such forward looking statements.
OUR BUSINESS STRATEGY
Our focus is to provide products and professional services to improve the
productivity of mainframe, distributed and web developers, testers and
operations staff in businesses worldwide. Companies with information technology
departments invest substantial resources to build and maintain large, complex,
mission-critical applications. As a result, this target market can benefit most
from our product and services offerings.
The applications process includes four primary phases: 1) the application
development phase 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 phase in
which the performance and availability of operating systems, databases, servers,
applications and networks is monitored and managed.
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PRODUCTS DIVISION
MAINFRAME MARKET
We believe that the market for mainframe products is well defined, and will
continue to be in demand as the drive to e-business continues to emphasize the
need for reliable, high-volume servers.
We intend to 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 continue to pursue product
integration opportunities to increase the value that our customers obtain from
the use of our products, to enhance the synergy among the functional groups
working on key application projects, and to make the entire process more
streamlined, automated and repeatable.
MAINFRAME TESTING AND IMPLEMENTATION TOOLS
We currently offer testing and implementation software products that focus on
improving the productivity of programmers and analysts in application testing,
test data preparation, error analysis and maintenance of systems running on IBM
and IBM-compatible mainframes.
Our testing and implementation products are functionally rich, are focused on
user needs and require minimal user training. We strive to ensure a common look
and feel across our products and emphasize ease of use in all aspects of product
design and functionality. Most products can be used immediately without
modification of customer development practices and standards, and can be quickly
integrated into day-to-day testing, debugging and maintenance activities.
Our mainframe 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. For fiscal 2001, 2000
and 1999, total software license and maintenance fee revenues derived from the
file and data management product family were approximately $259,835,000,
$381,109,000 and $325,136,000, respectively, which accounted for 12.9%, 17.1%
and 19.8%, respectively, of our total revenues.
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. For fiscal 2001, 2000 and 1999, total software license and
maintenance fee revenues derived from the fault management product family were
approximately $211,375,000, $311,521,000 and $260,876,000, respectively, which
accounted for 10.5%, 14.0% and 15.9%, respectively, of our total revenues.
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 business logic code. For fiscal
2001, 2000
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and 1999, total software license and maintenance fee revenues derived from the
interactive analysis and debugging product family were approximately
$142,123,000, $204,542,000 and $171,858,000, respectively, which accounted for
7.1%, 9.2% and 10.5%, respectively, of our total revenues.
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
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. For fiscal 2001, 2000 and 1999,
total software license and maintenance fee revenues derived from the automated
testing product family were approximately $45,969,000, $79,163,000 and
$72,386,000, respectively, which accounted for 2.3%, 3.5% and 4.4%,
respectively, of our total revenues.
MAINFRAME APPLICATION MANAGEMENT TOOLS
Our 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.
Our 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.
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 web-enable, 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 market distributed development, integration,
functional and performance testing and application management software to our
target markets.
In the last several 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 progress in penetrating all of these markets because of the quality and
visibility of our UNIFACE, EcoSYSTEMS, QACenter and DevPartner Studio products,
which are described below.
APPLICATION DEVELOPMENT AND INTEGRATION 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
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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.
OptimalView is our business integration portal product. As a packaged, web-based
portal application, OptimalView enables customers to quickly implement an
integrating platform to help bring together the diverse array of custom-built
and packaged applications and web services that many companies have assembled
over a period of time. OptimalView brings these applications together in a
single desktop portal with powerful integration and administrative functions,
making it possible for a customer's IT department to effectively manage the
"home-base" desktop of every employee in their organization.
AUTOMATED SOFTWARE QUALITY TOOLS
Our distributed systems and web applications toolset improves 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 automated software quality products are grouped into
three product lines: File and Data Management, NuMega and Automated Testing.
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. Our DBPartner suite
provides database and SQL tuning capabilities as well as interactive analysis
and resolution of SQL program errors in stored procedures.
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.
QACenter Performance Edition is used for pre-production server load and
performance testing, as well as analysis of the underlying application and
infrastructure to help determine the cause of potential performance issues.
These products are augmented by QASolutions, a complete line of testing
services.
PointForward is a remote testing and monitoring solution that provides customers
with valuable information about how their web site is running. Test results are
posted automatically on our PointForward secure web portal, where subscribers
can access results with a unique log-on ID. Alert and e-mail notifications
inform customers when service levels are in jeopardy. PointForward provides four
critical testing options: reliability, scalability, integrity and performance
monitoring capabilities.
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APPLICATION PERFORMANCE AND AVAILABILITY 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.
Application Expert and Application Vantage enable production support staff to
quickly and easily diagnose performance problems that occur in distributed and
web-based application systems. Application Expert is used in a pre-production
mode to analyze application transactions and predict how they will perform under
production conditions--helping to diagnose where potential problems will occur.
Application Vantage is used in production mode to analyze historic and current
performance problems by "breaking down" why specific transactions took so long
to execute.
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
We believe that effective support of our customers and products during both the
trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide high levels of customer
support and product upgrades to assure a continuing high level of customer
satisfaction. In fiscal year 2001, we continued to experience a high customer
maintenance renewal rate. We had 171 employees as of March 31, 2001 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, La Jolla, California, Nashua, New
Hampshire, and in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee of up to 16% 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 2001,
2000 and 1999, maintenance fees represented approximately 22.7%, 19.4% and
20.4%, respectively, of our total revenues.
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
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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 844 employees as of March 31, 2001.
Product development is performed primarily at our headquarters in Farmington
Hills, Michigan, and at our offices in Amsterdam, The Netherlands, Cambridge,
Massachusetts, La Jolla, California, and Nashua, New Hampshire.
Total internal research and development costs were $116.1 million, $95.6 million
and $76.8 million during fiscal 2001, 2000 and 1999, respectively. Of these
amounts, $13.5 million, $14.5 million and $11.9 million were capitalized during
the same periods, respectively. Capitalization of internally developed software
products begins when technological feasibility of the product is established.
Software product development expense in the statement of 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.
PROFESSIONAL SERVICES DIVISION
We offer a broad range of IT staff supplementation services for distributed
systems and mainframe environments. Our offerings include IT technical staffing
and project assistance, e-business and wireless development and ERP
implementation. We also provide application life cycle management assistance for
outsourcing customers' application development and maintenance activities as
well as services for the Compuware-owned products that enhance their value.
We believe that the demand for professional services will continue to be driven
by the need to control costs, the significant level of resources necessary to
support complex and rapidly changing hardware, software and communication
technologies, the need for a larger technical staff for ongoing maintenance, and
the ongoing talent shortage in the IT industry. Our business approach to
professional services delivery emphasizes hiring experienced staff, extensive
ongoing training, high staff utilization and immediate, productive deployment of
new personnel at client accounts.
Our objective in the professional services division is to create long-term
relationships with customers in which our professional staff joins with the
customer's information technology organization to plan, design, program,
implement and maintain technology-based solutions that achieve customer business
goals. Typically, the professional services staff is integrated with the
customer's development team on a specific application or project. Professional
services staff work primarily at customer sites or at our professional services
offices located throughout North America and Europe. We also have professional
services operations in other international locations.
CUSTOMERS
Our products and professional services are used by the information technology
departments of a wide variety of commercial and government organizations.
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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, Mexico and South Africa as
well as through independent distributors in 29 other countries. Our combined
products sales and marketing staff as of March 31, 2001 numbered 1,156 in the
United States (including headquarters support for international sales), 41 in
Canada, 816 in Europe, 115 in Japan, 187 in Asia/Pacific, 79 in Brazil, 31 in
Mexico and 34 in South Africa, for a total of 2,459 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.
COMPETITION
The markets for our software products are highly competitive and characterized
by continual change and improvement in technology. Although no company competes
with us across our entire product line, we consider over 40 firms to be directly
competitive with one or more of our products. Our competitors include BMC
Software, Inc., Computer Associates International, Inc., Mercury Interactive
Corporation, Oracle Corporation, Rational Software Corporation, Sun
Microsystems, Inc. and Sybase, Inc. Some of these competitors have substantially
greater financial, marketing, recruiting and training resources than we do. We
believe our mainframe products are generally complementary to those marketed by
IBM, however, IBM does offer some products that are directly competitive and
there can be no assurance that IBM will not choose to offer additional
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 Accenture, Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts International
Corporation, Keane, Inc. and numerous other regional and local firms in the
markets in which we have professional services offices. Several of these
competitors have substantially greater financial, marketing, recruiting and
training resources than we do. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
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PROPRIETARY RIGHTS
We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable, perpetual licenses. Under the general
terms and conditions of our standard product license agreement, the licensed
software may be used solely for the licensee's own internal operations on
designated computers at specific sites. Under certain limited circumstances,
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 fourteen patents and have fifteen 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, 2001, we employed 13,220 people worldwide, with 2,459 in
products sales, sales support and marketing; 844 in research and development;
171 in product maintenance and customer support; 8,612 in professional services
marketing and delivery and 1,134 in other general and administrative functions.
Substantially all of our employees are not 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.
SEGMENT INFORMATION; PAYMENT TERMS AND FOREIGN REVENUES
For a description of revenues and operating profit by segment for each of the
last three fiscal years, see Note 10 of Notes to Consolidated Financial
Statements, included in Item 8 of this report. For a description of extended
payment terms offered to some customers, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Product Revenue." The Company's foreign operations are subject to
risks related to foreign exchange rates. For a discussion of this risk, see Item
7A Quantitative and Qualitative Disclosure About Market Risk. For financial
information regarding geographic operations, see Note 10 of Notes to
Consolidated Financial Statements, included in Item 8 of this report.
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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, as well as approximately 133,000 square feet in
nearby Southfield. In addition, we own approximately 40,000 square feet in
nearby West Bloomfield, Michigan which houses our production, distribution and
additional services facilities. As further discussed in Note 4 of Notes to
Consolidated Financial Statements and in the Liquidity and Capital Resources
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations, we have begun construction on an office tower within the
City of Detroit which will consolidate our corporate office functions and
Detroit area operations.
We lease approximately 103 professional services and sales offices, including 5
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, who are elected by and serve at the discretion of the
Company's Board of Directors, are as follows as of June 15, 2001:
Name Age Position
- ---- --- --------
Peter Karmanos, Jr. 58 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 48 President and Chief Operating Officer
Henry A. Jallos 52 Executive Vice President, Products Division
Denise A. Knobblock 45 Executive Vice President, Human Resources and
Administration
W. Alan Cantrell 44 Senior Vice President, Professional Services Division
Laura L. Fournier 48 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
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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.
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.
W. Alan Cantrell has served as Senior Vice President, Professional Services
Division since January 2001. Prior to his appointment as Senior Vice President,
Mr. Cantrell was Vice President, Alternate Channels from February 2000 through
December 2000, From April 1997 through January 2000, Mr. Cantrell was Vice
President, Enterprise Solutions, North America (UNIFACE), and from December 1994
through March 1997 was Vice President, Professional Services Division.
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.
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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's National Market under
the symbol CPWR. As of June 15, 2001, there were approximately 6,772
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. The following table sets forth the range of high and low trading sale
prices for our Common Stock for the periods indicated, all as reported by
Nasdaq.
FISCAL YEAR ENDED MARCH 31, 2001 HIGH LOW
First quarter $22.00 $9.25
Second quarter 11.25 7.50
Third quarter 9.25 5.63
Fourth quarter 14.38 6.25
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
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected income statement and balance sheet data presented below are derived
from our audited consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements and notes thereto
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
Year Ended March 31,
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2001 2000 1999 1998 1997
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(In thousands, except earnings per share data)
STATEMENT OF INCOME DATA:
Revenues:
Software license fees $ 495,572 $ 819,247 $ 683,354 $ 467,251 $ 318,907
Maintenance fees 456,534 432,707 334,371 244,273 209,521
Professional services fees 1,057,944 978,674 620,720 427,794 284,468
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Total revenues 2,010,050 2,230,628 1,638,445 1,139,318 812,896
------------- ------------- ------------- ------------- --------------
Operating expenses:
Cost of software license fees 39,551 30,739 28,097 22,874 20,881
Cost of maintenance 53,076 45,367 37,286 31,203 27,278
Cost of professional services 1,039,237 946,710 506,765 365,948 250,405
Software product development 102,617 81,133 64,957 54,416 44,494
Sales and marketing 451,719 467,060 418,019 325,793 256,139
Administrative and general 131,218 90,386 78,333 58,965 48,233
Purchased research and development 17,900 4,350 3,160 21,790
Restructuring and merger-related costs 3,606 (1)
------------- ------------- ------------- ------------- --------------
Total operating expenses 1,817,418 1,679,295 1,137,807 865,965 669,220
------------- ------------- ------------- ------------- --------------
Income from operations 192,632 551,333 500,638 273,353 143,676
Interest and investment income (expense), net (563) 10,443 29,403 17,417 5,710
------------- ------------- ------------- ------------- --------------
Income before income taxes 192,069 561,776 530,041 290,770 149,386
Income tax provision 72,986 209,800 180,178 96,826 51,950
------------- ------------- ------------- ------------- --------------
Net income $ 119,083 $ 351,976 $ 349,863 $ 193,944 $ 97,436
============= ============= ============= ============= ==============
Basic earnings per share (2 and 3) $ 0.33 $ 0.98 $ 0.95 $ 0.55 $ 0.29
Diluted earnings per share (2 and 3) 0.32 0.91 0.87 0.50 0.27
Shares used in computing net income
per share(3):
Basic earnings per share 365,192 358,560 366,734 352,274 340,770
Diluted earnings per share 372,809 384,691 402,036 387,426 359,740
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 434,902 $ 391,801 $ 550,586 $ 362,324 $ 179,508
Total assets 2,279,374 2,415,907 1,676,683 1,072,640 755,407
Long-term debt, less current maturities 140,000 450,000 - 6,956 6,068
Total shareholders' equity (4) 1,377,372 1,203,872 1,079,522 708,296 445,636
(1) Reflects merger costs incurred in connection with the acquisition,
restructuring and integration of NuMega Technologies, Inc.
(2) See notes 1 and 8 of Notes to Consolidated Financial Statements for the
basis of computing earnings per share.
(3) See note 7 of Notes to Consolidated Financial Statements for the impact
of stock splits on computing earnings per share.
(4) No dividends were paid during the periods presented.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward looking statements within the
meaning of the federal securities laws. Numerous important factors, including
those discussed below under the caption "Forward Looking Statements" could cause
actual results to differ materially from those indicated by such forward looking
statements. While the Company believes that its forward-looking statements are
reasonable, you should not place undue reliance on any such forward-looking
statements, which speak only as of the date made. Except as required by
applicable law, the Company does not undertake any obligation to publicly
release any revisions which may be made to any forward-looking statements to
reflect events or circumstances occurring after the date of this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the 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
TOTAL REVENUES PERIOD-TO-PERIOD
----------------------------------- CHANGE
FISCAL YEAR ENDED ------------------------
MARCH 31, 2000 1999
----------------------------------- TO TO
2001 2000 1999 2001 2000
----------- ---------- ---------- ----------- -----------
Revenues:
Software license fees 24.7% 36.7% 41.7% (39.5%) 19.9%
Maintenance fees 22.7 19.4 20.4 5.5 29.4
Professional services fees 52.6 43.9 37.9 8.1 57.7
----------- ---------- ----------
Total revenues 100.0 100.0 100.0 (9.9) 36.1
----------- ---------- ----------
Operating expenses:
Cost of software license fees 2.0 1.4 1.7 28.7 9.4
Cost of maintenance 2.6 2.0 2.3 17.0 21.7
Cost of professional services 51.7 42.4 30.9 9.8 86.8
Software product development 5.1 3.6 3.9 26.5 24.9
Sales and marketing 22.5 20.9 25.5 (3.3) 11.7
Administrative and general 6.5 4.2 4.8 45.2 15.4
Purchased research and development 0.8 0.3 (100.0) 311.5
----------- ---------- ----------
Total operating expenses 90.4 75.3 69.4 8.2 47.6
----------- ---------- ----------
Income from operations 9.6 24.7 30.6 (65.1) 10.1
----------- ---------- ----------
Other income (expense):
Interest and investment income 1.5 1.6 1.8 (12.1) 15.7
Interest expense (1.6) (1.1) 27.7 *
----------- ---------- ----------
Total other income (expense) (0.1) 0.5 1.8 (105.4) (64.5)
----------- ---------- ----------
Income before income taxes 9.5 25.2 32.4 (65.8) 6.0
Income tax provision 3.6 9.4 11.0 (65.2) 16.4
----------- ---------- ----------
Net income 5.9% 15.8% 21.4% (66.2%) 0.6%
=========== ========== ==========
*- Calculation is not meaningful.
15
16
To improve comparability with competitors' results, we included the following
table indicating certain operational data after excluding special charges for
purchased research and development and amortization of intangible assets
acquired as a result of acquisitions (dollars in thousands):
INCOME BEFORE PERIOD-TO-PERIOD
SPECIAL CHARGES CHANGE
FISCAL YEAR ENDED -----------------------
MARCH 31, 2000 1999
RECONCILIATION OF INCOME BEFORE ------------------------------------------ TO TO
SPECIAL CHARGES 2001 2000 1999 2001 2000
------------- ------------- ------------ ---------- -----------
Income before income taxes $ 192,069 $ 561,776 $ 530,041 (65.8%) 6.0%
(See Consolidated Statements of
Income)
Purchased research and development 17,900 4,350 (100.0) 311.5
Amortization of goodwill 41,302 25,252 4,857 63.6 419.9
Amortization of purchased software 16,089 7,605 750 111.6 914.0
------------- ----------- -----------
Income before income taxes and special charges 249,460 612,533 539,998 (59.3) 13.4
Income tax provision 85,649 220,317 182,714 (61.1) 20.6
------------- ----------- -----------
Net income before special charges $ 163,811 $ 392,216 $ 357,284 (58.2%) 9.8%
============= =========== ===========
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: development and integration, quality assurance,
production readiness and performance management of the application to optimize
performance in production. Products revenue consists of software license fees
and maintenance fees and comprised 47.4%, 56.1% and 62.1% of total Company
revenue during fiscal years 2001, 2000 and 1999, respectively. S/390 product
revenue (mainframe revenue) decreased $268.5 million or 26.0% during fiscal 2001
and increased $201.0 million or 24.2% during fiscal 2000. Revenue from
distributed software products decreased $31.4 million or 14.2% during fiscal
2001 and increased $33.2 million or 17.7% during fiscal 2000. The overall
decline in product revenue from fiscal year 2000 to fiscal year 2001 is
primarily attributable to a decrease in demand for large enterprise license
agreements and fluctuations in foreign currencies. If foreign exchange rates
remained consistent with fiscal 2000, product revenue would have been $984
million in fiscal 2001 compared to $1.252 billion in fiscal 2000. This
represents an overall decline in constant U.S. dollars of $268 million or 21.4%
compared to the actual decline of $300 million or 24.0%. Product revenue in
fiscal year 2001 was negatively impacted by a decrease in customer demand for
large enterprise license agreements ("ELAs") which are multi-year, and often
multi-payment contracts. We believe that the decrease in large multi-year
contracts is due, in part, to the capacity purchased by our customers in fiscal
year 2000 during their preparations for Y2K. The increase in product revenue
from fiscal year 1999 to fiscal year 2000 was primarily attributable to
increased demand for ELAs to meet customer needs at that time. For fiscal years
2001 and 2000, multi-year contracts greater than $5 million represented
approximately 12.8% and 26.5%, respectively, of
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17
license revenue. The products organization is focused on completing a larger
number of transactions each quarter rather than relying on ELAs.
For more than five years, the Company has supported clients with product
agreements covering multiple years and allowing deferred payment terms. The
contract price is allocated between maintenance for the term of the deal and
license revenue. All license revenue associated with these perpetual license
agreements is recognized when the customer commits unconditionally to the
transaction, the software products and quantities are fixed and the software has
been shipped to the customer. License revenue associated with certain
transactions that include an option to exchange or select products in the future
has been deferred and will be recognized over the term of the deal. When the
license portion is paid over a number of years, the license portion of the
payment stream is discounted to its net present value. Interest income is
recognized over the payment term. The maintenance associated with all sales is
deferred and recognized over the applicable maintenance period.
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 $79.3 million or 8.1% during fiscal 2001 compared to fiscal
2000 and $358.0 million or 57.7% during fiscal 2000 compared to fiscal 1999.
These increases are primarily associated with increased market share associated
with the August 1999 acquisition of Data Processing Resources Corporation.
OPERATING PROFIT AND EXPENSES
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses and purchased research and
development expense.
Financial information for the Company's products segment is as follows (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Revenue $ 952,106 $ 1,251,954 $ 1,017,725
Operating expenses 646,963 624,299 548,359
------------------- ------------------- -------------------
Products operating profit $ 305,143 $ 627,655 $ 469,366
=================== =================== ===================
Products revenue by geographic location is presented in the table below (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
United States $ 597,290 $ 833,365 $ 654,011
European subsidiaries 235,841 285,158 252,964
Other international operations 118,975 133,431 110,750
------------------- ------------------- -------------------
Total products revenue $ 952,106 $ 1,251,954 $ 1,017,725
=================== =================== ===================
The products segment generated operating margins of 32.0%, 50.1% and 46.1%
during fiscal years 2001, 2000 and 1999, respectively. Products expenses include
cost of software license
17
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fees, cost of maintenance, software product development costs, and sales and
marketing expenses. The decrease in operating margin in fiscal 2001 is primarily
a result of a decrease in software license revenue while total products costs
have remained fairly constant. The increase in operating margin in fiscal 2000
is primarily the 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, related to the Programart, CACI
and Optimal acquisitions and, in fiscal 2001, to increased amortization of
internally capitalized projects associated with EcoSYSTEMS, QALoad, UNIFACE,
AbendAID, FileAID and XPEDITER, which were released for general availability
during fiscal year 2001. In fiscal 2000, 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 8.0%, 3.8% and 4.1%
in fiscal 2001, 2000 and 1999, 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 to a higher average
headcount during fiscal 2001 and fiscal 2000 compared to the prior fiscal years.
The average headcount increase was primarily the result of the Programart
acquisition, which occurred in September 1999. As a percentage of maintenance
fees, these costs were 11.6%, 10.5% and 11.2% for fiscal years 2001, 2000 and
1999, 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 primarily due to an increase in
salaries and benefits, including severance costs, associated with a relocation
of the software development lab for the EcoSYSTEMS product line during fiscal
2001 and an increase in software development staff related to the Programart and
CACI acquisitions during fiscal 2000. Before the capitalization of internally
developed software products, total research and development expenditures for
fiscal 2001 increased $20.5 million, or 21.5%, to $116.1 million from $95.6
million in fiscal year 2000. In fiscal 2000, total research and development
costs increased $18.8 million, or 24.5%, to $95.6 million from $76.8 million in
fiscal 1999. The major development projects that achieved technological
feasibility during fiscal 2001 included five new interactive analysis and
debugging products, three new fault management products, eight new file and data
management products, sixteen new automated testing products, eight new systems
management products, four new application development products, two new
application performance management products and sixteen new windows development
tools.
Sales and marketing costs consist of the sales and marketing expenses associated
with the Company's products business, which include costs of direct sales, sales
support and marketing staff, the facilities and benefits costs allocated to such
personnel and the costs of marketing and sales incentive programs. The decrease
in sales and marketing costs from fiscal 2000 to fiscal 2001 was largely
attributable to lower sales commissions associated with decreased product sales
and to reduced advertising expenditures, offset, in part, by increased salary
and benefits
18
19
costs due, primarily, to a higher average headcount during fiscal
year 2001 compared to the prior year. The increase in sales and marketing
expenses from fiscal 1999 to fiscal 2000 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 decreased by 221 to 2,459 people at the end of
fiscal 2001, as compared to 2,680 at the end of fiscal 2000 and 2,061 at the end
of fiscal 1999.
Financial information for the Company's professional services segment is as
follows (in thousands):
YEAR ENDED MARCH 31,
-------------------------------------------------------
2001 2000 1999
----------------- -------------------------------------
Revenue $ 1,057,944 $ 978,674 $ 620,720
Operating expenses 1,039,237 946,710 506,765
----------------- -------------------------------------
Professional services operating profit $ 18,707 $ 31,964 $ 113,955
================= =====================================
Professional services revenue by geographic location is presented in the table
below (in thousands):
YEAR ENDED MARCH 31,
------------------------------------------------------
2001 2000 1999
----------------- ------------------------------------
United States $ 963,508 $ 903,146 $ 548,255
European subsidiaries 88,041 66,269 63,429
Other international operations 6,395 9,259 9,036
----------------- ------------------------------------
Total professional services revenue $ 1,057,944 $ 978,674 $ 620,720
================= ====================================
The professional services segment generated operating margins of 1.8%, 3.3% and
18.4% during fiscal years 2001, 2000 and 1999, respectively. The decrease in
professional services operating margin is primarily due to lower utilization and
billing rates during the first two quarters of fiscal year 2001 and increased
costs, primarily associated with the Data Processing Resources Corporation
acquisition. During each quarter of fiscal year 2001, the professional services
operating margin was a negative 2.5% and positive 0.4%, 4.6% and 4.7%, for the
first, second, third and fourth quarters, respectively. The increase in the
professional services operating margin during fiscal 2001 is attributable to
increased utilization of professional billable staff coupled with significant
decreases in cost of professional services due to reductions in staff,
commissions and advertising, offset, in part, by increased use of subcontractors
for special services. The decrease in professional services operating margin in
fiscal 2000 is primarily attributable to billable staff off assignment,
increased use of subcontractors for special services and increased allocations
of costs of corporate systems. All reported professional services revenue and
expenses include operating revenue and operating expenses associated with Data
Processing Resources Corporation since the acquisition in August 1999.
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 costs is
due, primarily, to a higher average professional staff headcount during fiscal
years 2001 and 2000, compared to the prior fiscal years, and to increased use of
subcontractors for special services. The professional billable staff decreased
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20
1,565 people to 8,041 people as of March 31, 2001 from 9,606 people at the end
of fiscal 2000. This compares 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.
Administrative and general expenses increased 45.2% during fiscal 2001 compared
to fiscal 2000. The increase in administrative and general expenses is primarily
attributable to charges against investments in joint ventures and increased
goodwill amortization expense, offset, in part, by decreases in legal costs,
associated with fewer acquisitions, and decreases in outside consulting
services. The increase in administrative and general expenses in fiscal 2000 of
15.4% relates primarily to increased goodwill amortization expense associated
with the DPRC acquisition.
During fiscal year 2000, the Company recognized $17.9 million of expense for
purchased research and development costs associated with the acquisition of in
process research and development 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 in process research and
development from Centerline Software, Inc., Vireo Software, Inc. and Cardume
Software Limited. 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.
Interest and investment income for fiscal 2001 was $30.7 million as compared to
$34.9 million in fiscal 2000 and $30.2 million in fiscal 1999. Interest and
investment income in fiscal 2000 includes a gain of approximately $10.9 million
resulting from the sale of securities. Interest expense for fiscal 2001 was
$31.3 million as compared to $24.5 million in fiscal 2000 and $0.8 million in
fiscal 1999. This increase in interest expense 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.
The Company's provision for income taxes was $73.0 million in fiscal 2001, which
represents an effective tax rate of 38.0%. This compares to a tax provision of
$209.8 million in fiscal 2000, which represents an effective tax rate of 37.3%,
and an income tax provision of $180.2 million in fiscal 1999, which represents
an effective tax rate of 34.0%. The fiscal 2001 and fiscal 2000 increases in the
effective tax rate were due to 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, 2001, the Company had approximately $255.0 million in cash and
investments, which is consistent with the level the Company has committed to
maintain while utilizing the $900 million Senior Credit Facility. During fiscal
2001 and 2000, the Company generated $336.6 million and $165.4 million,
respectively, in operating cash flow. The increased operating cash flow is
generated, in part, from the collection of the current portion of prior years'
installment sales as reflected in the decrease in total accounts receivable.
During these periods, the Company had capital expenditures that included
property and equipment, capitalized research and software development, and
purchased software of $53.7 million and $50.6 million, respectively.
20
21
As of March 31, 2001 and 2000, the Company had $140.0 million and $450.0
million, respectively, in long-term debt representing borrowings under the $900
million Senior Credit Facility entered into in August 1999. Initial borrowings
during fiscal year 2000 were used primarily to fund the acquisition of Data
Processing Resources Corporation. In August 2001, the Senior Credit Facility
will be reduced to a total of $800 million available. The Company does not
anticipate any negative impact on its liquidity from this decrease. See Note 5
of Notes to Consolidated Financial Statements for a description of the terms of
the Senior Credit Facility.
The Company acquired Nomex, Inc., a privately held provider of web design and
development services located in Montreal, Canada, for $8.9 million on May 10,
2000. During July 2000, the Company acquired substantially all the assets and
certain liabilities of Optimal Networks Corporation for $5.0 million. The
Company continues to evaluate business acquisition opportunities that fit the
Company's strategic plans.
The Company has begun construction on an office tower with a current estimated
cost of $350 million within the City of Detroit. These cash outlays will have no
impact on operating expenses until the building is occupied in the fall of 2002,
at which point, the depreciation will result in an annual expense of
approximately $11.7 million. This will be partially offset by the savings
realized by the consolidation of offices. As of March 31, 2001 and 2000, funds
expended were approximately $25.2 million and $2.2 million, respectively (See
Note 4 of Notes to Consolidated Financial Statements). Cash outlays over the
next twelve months are expected to be approximately $150.0 million, with the
funds coming from the Senior Credit Facility and cash flow from operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company has adopted SFAS 133
effective April 1, 2001. The adoption of SFAS 133 will not have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
FORWARD LOOKING STATEMENTS
The Company makes forward looking statements in this report within the meaning
of the federal securities laws and may make forward looking statements on future
filings with the Securities and Exchange Commission and in press releases and
other communications. Forward looking statements 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 discussed below. These factors, risks and
uncertainties could cause the Company's actual results to differ materially from
the results implied by these or any other
21
22
forward looking statements made by, or on behalf of, the Company. There can be
no assurance that future results will meet expectations.
- - Our quarterly financial results vary and may be adversely affected by
certain relatively fixed costs. Our product revenues vary from quarter to
quarter. Net income may be disproportionately affected by a fluctuation in
revenues because only a small portion of our expenses varies with revenues.
- - Our success depends in part on our ability to develop product enhancements
and new products which keep pace with continuing changes in technology and
customer preferences.
- - Approximately 22% of our revenue is derived from foreign sources. This
exposes us to exchange rate risks on foreign currencies and to other
international risks such as the need to comply with foreign and U.S. export
laws, and the uncertainty of certain foreign economies.
- - While we are expanding our focus on distributed software products, a
majority of our revenue from software products is dependent on our
customers' continued use of IBM and IBM-compatible mainframe products and
on the acceptance of our pricing structure for software licenses, upgrades
and maintenance. The pricing of our software licenses and maintenance is
under constant pressure from customers and competitive vendors.
- - We regard our software as proprietary and attempt to protect it with
copyrights, trademarks, trade secret laws and restrictions on disclosure,
copying and transferring title. 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.
- - Although we have not received any material claims that our products
infringe on the proprietary rights of third parties, 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.
- - We depend on key employees and technical personnel. The loss of certain key
employees or our inability to attract and retain other qualified employees
could have a material adverse effect on our business.
- - Our operating margins may continue to decline. We do not compile margin
analysis other than on a segment basis. However, we are aware that
operating expenses associated with our distributed systems products are
higher than those associated with our traditional mainframe products. Since
we believe the best opportunities for revenue growth are in the distributed
systems market, products operating margins could experience more pressure.
In addition, operating margins in the professional services business are
significantly impacted by small fluctuations in revenue since most costs
are fixed during any short-term period.
- - A general or regional slowdown in the world economy could cause customers
to delay or forego decisions to license new products or upgrades to their
existing environments and this could adversely affect our operating
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed primarily to market risks associated with movements in
interest rates and foreign currency exchange rates. The Company believes that it
takes the necessary steps to appropriately reduce the potential impact of
interest rate and foreign exchange exposures on the Company's financial position
and operating performance. The Company does not use derivative financial
instruments or forward foreign exchange contracts for investment, speculative or
trading purposes. Immediate changes in interest rates and foreign currency rates
discussed in the following paragraphs are hypothetical rate scenarios
22
23
used to calibrate risk and do not currently represent management's view of
future market developments. A discussion of the Company's accounting policies
for derivative instruments is included in the Notes to Consolidated Financial
Statements.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's cash investments, revolving credit facility and
installment receivables. 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.
The table below provides information about the Company's investment portfolio.
For investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates (in thousands, except
interest rates):
FAIR VALUE AT
FY 2002 FY 2003 TOTAL MARCH 31, 2001
--------------------------------------------------------------------
Cash Equivalents $ 53,340 $ 53,340 $ 53,340
Average Interest Rate 4.51% 4.51%
Average Interest Rate (tax equivalent) 4.53% 4.53%
Investments 185,176 $ 16,488 201,664 202,497
Average Interest Rate 4.17% 4.30% 4.18%
Average Interest Rate (tax equivalent) 6.35% 6.62% 6.37%
At March 31, 2001 the Company's outstanding variable rate debt was $140.0
million. Each 25 basis point increase or decrease in the level of interest rates
would have $0.4 million effect on variable rate debt interest based on the
balance of such debt at March 31, 2001. Information about the Company's long
term debt is set forth in Note 5 of Notes to Consolidated Financial Statements.
The Company offers financing arrangements with installment payment terms in
connection with its multi-year software sales (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Product Revenue"). Installment accounts are generally receivable
over a three to five year period. As of March 31, 2001, non-current receivables
amount to $356.4 million and are due approximately $199.4 million, $114.4
million, $32.8 million, $5.5 million and $4.3 million in each of the years ended
March 31, 2003 through 2006 and thereafter, respectively. The fair value of
non-current accounts receivable is estimated by discounting the future cash
flows using the current rate at which the Company would finance a similar
transaction. At March 31, 2001, the fair value of such receivables is
approximately $349.2 million. Each 25 basis point increase in interest rates
would have an associated $1.4 million negative impact on the fair value of
non-current accounts receivable based on the balance of such receivables at
March 31, 2001. A change in interest rates will have no impact on cash flows or
net income associated with non-current accounts receivable.
23
24
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'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.
The table below provides information about the Company's foreign exchange
forward contracts at March 31, 2001. The table presents the value of the
contracts in U.S. dollars at the contract maturity date and the fair value of
the contracts at March 31, 2001 (in thousands, except contract rates):
CONTRACT MATURITY FORWARD FAIR
DATE IN DATE IN CONTRACT POSITION IN VALUE AT
2001 2001 RATE U.S. DOLLARS MARCH 31, 2001
-------------------------------------------------------------------------------------------
Australian Dollar March 31 April 30 2.03798 $ 5,103 $ 5,048
Canadian Dollar March 31 April 30 1.574502 5,399 5,380
Danish Krone March 31 April 30 8.48825 766 764
Hong Kong Dollar March 31 April 30 7.999 1,154 1,154
Japanese Yen March 31 April 30 124.395 121 119
Singapore Dollar March 31 April 30 1.8026 3,606 3,591
Swiss Franc March 31 April 30 1.73063 5,778 5,747
British Pound March 31 April 30 0.702647 7,685 7,668
Euro Dollar March 31 April 30 1.13603 13,503 13,499
Approximately 22% of our revenue is derived from foreign sources. This exposes
us to exchange rate risks on foreign currencies related to the fair value of
foreign assets and liabilities, net income and cash flows.
24
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Compuware Corporation:
We have audited the accompanying consolidated balance sheets of Compuware
Corporation and subsidiaries as of March 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Compuware Corporation and its
subsidiaries as of March 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 2, 2001
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26
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS NOTES 2001 2000
---------- ---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 53,340 $ 30,480
Investments 3 185,176 157,030
Accounts receivable, less allowance for doubtful
accounts of $21,267 and $15,466 705,546 728,629
Deferred tax asset, net 9 32,011 24,346
Income taxes refundable 10,028 22,125
Prepaid expenses and other current assets 17,635 25,248
---------- ----------
Total current assets 1,003,736 987,858
---------- ----------
INVESTMENTS 3 16,488 78,944
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 125,800 114,409
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $137,530 AND $109,405 87,781 98,464
---------- ----------
OTHER:
Accounts receivable 356,431 399,911
Excess of cost of investment over fair value of net
assets acquired, less accumulated amortization
of $81,246 and $39,944 2 631,609 659,391
Other assets 57,529 76,930
---------- ----------
Total other assets 1,045,569 1,136,232
---------- ----------
TOTAL ASSETS $2,279,374 $2,415,907
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY NOTES 2001 2000
---------- ---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 39,846 $ 67,173
Accrued expenses 127,854 135,129
Accrued bonuses and commissions 50,093 64,153
Deferred revenue 351,041 329,602
---------- ----------
Total current liabilities 568,834 596,057
LONG TERM DEBT 5 140,000 450,000
DEFERRED REVENUE 172,367 152,947
DEFERRED INCOME TAXES 9 20,801 13,031
---------- ----------
Total liabilities 902,002 1,212,035
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 6
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
369,816,432 and 361,621,234 shares in 2001
and 2000, respectively 7 3,698 3,616
Additional paid-in capital 7 620,743 556,150
Retained earnings 774,059 654,976
Accumulated other comprehensive loss (21,128) (10,870)
---------- ----------
Total shareholders' equity 1,377,372 1,203,872
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,279,374 $2,415,907
========== ==========
See notes to consolidated financial statements.
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COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTES 2001 2000 1999
----------- ----------- -----------
REVENUES:
Software license fees $ 495,572 $ 819,247 $ 683,354
Maintenance fees 456,534 432,707 334,371
Professional services fees 1,057,944 978,674 620,720
----------- ----------- -----------
Total revenues 2,010,050 2,230,628 1,638,445
----------- ----------- -----------
OPERATING EXPENSES:
Cost of software license fees 39,551 30,739 28,097
Cost of maintenance 53,076 45,367 37,286
Cost of professional services 1,039,237 946,710 506,765
Software product development 102,617 81,133 64,957
Sales and marketing 451,719 467,060 418,019
Administrative and general 131,218 90,386 78,333
Purchased research and development 2 17,900 4,350
----------- ----------- -----------
Total operating expenses 1,817,418 1,679,295 1,137,807
----------- ----------- -----------
INCOME FROM OPERATIONS 192,632 551,333 500,638
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and investment income 30,692 34,927 30,175
Interest expense (31,255) (24,484) (772)
----------- ----------- -----------
Total other income (expense) (563) 10,443 29,403
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 192,069 561,776 530,041
INCOME TAX PROVISION 9 72,986 209,800 180,178
----------- ----------- -----------
NET INCOME $ 119,083 $ 351,976 $ 349,863
=========== =========== ===========
Basic earnings per share 8 $ 0.33 $ 0.98 $ 0.95
=========== =========== ===========
Diluted earnings per share 8 $ 0.32 $ 0.91 $ 0.87
=========== =========== ===========
See notes to consolidated financial statements.
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28
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
---------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Loss Equity Income
------------ ------- ----------- --------- --------- ---------- --------
BALANCE AT APRIL 1, 1998 360,341,946 $ 3,603 $ 280,867 $ 427,455 $ (3,629) $ 708,296
Net income 349,863 349,863 $349,863
Foreign currency translation, net of tax (2,671) (2,671) (2,671)
--------
Comprehensive income $347,192
========
MISI acquisition (Note 2) 1,021,864 10 31,089 31,099
Issuance of common stock 1,367,818 14 24,457 24,471
Purchase and retirement of common stock (6,200,000) (62) (151,555) (151,617)
Acquisition tax benefits 6,707 6,707
Exercise of employee stock options
and related tax benefit (Note 12) 11,394,760 114 113,260 113,374
------------ ------- ----------- --------- --------- ----------
BALANCE AT MARCH 31, 1999 367,926,388 3,679 304,825 777,318 (6,300) 1,079,522
Net income 351,976 351,976 $351,976
Foreign currency translation, net of tax (4,570) (4,570) (4,570)
--------
Comprehensive income $347,406
========
Issuance of common stock 1,325,761 13 33,764 33,777
Purchase and retirement of common stock (15,335,259) (153) 126,098 (474,318) (348,373)
Acquisition tax benefits 7,219 7,219
Exercise of employee stock options
and related tax benefit (Note 12) 7,704,344 77 79,844 79,921
Other 4,400 4,400
------------ ------- ----------- --------- --------- ----------
BALANCE AT MARCH 31, 2000 361,621,234 3,616 556,150 654,976 (10,870) 1,203,872
Net income 119,083 119,083 $119,083
Foreign currency translation, net of tax (10,258) (10,258) (10,258)
--------
Comprehensive income $108,825
========
Issuance of common stock 5,735,834 57 40,301 40,358
Acquisition tax benefits 7,454 7,454
Exercise of employee stock options
and related tax benefit (Note 12) 2,459,364 25 16,838 16,863
------------ ------- ----------- --------- --------- ----------
BALANCE AT MARCH 31, 2001 369,816,432 $ 3,698 $ 620,743 $ 774,059 $ (21,128) $1,377,372
============ ======= =========== ========= ========= ==========
See notes to consolidated financial statements.
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COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 119,083 $ 351,976 $ 349,863
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 17,900 4,350
Depreciation and amortization 103,663 71,510 41,537
Tax benefit from exercise of stock options 10,283 45,962 91,083
Issuance of common stock to Employee Stock Ownership Trust 10,685 6,496 4,558
Acquisition tax benefits 7,454 7,219 6,707
Deferred income taxes 105 (5,758) (1,015)
Gain on sale of marketable securities (10,918)
Other (4,080) 994 160
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 67,799 (385,102) (214,293)
Prepaid expenses and other current assets 8,298 2,962 (18,215)
Other assets 13,199 (27,716) (21,759)
Accounts payable and accrued expenses (51,012) (19,222) 99,522
Deferred revenue 39,034 137,954 107,014
Income taxes 12,084 (28,858) 29,744
--------- --------- ---------
Net cash provided by operating activities 336,595 165,399 479,256
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (17,576) (700,266) (12,629)
Property and equipment (39,803) (34,922) (26,370)
Capitalized software (13,881) (15,698) (12,173)
Investments:
Proceeds from maturity 309,377 471,932 446,221
Proceeds from sales of securities 14,194
Purchases (278,105) (230,554) (774,350)
--------- --------- ---------
Net cash used in investing activities (39,988) (495,314) (379,301)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 18,000 533,000
Payment of long term debt (328,000) (83,000) (3,692)
Net proceeds from sale of common stock 29,673 31,681 19,913
Repurchase of common stock (348,373) (151,617)
Net proceeds from exercise of stock options 6,580 33,959 22,291
--------- --------- ---------
Net cash (used in) provided by financing activities (273,747) 167,267 (113,105)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,860 (162,648) (13,150)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30,480 193,128 206,278
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 53,340 $ 30,480 $ 193,128
========= ========= =========
See notes to consolidated financial statements.
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COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
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, 2001 and 2000 and
the results of operations for the years ended March 31, 2001, 2000 and 1999.
While management has based their assumptions and estimates on the facts and
circumstances known at March 31, 2001, 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. License revenue associated with
certain transactions that include an option to exchange or select products in
the future is deferred and recognized over the term of the deal. When the
license portion is paid over a number of years, the license portion of the
payment stream is discounted to its net present value. Interest income is
recognized over the payment term. 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 provided that
collection of the related receivable is deemed probable.
Cash and Cash Equivalents - For the purpose of the statement of cash flows, the
Company considers all investments with an original maturity of three months or
less to be cash equivalents.
Investments consist of municipal obligations, tax-free 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, 2001 and 2000 is $48,353,000 and $60,029,000, respectively.
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
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31
Company were $116,147,000, $95,629,000 and $76,831,000 in fiscal 2001, 2000 and
1999, respectively, of which $13,530,000, $14,496,000 and $11,874,000,
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 ten to twenty 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 $41,302,000, $25,252,000
and $4,857,000, for the fiscal years ended March 31, 2001, 2000 and 1999,
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, 2001, the fair
value of long-term receivables is approximately $349,216,000 compared to the
carrying amount of $356,431,000. At March 31, 2000, the fair value of long-term
receivables was approximately $371,145,000 compared to the carrying amount of
$399,911,000. The fair value of non-current accounts receivable is estimated by
discounting the future cash flows using the current rate at which the Company
would finance a similar transaction.
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
$2,487,000, $464,000 and $2,944,000 for the fiscal years ended March 31, 2001,
2000 and 1999, respectively. These amounts are included in "sales and marketing"
in the consolidated statements of income.
At March 31, 2001, the Company had contracts maturing through April 2001 to sell
$43,115,000 in foreign currencies. At March 31, 2000, the Company had contracts
maturing through April 2000 to sell $39,286,000 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 IT organizations that help information technology professionals efficiently
develop, implement and support the applications that run their businesses.
Recently Issued Accounting Pronouncements - Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS 133 effective April 1, 2001. The
adoption of SFAS 133 will not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
2. ACQUISITIONS
Fiscal 2001 Acquisitions:
In July 2000, the Company acquired substantially all the assets and certain
liabilities of Optimal Networks Corporation (Optimal), a developer of e-business
performance measurement tools, for $5,000,000 in cash and assumed liabilities.
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 $2,300,000 and is being amortized over
a 10-year period on a straight-line basis.
In May 2000, the Company acquired Nomex, Inc. (Nomex), a privately-held provider
of web design and development services located in Montreal, Canada, for
approximately $8,900,000 in cash. The acquisition has been accounted for as a
purchase, and, accordingly, assets and liabilities acquired have been recorded
at fair value as of the date of acquisition. The amount by which the acquisition
cost exceeded the fair value of the net assets acquired was approximately
$8,200,000 and is being amortized over a 10-year period on a straight-line
basis.
Fiscal 2000 Acquisitions:
During fiscal 2000, the Company completed the acquisition of certain
professional services companies for a combined total of $522,500,000, the
largest of which was Data Processing Resources Corporation for $499,500,000. The
Company also completed four product-related acquisitions during the year for a
combined total of $180,850,000, the largest of which was Programart Corporation
for $126,100,000. All of the acquisitions were accounted for as purchases and,
accordingly, assets and liabilities acquired have been recorded at fair value as
of their respective acquisition dates. Of the total purchase price, $56,500,000
was capitalized as purchased software, $11,200,000 was allocated to other
intangible assets and $17,900,000 was allocated to in-process research and
development and expensed as of the purchase date. The aggregate amount by which
the acquisition cost exceeded the fair value of the net assets acquired was
approximately $600,200,000 and is being amortized on a straight-line basis, over
periods ranging from ten to twenty years.
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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:
During fiscal 1999, the Company completed the acquisition of a professional
services firm and certain software products for an aggregate cost of
approximately $40,350,000, including $31,100,000 in Compuware stock and
$9,250,000 in cash and short-term notes payable. All of 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, $4,350,000 was allocated to in-process research and
development and expensed as of the purchase date. The amount by which the
acquisition cost exceeded the fair value of the net assets acquired was
approximately $31,888,000 and is being amortized over a fifteen-year period on a
straight-line basis.
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3. INVESTMENTS
A summary of securities classified as held to maturity at March 31, 2001 and
2000 is set forth below (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2001: ---------- ----------- ----------- ---------
Municipal Obligations $ 160,899 $ 831 $ 8 $ 161,722
Tax Advantage Auction
Rate Securities 16,000 16,000
Tax Free Auction
Rate Securities 23,602 2 23,600
Zero Coupon Bonds 1,163 12 1,175
---------- ----------- ----------- ---------
Securities Classified as
Held to Maturity $ 201,664 $ 843 $ 10 $ 202,497
========== =========== =========== =========
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
========== =========== =========== =========
Scheduled maturities of securities classified as held to maturity at March 31,
2001 were as follows (in thousands):
Amortized Fair
Cost Value
---------- ---------
Due in:
2002 $ 185,176 $ 185,808
2003 16,488 16,689
---------- ---------
Total $ 201,664 $ 202,497
---------- ---------
Marketable Securities - During fiscal 2000, the Company sold securities that had
been classified as available-for-sale for approximately $14.2 million and
realized a gain of approximately $10.9 million. There were no such transactions
during fiscal 2001. 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,
----------------------------
2001 2000
------------- -------------
Land $ 1,776 $ 1,776
Construction in progress 25,166 2,223
Buildings 28,780 28,784
Leasehold improvements 24,226 23,794
Furniture and fixtures 52,780 50,083
Computer equipment and software 101,105 93,940
------------- -------------
233,833 200,600
Less accumulated depreciation and
amortization 108,033 86,191
------------- -------------
Total $ 125,800 $ 114,409
============= =============
On October 23, 2000, the Company entered into a Restated Development Agreement
with the City of Detroit and the City of Detroit Downtown Development Authority
to construct an office tower with retail and related amenities for a current
estimated cost of $350 million. As of March 31, 2001 and 2000, approximately
$25,166,000 and $2,223,000, respectively, was expended and included in
construction in progress.
5. LONG TERM DEBT
Senior Credit Facility - In August 1999, the Company entered into a $900 million
unsecured Senior Credit Facility (credit facility) maturing in August 2003.
Interest may be determined on a Eurodollar or base rate (as defined in the
credit facility) basis at the Company's option. The Company currently pays a
commitment fee of .3% per annum for any unused portion of the credit facility.
During fiscal 2001, the maximum borrowings under the credit facility were $468
million; average borrowings were $333 million at a weighted average interest
rate of 8.12%. The weighted average interest rate for fiscal 2000 was 7.25%. At
March 31, 2001 and 2000, there was $140 million and $450 million, respectively,
outstanding under this facility.
The total commitment under the credit facility 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 $28,627,000, $21,861,000 and
$687,000 for the years ended March 31, 2001, 2000 and 1999, respectively.
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6. PREFERRED STOCK PURCHASE RIGHTS
Under the Company's shareholder rights plan, each common shareholder receives
one right to purchase one two-thousandth of a share of Series A Junior
Participating Preferred Stock (a Right) for each share of common stock owned by
the shareholder. Holders of the Rights are entitled to purchase for $40.00 one
two-thousandth of one share of the Company's Series A Junior Participating
Preferred Stock in certain limited circumstances involving acquisitions of, or
offers for, 15 percent or more of the Company's common stock. After any such
acquisition is completed, each Right entitles its holder to purchase for $40.00
an amount of common stock of the Company, or in certain circumstances securities
of the acquirer, having a then current market value of two times the exercise
price of the Right. In connection with the shareholder rights plan, the Company
has designated 800,000 shares of its 5,000,000 shares of authorized but unissued
Preferred Stock as "Series A Junior Participating Preferred Stock." Each one
two-thousandth of each share of Series A Junior Participating Preferred Stock
will generally be afforded economic rights similar to one share of the Company's
common stock. The Rights are redeemable for a specified period at a price of
$0.001 per Right and expire on November 9, 2010 unless extended or earlier
redeemed by the Board of Directors.
7. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
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 split.
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8. 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,
-------------------------------------------
2001 2000 1999
---- ---- ----
BASIC EPS:
Numerator: Net income $ 119,083 $ 351,976 $ 349,863
------------- ------------- ------------
Denominator:
Weighted-average common shares outstanding 365,192 358,560 366,734
------------- ------------- ------------
Basic EPS $ 0.33 $ 0.98 $ 0.95
============= ============= ============
DILUTED EPS:
Numerator: Net income $ 119,083 $ 351,976 $ 349,863
------------- ------------- ------------
Denominator:
Weighted-average common shares outstanding 365,192 358,560 366,734
Dilutive effect of stock options 7,617 26,131 35,302
------------- ------------- ------------
Total shares 372,809 384,691 402,036
------------- ------------- ------------
Diluted EPS $ 0.32 $ 0.91 $ 0.87
============= ============= ============
9. 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,
----------------------------
2001 2000
----------- -----------
Deferred tax assets:
Accrued vacation $ 3,494 $ 4,915
Deferred maintenance 374 4,582
Purchased software 17,388 16,433
Allowance for doubtful accounts 5,743 4,636
Net operating loss carryforwards 29,670 31,964
Other 32,380 23,990
----------- -----------
89,049 86,520
Less valuation allowance 5,551 5,877
----------- -----------
Net deferred tax assets 83,498 80,643
Current portion 32,358 26,676
----------- -----------
Long term portion $ 51,140 $ 53,967
=========== ===========
Deferred tax liabilities:
Amortization $ 4,109 1,088
Capitalized research and development costs 13,800 10,278
Depreciation 5,059 3,891
Other 49,320 54,071
----------- -----------
Total deferred tax liabilities 72,288 69,328
Current portion 347 2,330
----------- -----------
Long term portion $ 71,941 $ 66,998
=========== ===========
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The income tax provision (benefit) includes the following (in thousands):
Year Ended March 31,
----------------------------------------------
2001 2000 1999
------------ ------------ -------------
Current:
Federal $ 50,711 $ 181,664 $ 160,192
Foreign 16,370 9,268 6,210
State 5,800 24,626 14,790
------------ ------------ -------------
Total current tax provision 72,881 215,558 181,192
------------ ------------ -------------
Deferred:
Federal (3,297) (4,120) (4,131)
Foreign 3,402 (1,638) 3,117
------------ ------------ -------------
Total deferred tax expense (benefit) 105 (5,758) (1,014)
------------ ------------ -------------
Total income tax provision $ 72,986 $ 209,800 $ 180,178
============ ============ =============
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,
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Federal income tax at statutory rates $ 67,224 $ 196,622 $ 185,514
Increase (decrease) in taxes:
Foreign Sales Corporation subsidiary (8,024) (9,537) (8,643)
State income taxes, net 3,770 16,007 9,613
Goodwill amortization 8,831 5,291 1,145
Other, net 1,185 1,417 (7,451)
------------ ------------ ------------
Provision for income taxes $ 72,986 $ 209,800 $ 180,178
============ ============ ============
At March 31, 2001 the Company has net operating loss carryforwards for income
tax purposes of approximately $98,275,000 which expire as follows (in
thousands):
Year ending March 31:
2002 $ 2,834
2003 6,360
2004 5,524
2005 5,867
2006 6,018
2008 999
2009 410
2010 2,544
2011 4,006
Unlimited carryforward 63,713
Of this amount, approximately $1,520,000 is available to offset U.S. federal
income taxes and approximately $96,755,000 relates to various foreign
jurisdictions. In addition, approximately $921,000 of tax credits expiring
through the year 2002 are available to offset future U.S. federal income tax
liabilities.
Cash paid for income taxes totaled approximately $41,538,000, $136,838,000 and
$28,332,000 for the years ended March 31, 2001, 2000 and 1999, respectively.
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10. SEGMENT INFORMATION
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to IT organizations that help IT professionals efficiently develop, implement
and support the applications that run their businesses.
The Company's products are designed to support four key activities within the
application development process: development and integration, quality assurance,
production readiness and performance management of the application to optimize
performance in production.
The Company also offers a broad range of data processing professional services
including business systems analysis, design and programming, software conversion
and system planning and consulting.
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses and purchased research and
development expense. 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,
----------------------------------------------
2001 2000 1999
-------------- -------------- -------------
Revenue:
Products:
Mainframe $ 762,778 $ 1,031,273 $ 830,256
Distributed systems 189,328 220,681 187,469
-------------- -------------- -------------
Total products revenue 952,106 1,251,954 1,017,725
Services 1,057,944 978,674 620,720
-------------- -------------- -------------
Total revenues $ 2,010,050 $ 2,230,628 $ 1,638,445
============== ============== =============
Operating Expenses:
Products $ 646,963 $ 624,299 $ 548,359
Services 1,039,237 946,710 506,765
Corporate staff 89,916 65,134 73,476
Goodwill amortization 41,302 25,252 4,857
-------------- -------------- -------------
Total operating expenses $ 1,817,418 $ 1,661,395 $ 1,133,457
============== ============== =============
Income from operations, before other income
(expense) and purchased research and development
charges:
Products $ 305,143 $ 627,655 $ 469,366
Services 18,707 31,964 113,955
Corporate staff (89,916) (65,134) (73,476)
Goodwill amortization (41,302) (25,252) (4,857)
-------------- -------------- -------------
Income from operations, before other income
(expense) and purchased research and development
charges: 192,632 569,233 504,988
Purchased research and development charges (17,900) (4,350)
Other income (expense) (563) 10,443 29,403
-------------- -------------- -------------
Income before income taxes $ 192,069 $ 561,776 $ 530,041
============== ============== =============
39
40
Financial information regarding geographic operations are presented in the table
below (in thousands):
Year Ended March 31,
-----------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenue:
United States $ 1,560,798 $ 1,736,511 $ 1,202,266
Europe 323,882 351,427 316,393
Other international operations 125,370 142,690 119,786
------------ ------------ ------------
Total revenue $ 2,010,050 $ 2,230,628 $ 1,638,445
============ ============ ============
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than ten percent
of the Company's long lived assets, other than financial instruments, are
located outside of the United States.
11. 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 2011. 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:
2002 $ 42,643
2003 37,000
2004 29,294
2005 19,780
2006 13,545
Thereafter 26,782
-------------
Total $ 169,044
=============
Lease expense for the years ended March 31, 2001, 2000 and 1999 under all
operating leases amounted to approximately $39,652,000, $34,180,000 and
$27,720,000, respectively.
12. 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
$10,685,000, $6,497,000 and $4,558,000 in fiscal 2001, 2000 and 1999,
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 was 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. The final offering period commenced on January 1, 2001 and ended in
March 2001 at which time all shares authorized under the plan were sold. Under
the terms of the plan, employees could elect to have up to ten percent of their
annual earnings withheld to purchase Company stock, with a
40
41
value not to exceed $25,000. The purchase price was 85 percent of the first or
last day's closing market price for each offering period, whichever was lower.
During fiscal 2001, 2000 and 1999, the Company sold approximately 4,515,000,
1,009,000 and 1,177,000 shares, respectively, to eligible employees under the
plan.
Employee Stock Option Plans - The Company adopted five Employee Stock Option
Plans dating back to 1992. 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 43,157,000 were outstanding at March 31, 2001.
Under the terms of the plans, the Company may grant nonqualified options at the
fair market value of the stock on the date of grant. During fiscal 2001, the
Company granted approximately 9,855,000 options under the five different
Employee Stock Option Plans.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan provides for grants of options to purchase up to 50,000,000 shares of the
Company's common stock to employees or directors of the Company, of which
approximately 1,461,000 were outstanding at March 31, 2001. Under the terms of
the plan, the Company may grant nonqualified stock options at the fair market
value of the stock on the date of grant. In April 2001, the Company granted
approximately 22,000,000 shares under the broad based stock option plan.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming
director. During fiscal 2001, approximately 166,000 options were granted under
the Non-Employee Director Stock Option Plan. Approximately 1,512,000 options
were outstanding at March 31, 2001.
Each non-employee director receives an annual grant of 20,000 options with
additional grants for board and committee meeting attendance. 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.
Non-employee directors are granted stock options out of the Non-Employee
Director Stock Option Plan or the 1999 Employee Stock Option Plan.
Options generally vest in cumulative annual or semi-annual installments over a
three to five year period. All options were granted at fair market value and
expire ten years from the date of grant.
At March 31, 2001, approximately 142,000 options were outstanding under plans
that were terminated by the Company, of which approximately 128,000 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 2001, approximately 2,902,000 shares were exercised under the Replacement
Stock Option Award program for which approximately 1,973,000 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.
41
42
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 2001, 2000 and
1999 consistent with the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", Compuware's net income and earnings per share would
have been adjusted to the pro forma amounts indicated below:
Year Ended March 31,
--------------------------------------------
2001 2000 1999
------------ ----------- -----------
Net Income:
As reported $ 119,083 $ 351,976 $ 349,863
Pro forma 62,154 286,403 297,490
Earnings per Share:
As reported:
Basic earnings per share 0.33 0.98 0.95
Diluted earnings per share 0.32 0.91 0.87
Pro forma:
Basic earnings per share 0.17 0.80 0.81
Diluted earnings per share 0.17 0.75 0.74
The pro forma amounts for compensation cost may not be indicative of the effects
on net income and earnings per share for future years.
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in fiscal 2001, 2000 and 1999,
respectively: expected volatility of 95.55, 85.85 and 66.88 percent; risk-free
interest rates of 4.6, 6.4 and 5.3 percent; and expected lives at date of grant
of 5.0, 4.8 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 comparable to the stock option plans above. The
weighted-average fair value of the purchase rights granted in fiscal 2001, 2000
and 1999 were $3.12, $12.00 and $6.48, respectively.
42
43
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2001, 2000 and 1999, and changes
during the years ending on those dates is as follows (shares in thousands):
2001 2000 1999
------------------------- -------------------------- -------------------------
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 44,965 $ 13.93 48,801 $ 11.21 52,102 $ 6.13
Granted 11,482 9.80 8,392 20.90 12,183 25.33
Exercised (2,459) 5.52 (7,704) 4.77 (11,395) 2.41
Exchanged (1,973) 11.43 (1,703) 22.58 (1,069) 28.07
Forfeited (5,743) 15.45 (2,821) 17.20 (3,020) 11.47
-------- -------- --------
Outstanding at
year end 46,272 $ 13.53 44,965 $ 13.93 48,801 $ 11.21
======== ======== ========
Options exercisable
at year end 20,140 $ 9.77 14,769 $ 8.79 12,655 $ 5.71
======== ======== ========
Weighted-average
fair value of options
granted during the
year $ 7.30 $ 15.52 $ 15.40
======== ======== ========
The following table summarizes information about fixed stock options outstanding
at March 31, 2001 (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 23,209 6.46 $ 6.82 12,957 $ 5.26
10.01 TO 20.00 11,808 6.88 15.52 4,914 14.35
20.01 TO 30.00 10,128 6.45 24.54 2,050 24.77
30.01 TO 42.00 1,127 7.45 31.98 219 33.85
------- -------
46,272 6.59 13.53 20,140 9.77
======= =======
The maximum number of shares for which additional options may be granted was
55,672,142 at March 31, 2001, 9,437,993 at March 31, 2000 and 13,306,421 at
March 31, 1999. At March 31, 2001, a total of 101,944,135 shares of the
Company's common stock are reserved for issuance under all option plans. Income
tax benefits associated with the exercise of stock options are reflected as
adjustments to additional paid-in capital.
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44
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2001 and 2000 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------- ------------- ------------- ------------- ----------
Fiscal 2001:
Revenues $ 513,874 $ 486,323 $ 495,356 $ 514,497 $2,010,050
Operating income 40,932 21,890 57,450 72,360 192,632
Pre-tax income 38,116 20,792 58,000 75,161 192,069
Net income 23,632 12,891 35,960 46,600 119,083
Basic earnings per share 0.07 0.04 0.10 0.13 0.33
Diluted earnings per share 0.06 0.03 0.10 0.12 0.32
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in the Proxy Statement
under the captions "Election of Directors" and "Other Matters - Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Proxy Statement
under the caption "Compensation of Executive Officers and Directors"
(excluding the Compensation Committee Report on Executive Compensation and
the Performance Graph) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the Proxy Statement
under the caption "Security Ownership of Management and Major Shareholders"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the Proxy Statement
under the caption "Other Matters -- Related Party Transactions" and is
incorporated herein by reference.
45
46
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 25
Consolidated Balance Sheets as of March 31, 2001 and 2000 26
Consolidated Statements of Income for each of the years
ended March 31, 2001, 2000 and 1999 27
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2001, 2000 and 1999 28
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2001, 2000 and 1999 29
Notes to Consolidated Financial Statements 30-44
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 50
Schedule II - Valuation and Qualifying Accounts and Reserves 51
All other financial statement schedules not listed above are
omitted as the required information is not applicable or the
information is presented in the consolidated financial statements
or related notes.
3. The exhibits filed in response to Item 601 of Regulation S-K are listed
in the Exhibit Index attached to this report. The Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2001.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Farmington Hills, State of Michigan on June 25, 2001.
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 25, 2001
Peter Karmanos, Jr. and Director (Principal Executive Officer)
/S/ THOMAS THEWES
--------------------------------- Vice Chairman of the Board and Director June 25, 2001
Thomas Thewes
/S/ JOSEPH A. NATHAN
--------------------------------- President, Chief Operating Officer and Director June 25, 2001
Joseph A. Nathan
/S/ LAURA L. FOURNIER
--------------------------------- Senior Vice President, Chief Financial Officer June 25, 2001
Laura L. Fournier and Treasurer (Chief Financial and Accounting Officer)
/S/ ELIZABETH A. CHAPPELL
--------------------------------- Director June 25, 2001
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER
--------------------------------- Director June 25, 2001
Elaine K. Didier
/S/ BERNARD M. GOLDSMITH
--------------------------------- Director June 25, 2001
Bernard M. Goldsmith
/S/ WILLIAM O. GRABE
--------------------------------- Director June 25, 2001
William O. Grabe
/S/ WILLIAM R. HALLING
--------------------------------- Director June 25, 2001
William R. Halling
/S/ W. JAMES PROWSE
--------------------------------- Director June 25, 2001
W. James Prowse
/S/ G. SCOTT ROMNEY
--------------------------------- Director June 25, 2001
G. Scott Romney
/S/ LOWELL WEICKER, JR.
--------------------------------- Director June 25, 2001
Lowell Weicker, Jr.
47
48
EXHIBITS
The following exhibits are filed herewith or incorporated by reference.
Each management contract or compensatory plan or arrangement filed as an
exhibit to this report is identified below with an asterisk before the
exhibit number. The Company's SEC file number is 0-20900.
Exhibit
Number Description of Document
------ -----------------------
3(i).1 Restated Articles of Incorporation of Compuware Corporation,
as amended, as of October 25, 2000.
3(i).4 Amended and Restated Bylaws of Compuware Corporation, as of
July 2000.
4.0 Rights Agreement dated as of October 25, 2000 between
Compuware Corporation and Equiserve Trust Company, N.A., as
Rights Agent. (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)
*10.37 Fiscal 1998 Stock Option Plan (3)
*10.51 Fiscal 1996 Stock Option Plan (7)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (7)
*10.83 Fiscal 1999 Stock Option Plan (9)
10.84 Agreement and Plan of Merger, dated June 23, 1999, among the
Company, DPRC and COMP Acquisition Co. (5)
*10.85 2001 Broad Based Stock Option Plan (6)
*10.86 First Amendment to 1992 Stock Option Plan (2)
*10.87 First Amendment to 1993 Stock Option Plan (2)
*10.88 First Amendment to 1996 Stock Option Plan (2)
*10.89 First Amendment to Stock Option Plan For Non-Employee
Directors (4)
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99.(B)(2) Credit Agreement, dated as of August 3, 1999, between
Compuware Corporation, Various Lenders, Comerica Bank, as
Administrative Agent and Co-Arranger, and Morgan Stanley
Senior Funding, Inc., as Lead Arranger, Syndication Agent and
Book Manager (10)
---------------------------
(1) Incorporated by reference to the corresponding exhibit
to the Registration Statement on Form S-1, as amended
(Registration No. 33-53652).
(2) Incorporated by reference to exhibits 12.0, 12.1 and
12.2 to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
(3) Incorporated by reference to exhibit 4.1 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-37873).
(4) Incorporated by reference to exhibit 12.3 to the 1998
Annual Report on Form 10-K.
(5) Incorporated by reference to the corresponding exhibit
to the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999.
(6) Incorporated by reference to exhibit 4.10 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-57984).
(7) Incorporated by reference to the corresponding exhibit
to the fiscal 2000 Annual Report on Form 10-K.
(8) Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 26, 2000.
48
49
(9) Incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2000.
(10) Incorporated by reference to Exhibit 99.(B)(2) to the
Company's Amendment No. 3 (Final Amendment) to Schedule
14D-1
49
50
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, 2001 and 2000 and for each of the three years
in the period ended March 31, 2001, and have issued our report thereon dated May
2, 2001; 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 2, 2001
50
51
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(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, 2001 $ 15,466 10,432 4,631 21,267
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
- -----------------------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
51
52
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3(i).1 Restated Articles of Incorporation of Compuware
Corporation, as amended, as of October 25, 2000.
3(i).4 Amended and Restated Bylaws of Compuware Corporation,
as of July 2000.
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent