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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- -----------
Commission File Number: 0-20900
COMPUWARE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MI 48334-2564
-----------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (248) 737-7300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
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
--- ---
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. [X]
There were 375,890,681 shares of $.01 par value common stock outstanding as of
June 14, 2002. 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 14, 2002 of $7.13 as reported on the Nasdaq Stock Market,
was approximately $2,447,092,441. 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 2002 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Item
Number Page
- ------ ----
PART I
1. Business 3
Executive Officers of the Registrant 12
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 15
6. Selected Consolidated Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosure about Market Risk 28
8. Consolidated Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 50
PART III
10. Directors and Executive Officers of the Registrant 51
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and Management 51
13. Certain Relationships and Related Transactions 51
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 52
2
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 and integration, quality assurance, production readiness
and production availability areas of the application life cycle.
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 11 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.
In the fourth quarter of 2002, we adopted a restructuring plan which will
reorganize our operating divisions, primarily the professional services segment.
For a discussion of this restructuring, see Management's Discussion and Analysis
of Financial Condition and Results of Operations - Restructuring and Goodwill
Amortization and Impairment Charges.
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 products and services offerings.
The applications process includes four primary phases: 1) the application
development phase in which software source 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.
On March 31, 2002, we began to operate under our new geography-based
organizational structure. Our products and professional services organizations
are now combined under one geographic leadership structure that spans seven
regions, three in North America and four internationally.
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PRODUCTS
The following table sets forth, for the periods indicated, a breakdown of
revenue by product line and the percentage of total revenues for each line (in
thousands):
YEAR ENDED MARCH 31, PERCENTAGE OF TOTAL REVENUES
----------------------------------------------- ----------------------------------
PRODUCT REVENUE 2002 2001 2000 2002 2001 2000
--------------- --------------- --------------- ----------- ---------- -----------
File-AID $ 230,820 $ 259,835 $ 381,109 13.4% 12.9% 17.1%
Abend-AID 186,827 211,375 311,521 10.8 10.5 14.0
XPEDITER 136,848 142,123 204,542 7.9 7.1 9.2
QACenter Mainframe 30,880 45,969 79,163 1.8 2.3 3.5
STROBE 101,911 103,476 54,938 5.9 5.2 2.4
--------- --------- ---------- ---- ---- ----
Total Mainframe Revenue 687,286 762,778 1,031,273 39.8 38.0 46.2
--------- --------- ---------- ---- ---- ----
UNIFACE and Optimal 43,353 43,083 78,943 2.5 2.1 3.5
File-AID/Client Server 5,303 8,911 10,889 0.3 0.4 0.5
DevPartner 26,722 35,944 37,801 1.6 1.8 1.7
QACenter Distributed 31,221 37,389 38,392 1.8 1.9 1.7
Vantage 57,497 64,001 54,656 3.3 3.2 2.5
--------- --------- ---------- ---- ---- ----
Total Distributed Product Revenue 164,096 189,328 220,681 9.5 9.4 9.9
--------- --------- ---------- ---- ---- ----
Total Product Revenue $ 851,382 $ 952,106 $1,251,954 49.3% 47.4% 56.1%
========= ========= ========== ==== ==== ====
COMPUWARE SOFTWARE PRODUCTS AND THE APPLICATION LIFE CYCLE
Our software products enhance every step in the application life cycle, from
application development and quality assurance to production readiness and
availability, for mainframe and distributed platforms.
APPLICATION DEVELOPMENT AND INTEGRATION--Productivity gains are achieved by
using our Abend-AID, DevPartner, File-AID, Optimal, QACenter, STROBE, UNIFACE,
Vantage and XPEDITER products.
QUALITY ASSURANCE--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
XPEDITER tools are used to automate the multiple, complex steps of thorough
application testing.
PRODUCTION READINESS--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
Vantage product lines are used to ready applications for production.
PRODUCTION AVAILABILITY--The Abend-AID, File-AID, QACenter, STROBE, Vantage and
XPEDITER product lines are used to find and fix application, server and/or
network performance problems before they affect end users.
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MAINFRAME MARKET
We believe that the market for mainframe products is well defined, and that our
mainframe products will continue to be in demand as the drive to extend legacy
applications into distributed environments continues to emphasize the need for
reliable, high-volume servers.
We intend to remain focused on developing, marketing and supporting high quality
software tools both to support 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 longstanding 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 SOFTWARE PRODUCTS
Our mainframe products focus on improving the productivity of programmers and
analysts in analysis, unit testing, functional testing, performance testing,
defect removal, fault management, file and data management and application
performance management in the OS/390 and z/OS series environments.
Our mainframe 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 products are grouped into the following five product lines:
FILE-AID PRODUCTS
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.
ABEND-AID PRODUCTS
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.
XPEDITER PRODUCTS
XPEDITER interactive debugging products enable programmers to identify and
resolve errors in complex software efficiently and accurately, ensuring that all
of the software code has actually executed during a test run. These products
also help web-enable legacy applications by identifying and converting
presentation and business logic code.
QACENTER MAINFRAME PRODUCTS
QAHIPERSTATION products deliver complete testing functionality for automating
test creation and execution, test results analysis and documentation. The
products simulate the on-line systems environment, allowing programmers to test
on-line applications under production conditions without requiring actual users
at terminals. In addition, these products capture production transactions, allow
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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.
STROBE PRODUCTS
Our STROBE MVS Application Performance Management and iSTROBE 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 MARKET
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 products, IT organizations find
themselves under increasing pressure to rapidly create reliable, top-performing
e-business applications, despite an exponential 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.
DISTRIBUTED SOFTWARE PRODUCTS
Our distributed products focus on improving the productivity of programmers and
analysts in requirements management, application creation, unit and functional
testing, application performance, capacity planning, application profiling,
server availability, network availability and application availability in
platforms such as WIN95/98/NT, DC2000, AIX and Solaris.
Our distributed systems software products are grouped in six product lines:
UNIFACE, Optimal, File-AID/CS, DevPartner, QACenter and Vantage.
UNIFACE AND OPTIMAL PRODUCTS
UNIFACE, our distributed systems application development product, 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 reuse in the development of technology-independent applications
and allows for easier management and maintenance of applications. In addition,
UNIFACE insulates application development and deployment from the individual
technical components that comprise a computing environment. This reduces
development and maintenance costs and allows e-business applications to be
developed rapidly using existing, proven legacy code.
OPTIMALJ is our Java development product. OptimalJ accelerates application
delivery by simplifying Java development, allowing developers of varying
experience levels to rapidly produce reliable J2EE business applications.
OptimalJ generates complete, working applications directly from a visual model,
using sophisticated patterns to implement accepted best practices for coding to
J2EE specifications.
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
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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 its organization.
OPTIMALFLOW is our business process automation and business process modeling
product that automates the execution of business tasks running within and across
an organization. OptimalFlow helps solution architects model and automate
business processes and tasks by aligning and connecting the process to the
application environment for improved workflow execution. This creates a more
efficient and effective organization that benefits from faster process-cycle
times, improved time-to-market, greater cost effectiveness and better customer
service through improved response times.
FILE-AID/CLIENT SERVER
FILE-AID/CLIENT SERVER is a comprehensive 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.
File-AID/Client Server offers a range of functionality including the ability to
extract, load, transform, move, compare, edit and view data without having to be
an expert in each database environment. File-AID/Client Server eliminates the
need to write programs, scripts or SQL or use multiple utilities.
DEVPARTNER PRODUCTS
DEVPARTNER STUDIO is a suite of integrated development tools that help
developers automatically detect, diagnose and facilitate resolution of software
errors; maximize code performance; and ensure optimum code coverage and testing.
DevPartner Studio has specific editions for Java, Visual Basic and C++.
DEVPARTNER STUDIO ENTERPRISE EDITION combines powerful error detection,
performance, coverage, requirements management, testing and deployment tools
with comprehensive project tracking, defect management, task management and
workflow automation. DevPartner Studio Enterprise Edition supports Microsoft
Visual C++, Microsoft Visual Basic, Java and ASP.
DRIVERSTUDIO products help developers create code that enables operating systems
to communicate with peripheral devices such as printers, scanners and the
Internet. The DriverStudio product line includes DriverStudio and SoftICE Driver
Suite.
DEVPARTNERDB simplifies rapid, high-quality development by helping developers
debug stored procedures and tune SQL statements. DevPartnerDB has specific
editions that support Oracle, Microsoft SQL Server and Sybase.
QACENTER DISTRIBUTED PRODUCTS
QACENTER delivers a unique offering of automated testing products and solutions
designed to validate applications running in the full spectrum of environments,
isolate and correct problems and ensure that systems can handle anticipated
load--before applications go live. The QACenter products include:
QARUN--A functional test automation tool that allows organizations to validate
business-critical applications whether client/server, e-commerce (web/Java) or
CRM/ERP.
QADIRECTOR--Provides the framework for managing the entire testing process from
design through execution to analysis.
TRACKRECORD--A defect tracking and project status tool that serves as a central
repository and communication hub for all development-related activities and
test-related activities and data.
7
RECONCILE--An enterprise-wide requirements management system. It allows project
teams to create, change, track, evaluate and report project requirements.
QALOAD--An automated load testing solution for client/server, ERP and e-commerce
applications.
VANTAGE PRODUCTS
Vantage products allow IT professionals to manage, analyze and improve the
performance of distributed applications in a variety of environments. The
Vantage suite also helps IT organizations plan for and manage change and growth
to distributed applications and their supporting infrastructure. Vantage
products include:
CLIENTVANTAGE--Monitors the performance and availability of critical business
applications at the point of delivery--the client user interface.
NETWORKVANTAGE--Provides a global view of application usage of critical shared
network resources.
SERVERVANTAGE--Provides monitoring, alerting, troubleshooting and automated
response throughout the server infrastructure.
VANTAGEVIEW--Provides an overall enterprise view of application performance and
availability as well as access to the underlying performance metrics.
APPLICATION VANTAGE--Provides real-time application performance troubleshooting,
analyzing the interaction between the application, the network and the
supporting server infrastructure. Application Vantage is also integrated with
the ClientVantage product for 24-hour a day, seven days a week exception-based
performance analysis.
APPLICATION EXPERT--Analyzes transactions before applications are deployed and
predicts how they will perform under production conditions--helping to diagnose
where potential problems will occur. The WAN provisioning module determines the
aggregate network loading from a defined population of users and application
workloads to permit the "rightsizing" of expensive WAN links.
PREDICTOR--Predicts enterprise network behavior based on various scenarios such
as changes in application mix, transaction volume, device outages and deployment
of additional bandwidth.
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 2002, we continued to experience a high customer
maintenance renewal rate. We had 124 employees as of March 31, 2002 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.
8
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 2002,
2001 and 2000, maintenance fees represented approximately 25.1%, 22.7% and
19.4%, 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 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 771 employees as of March 31, 2002.
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 $115.6 million, $116.1
million and $95.6 million during fiscal 2002, 2001 and 2000, respectively.
Our software products are distributed as object code on standard magnetic
cartridges, diskettes and CDs, together with printed documentation. We also send
product electronically. 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
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 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 and the need for a larger technical staff for ongoing maintenance.
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.
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CUSTOMERS
Our products and professional services are used by the information technology
departments of a wide variety of commercial and government organizations.
None of our customers accounted for 10% or more of our total revenues during any
of the last three fiscal years. Approximately 45% of our professional services
revenue was derived from our 10 highest billed customers. We believe that these
customers will continue to represent a significant portion of the revenues of
the professional services segment for at least the next twelve months. The loss
of, or reduced demand for services from, any of our major services clients could
have an adverse effect on the results of operations.
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 28 other countries. Our combined
products sales and marketing staff as of March 31, 2002 totaled 1,951 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., International Business
Machines Corporation (IBM), Mercury Interactive Corporation, Oracle Corporation
and Rational Software Corporation. Some of these competitors have substantially
greater financial, marketing, recruiting and training resources than we do. 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
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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.
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, we
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 19 patents and have numerous 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 which could
require a partial payment to the third party upon sale of the product, or result
in costly litigation.
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EMPLOYEES
As of May 31, 2002, we employed 10,164 people worldwide, with 1,940 in products
sales, sales support and marketing; 805 in research and development; 95 in
product maintenance and customer support; 6,178 in professional services
marketing and delivery and 1,146 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, who are elected by and serve at the discretion of our
Board of Directors, are as follows as of June 14, 2002:
Name Age Position
- ---- --- --------
Peter Karmanos, Jr. 59 Chairman of the Board and Chief
Executive Officer
Joseph A. Nathan 49 President
Tommi A. White 51 Chief Operating Officer
Henry A. Jallos 53 Executive Vice President,
Global Account Management
Laura L. Fournier 49 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
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 since October 1994 and as Chief
Operating Officer from October 1994 through October 2001. From December 1990
through October 1994, Mr. Nathan was Senior Vice President and Chief Operating
Officer - Products Division.
Tommi A. White has served as Chief Operating Officer since October 2001. Ms.
White joined Compuware in August 2001 as Executive Vice President responsible
for evaluating, improving and implementing Compuware's organizational structure.
Before joining Compuware, Ms. White spent nearly nine years at Kelly Services,
Inc., most recently as Executive Vice President, Chief Administration and
Technology Officer.
Henry A. Jallos has served as Executive Vice President, Global Account
Management since October 2001 and as Executive Vice President, Products Division
from September 1998 through October 2001. From August 1994 through August 1998,
Mr. Jallos served as Senior Vice President, Worldwide Sales.
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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.
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 11 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 11 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 and distribution
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 are building a new corporate headquarters office building 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
four remote product research and development facilities, with a presence in 47
countries.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 2002, we filed suit in the United States District Court for the
Eastern District of Michigan against IBM alleging, among other things,
infringement of our copyrights and misappropriation of our trade secrets with
respect to our mainframe software tools, intentional interference with
contractual relations with our employees and former employees, anti-trust law
violations, tortious interference with our economic expectancy and various state
law violations. We claim that IBM has copied and misappropriated portions of our
mainframe software tools and has wrongfully used our technology to develop
competing products. We also claim that IBM is using its monopoly power to engage
in unlawful tying arrangements and is subverting competition on the merits by
denying critical information to us and others in an effort to undermine our
development efforts. The suit seeks injunctive relief and unspecified monetary
damages, among other things, from IBM. While we currently believe we ultimately
will benefit from this litigation, the impact of this action on our business
relationship with IBM and our liquidity, financial position and results of
operations are not determinable at the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
14
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 14, 2002, there were approximately 6,912
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, 2002 HIGH LOW
Fourth quarter $14.00 $ 10.68
Third quarter 13.68 7.46
Second quarter 14.50 7.68
First quarter 14.00 8.50
FISCAL YEAR ENDED MARCH 31, 2001 HIGH LOW
Fourth quarter $14.38 $ 6.25
Third quarter 9.25 5.63
Second quarter 11.25 7.50
First quarter 22.00 9.25
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations 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 in this report.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 417,631 $ 495,572 $ 819,247 $ 683,354 $ 467,251
Maintenance fees 433,751 456,534 432,707 334,371 244,273
Professional services fees 877,165 1,057,944 978,674 620,720 427,794
----------- ----------- ----------- ----------- -----------
Total revenues 1,728,547 2,010,050 2,230,628 1,638,445 1,139,318
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of software license fees 36,255 39,551 30,739 28,097 22,874
Cost of maintenance 39,662 53,076 45,367 37,286 31,203
Cost of professional services 879,953 1,039,237 946,710 506,765 365,948
Software product development 102,332 102,617 81,133 64,957 54,416
Sales and marketing 396,324 451,719 467,060 418,019 325,793
Administrative and general 73,670 89,126 64,800 73,516 54,593
Goodwill amortization and impairment (1) 426,344 42,092 25,586 4,817 4,372
Restructuring and merger-related costs (1) 46,930 3,606
Purchased research and development 17,900 4,350 3,160
----------- ------------- ----------- ----------- -----------
Total operating expenses 2,001,470 1,817,418 1,679,295 1,137,807 865,965
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (272,923) 192,632 551,333 500,638 273,353
Interest and investment income (expense), net 22,076 (563) 10,443 29,403 17,417
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (250,847) 192,069 561,776 530,041 290,770
Income tax provision (benefit) (5,592) 72,986 209,800 180,178 96,826
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (245,255) $ 119,083 $ 351,976 $ 349,863 $ 193,944
=========== =========== =========== =========== ===========
Basic earnings (loss) per share (2 and 3) $ (0.66) $ 0.33 $ 0.98 $ 0.95 $ 0.55
Diluted earnings (loss) per share (2 and 3) (0.66) 0.32 0.91 0.87 0.50
Shares used in computing net income (loss) per share (3):
Basic earnings (loss) per share 371,786 365,192 358,560 366,734 352,274
Diluted earnings (loss) per share 371,786 372,809 384,691 402,036 387,426
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 506,692 $ 434,902 $ 391,801 $ 550,586 $ 362,324
Total assets 1,993,938 2,279,374 2,415,907 1,676,683 1,072,640
Long term debt -- 140,000 450,000 -- 6,956
Total shareholders' equity (4) 1,189,851 1,377,372 1,203,872 1,079,522 708,296
(1) Amortization and impairment of goodwill during 2002 included $342.9
million associated with restructuring, $35.2 million associated with a
change in technology related to distributed products and $9.3 million
associated with the transfer of the engineering business discussed in
the Professional Services Revenue section in Item 7 of this report.
Restructuring costs in 2002 represent costs incurred with the
reorganization of the operating divisions during the fourth quarter.
See note 6 of Notes to Consolidated Financial Statements for more
details on these charges. Merger costs in 1998 reflect costs incurred
in connection with the acquisition, restructuring and integration of
NuMega Technologies, Inc.
(2) See notes 1 and 9 of Notes to Consolidated Financial Statements for the
basis of computing earnings per share.
(3) Adjusted for the impact of stock splits during 1998 and 1999.
(4) No dividends were paid during the periods presented.
All prior years have been reclassified to conform to the 2002
presentation.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We make 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 our actual results to differ materially from the
results implied by these or any other forward-looking statements made by, or on
behalf of, the Company. There can be no assurance that future results will meet
expectations. While we believe that our 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, we do 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.
- - 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 24% 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
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. Despite these precautions,
it may be possible for unauthorized third parties to copy certain
portions of our products or to obtain and use information that we
regard as proprietary. 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 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
17
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.
- - The slowdown in the world economy could continue for an extended period
and could cause customers to further delay or forego decisions to
license new products or upgrades to their existing environments and
this could adversely affect our operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUES CHANGE
------------------------------------ ------------------------
FISCAL YEAR ENDED
MARCH 31, 2001 2000
------------------------------------ TO TO
2002 2001* 2000* 2002 2001
----------- ---------- ----------- ---------- -----------
Revenues:
Software license fees 24.2% 24.7% 36.7% (15.7%) (39.5%)
Maintenance fees 25.1 22.7 19.4 (5.0) 5.5
Professional services fees 50.7 52.6 43.9 (17.1) 8.1
----- ----- -----
Total revenues 100.0 100.0 100.0 (14.0) (9.9)
----- ----- -----
Operating expenses:
Cost of software license fees 2.1 2.0 1.4 (8.3) 28.7
Cost of maintenance 2.3 2.6 2.0 (25.3) 17.0
Cost of professional services 50.9 51.7 42.4 (15.3) 9.8
Software product development 5.9 5.1 3.6 (0.3) 26.5
Sales and marketing 22.9 22.5 20.9 (12.3) (3.3)
Administrative and general 4.3 4.4 3.1 (17.3) 37.5
Goodwill amortization and impairment 24.7 2.1 1.1 ** 64.5
Restructuring costs 2.7 ** **
Purchased research and development 0.8 (100.0)
----- ----- -----
Total operating expenses 115.8 90.4 75.3 10.1 8.2
----- ----- -----
Income (loss) from operations (15.8) 9.6 24.7 ** (65.1)
----- ----- -----
Other income (expense):
Interest and investment income 1.7 1.5 1.6 (3.9) (12.1)
Interest expense (0.4) (1.6) (1.1) 76.2 (27.7)
----- ----- -----
Total other income (expense) 1.3 (0.1) 0.5 ** (105.4)
----- ----- -----
Income (loss) before income taxes (14.5) 9.5 25.2 ** (65.8)
Income tax provision (benefit) (0.3) 3.6 9.4 ** (65.2)
----- ----- -----
Net income (loss) (14.2%) 5.9% 15.8% ** (66.2%)
===== ===== =====
* Reclassified to conform to the 2002 presentation.
** Calculation is not meaningful.
18
The following table sets forth, for the periods indicated, certain operational
data after excluding restructuring, purchased research and development and
amortization and impairment of intangible assets acquired as a result of
acquisitions (excluded charges), (in thousands):
Fiscal Year Ended
March 31,
--------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Income (loss) before income taxes $(250,847) $ 192,069 $ 561,776
Amortization and impairment of goodwill (1) 426,344 42,092 25,586
Amortization and impairment of purchased software 18,879 15,299 7,271
Restructuring costs (2) 46,930
Purchased research and development 17,900
--------- --------- ---------
Income before income taxes and excluded charges 241,306 249,460 612,533
Income tax provision 79,405 85,649 220,317
--------- --------- ---------
Net income before excluded charges $ 161,901 $ 163,811 $ 392,216
========= ========= =========
(1) - Before income taxes, amortization and impairment of goodwill during 2002
included $342.9 million associated with restructuring, $35.2 million associated
with a change in technology related to distributed products and $9.3 million
associated with the transfer of the engineering business discussed in the
Professional Services Revenue section below. See note 6 of Notes to Consolidated
Financial Statements for more details on the restructuring related charge.
(2) - See note 6 of Notes to Consolidated Financial Statements for more details
on this charge.
We operate in two business segments in the technology industry: products and
professional services. We evaluate the performance of our segments based
primarily on operating profit or loss before corporate expenses. References to
years are to fiscal years ended March 31.
SOFTWARE PRODUCTS
REVENUE
Our products are designed to support four key activities within the application
development process: development and integration, quality assurance, production
readiness and performance management of the application to optimize performance
in production. Products revenue consists of software license fees and
maintenance fees and comprised 49.3%, 47.4% and 56.1% of total revenue during
2002, 2001 and 2000, respectively. OS/390 product revenue (mainframe revenue)
decreased $75.5 million or 9.9% during 2002 and decreased $268.5 million or
26.0% during 2001. Revenue from distributed software products decreased $25.2
million or 13.3% during 2002 and decreased $31.4 million or 14.2% during 2001.
License revenue decreased $78.0 million or 15.7% during 2002 to $417.6 million
from $495.6 million during 2001 and decreased $323.6 million or 39.5% from
$819.2 million during 2000. Maintenance fees decreased $22.7 million or 5.0% to
$433.8 million during 2002 from $456.5 million during 2001 and increased $23.8
million or 5.5% from $432.7 million in 2000. The decrease in maintenance fees
was primarily attributable to lower license fees during both 2002 and 2001 and
to market pressure on renewal rates.
The overall decline in product revenue from 2001 to 2002 was primarily
attributable to decreases in license fees and maintenance fees associated with
decreased customer demand for our products in
19
North America. The overall decline in product revenue from 2000 to 2001 was
primarily attributable to a decrease in demand for large enterprise license
agreements (ELAs) and unfavorable changes in foreign currency exchange rates. If
foreign exchange rates in 2002 had remained consistent with 2001, products
revenue would have been $870.9 million during 2002 compared to $952.1 million
during 2001. This represents an overall decline in constant U.S. dollars of
$81.2 million, or 8.5%, compared to an actual decline of $100.7 million, or
10.6%. If foreign exchange rates in 2001 had remained consistent with 2000,
product revenue would have been $984 million in 2001 compared to $1.252 billion
in 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 was further impacted by a decrease in customer demand for large
ELAs which are multiyear, and often multipayment contracts. Multiyear contracts
greater than $5 million represented approximately 6.9%, 12.8% and 26.5%, of
license revenue in 2002, 2001 and 2000, respectively.
We support clients with product transactions covering multiple years and
allowing deferred payment terms. The contract price is allocated between
maintenance for the contract term and license revenue. All license revenue
associated with these perpetual license agreements is recognized when the
customer commits unconditionally to the transaction, the software products and
quantities are fixed and the software has been shipped to the customer. License
revenue associated with transactions that include an option to exchange or
select products in the future has been deferred and is recognized over the
contract term. When the license portion is paid over a number of years, the
license portion of the payment stream is discounted to its net present value.
Interest income is recognized over the payment term. The maintenance associated
with all sales has been deferred and is recognized over the applicable
maintenance period.
Products revenue by geographic location is presented in the table below (in
thousands):
YEAR ENDED MARCH 31,
------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
United States $ 532,772 $ 597,290 $ 833,365
European subsidiaries 217,800 235,841 285,158
Other international operations 100,810 118,975 133,431
---------- ---------- ----------
Total products revenue $ 851,382 $ 952,106 $1,251,954
========== ========== ==========
OPERATING PROFIT AND EXPENSES
Financial information for our products segment is as follows (in thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Revenue $ 851,382 $ 952,106 $1,251,954
Operating expenses 574,573 646,963 624,299
---------- ---------- ----------
Products operating profit $ 276,809 $ 305,143 $ 627,655
========== ========== ==========
The products segment generated operating margins of 32.5%, 32.0% and 50.1%
during 2002, 2001 and 2000, respectively. Products expenses include cost of
software license fees, cost of maintenance, software product development costs,
and sales and marketing expenses. The operating margin in
20
2002 is fairly constant compared to the operating margin in 2001. The decrease
in operating margin in 2001 was primarily a result of a decrease in software
license revenue while total products costs were fairly constant.
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 decrease in these costs in 2002 was due primarily to decreased
author royalties, decreased printing and distribution costs, and decreased
salary and benefits associated with lower employee headcount. The increase in
these costs in 2001 was due primarily to an increase in amortization of
capitalized software products, related to the Programart, CACI and Optimal
acquisitions and increased amortization of internally capitalized projects
associated with Vantage (formerly EcoSYSTEMS), QALoad, UNIFACE, Abend-AID,
File-AID and XPEDITER, which were released for general availability during 2001.
As a percentage of software license fees, cost of software license fees were
8.7%, 8.0% and 3.8% in 2002, 2001 and 2000, 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 decrease in cost of maintenance in 2002 was due primarily to
decreases in salaries and benefits associated with lower employee headcount,
reduced travel expenses and reduced costs of corporate systems. The increase in
cost of maintenance in 2001 was due, primarily, to a higher average headcount
compared to the prior fiscal year. As a percentage of maintenance fees, these
costs were 9.1%, 11.6% and 10.5% for 2002, 2001 and 2000, 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 our software products, less
the amount of software development costs capitalized during the fiscal year. The
decrease in these costs in 2002 was due primarily to decreased salary and
benefits associated with lower employee headcount, offset by a charge for leased
office space no longer utilized as a result of the consolidation of development
facilities and increased amortization of purchased software due to impairment
charges against the purchased software associated with underperforming products
acquisitions. The increase in these costs in 2001 was primarily due to an
increase in salaries and benefits, including severance costs, associated with a
relocation of the software development lab for the Vantage product line and an
increase in software development staff related to the Programart and CACI
acquisitions during 2000.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total research and
development expenditures for 2002 decreased $0.5 million, or 0.4%, to $115.6
million from $116.1 million in 2001. In 2001, total research and development
costs increased $20.5 million, or 21.5%, to $116.1 million from $95.6 million in
2000. The major development projects that achieved technological feasibility
during 2002 included 3 new interactive analysis and debugging products, 2 new
fault management products, 8 new file and data management products, 8 new
automated testing products, 18 new systems management products, 10 new
application development products, 3 new application performance management
products, 2 new license management products, and 9 new windows development
tools.
Sales and marketing costs consist of the sales and marketing expenses associated
with the 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 2001 to 2002 was primarily attributable to
decreased salaries and benefits associated with lower average headcount,
decreased distributor commissions
21
associated with decreased software license revenue, decreased travel expenses,
and decreased advertising expenditures. The decrease in sales and marketing
costs from 2000 to 2001 was largely attributable to lower sales commissions
associated with decreased product sales and to reduced advertising expenditures,
offset, in part, by increased salaries and benefits due, primarily, to a higher
average headcount during 2001 compared to the prior year. The direct sales and
sales support staff decreased by 508 to 1,951 people at March 31, 2002, as
compared to 2,459 at March 31, 2001 and 2,680 at March 31, 2000.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of information technology professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Revenue from professional services decreased
$180.8 million or 17.1% during 2002 and increased $79.3 million or 8.1% during
2001. The decrease in revenue for 2002 was due, primarily, to a reduction in
customer demand for professional services. The increase from 2000 to 2001 was
due, primarily, to increased market share associated with the August 1999
acquisition of Data Processing Resources Corporation (DPRC).
On December 1, 2001, we transferred our engineering services business to an
unrelated third party. Professional services revenue associated with the
engineering business was approximately $21.0 million in 2002, $28.6 million in
2001 and $17.7 million in 2000. Effective January 1, 2002, we assigned our prime
contract with a client to a company in which we have a minority equity
investment and simultaneously entered into an agreement with this company to
become a subcontractor providing services for the client. Professional services
revenue associated with this activity was approximately $36.0 million, $64.0
million and $44.0 million during 2002, 2001 and 2000, respectively. These
changes, along with the restructuring discussed below, allow us to further focus
on our core professional services business.
Professional services revenue by geographic location is presented in the table
below (in thousands):
YEAR ENDED MARCH 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
United States $ 783,764 $ 963,508 $ 903,146
European subsidiaries 90,031 88,041 66,269
Other international operations 3,370 6,395 9,259
---------- ---------- ----------
Total professional services revenue $ 877,165 $1,057,944 $ 978,674
========== ========== ==========
22
OPERATING PROFIT AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
YEAR ENDED MARCH 31,
--------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Revenue $ 877,165 $1,057,944 $ 978,674
Operating expenses 879,953 1,039,237 946,710
---------- ---------- ----------
Professional services operating profit $ (2,788) $ 18,707 $ 31,964
========== ========== ==========
The professional services segment generated operating margins of negative 0.3%,
and positive 1.8% and positive 3.3% during 2002, 2001 and 2000, respectively.
The decrease in professional services operating margin is primarily due to lower
utilization, lower billing rates, and reduced customer demand for our services
associated with the decline of the economy as a whole and the IT sector
specifically.
Cost of professional services includes all costs of our professional services
business, including the personnel costs of the professional, management and
administrative staff of our services business and the facilities and benefits
costs allocated to such personnel. The decrease in these costs from 2001 to 2002
is due, primarily, to reductions in staff, resulting in lower salaries and
benefits, reduced travel expenditures and decreased use of subcontractors for
special services. The increase in these costs from 2000 to 2001 is due,
primarily, to a higher average professional staff headcount during 2001 compared
to 2000, and to increased use of subcontractors for special services. The
professional billable staff decreased 1,016 people to 7,025 people as of March
31, 2002 from 8,041 people at March 31, 2001. This compares to a decrease of
1,565 professional billable staff, to 8,041 at March 31, 2001 from 9,606 people
at March 31, 2000.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses decreased 17.3% during 2002 and increased
37.5% during 2001. The decrease in administrative and general expenses during
2002 was primarily attributable to decreased charges against investments in
joint ventures. The increase in administrative and general expenses from 2000 to
2001 is primarily attributable to charges against investments in joint ventures,
offset, in part, by decreases in legal costs associated with fewer acquisitions,
and decreases in outside consulting services.
During 2000, we 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.
Interest and investment income for 2002 was $29.5 million as compared to $30.7
million in 2001 and $34.9 million in 2000. These decreases were due to lower
interest earnings on investments due to reduced interest rates, offset, in part,
by increased interest related to customers' deferred installments. Interest
expense for 2002 was $7.4 million as compared to $31.3 million in 2001 and $24.5
million in 2000. Interest expense includes amortization of the initial financing
fees and ongoing fees associated with the unutilized balance of the Senior
Credit Facility (the credit facility) discussed in the Liquidity and Capital
Resources section below. The decrease in interest expense from 2001 to 2002 was
primarily attributable to the July 2001 payoff of debts previously outstanding
under the credit facility. The increase in interest expense from 2000 to 2001
was primarily attributable to interest expense associated with debt outstanding
under the credit facility during 2001.
23
We account for income taxes using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax benefit was $5.6 million in 2002. This compares to an income tax provision
of $73.0 million in 2001, which represents an effective tax rate of 38.0%, and
an income tax provision of $209.8 million in 2000, which represents an effective
tax rate of 37.3%. Our effective tax rate for 2002 differs significantly from
the U.S. federal income tax rate of 35% primarily as a result of nondeductible
goodwill amortization and impairment charges. The 2001 increase in the effective
tax rate was due to nondeductible goodwill amortization associated with certain
acquisitions and a shift of our state apportionment to states with higher
corporate income tax rates.
RESTRUCTURING AND GOODWILL AMORTIZATION AND IMPAIRMENT CHARGES
In the fourth quarter of 2002, we adopted a restructuring plan which will
reorganize our operating divisions, primarily the professional services segment.
The plan resulted in total charges of $389.9 million including $342.9 million
for the impairment of goodwill recognized in the acquisition of certain
professional services businesses, primarily DPRC. These changes are designed to
increase profitability in the future by better aligning cost structures with
current market conditions. We also incurred an impairment charge of $35.2
million associated with a change in technology related to distributed products
and a $9.3 million charge associated with the transfer of the engineering
business.
The restructuring plan includes a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees will be terminated as a
result of the reorganization. Prior to year-end, we communicated benefits
available to employees under the plan. A majority of affected employees are
expected to be terminated during the first quarter of 2003. As of May 31, 2002,
1,049 of the effected employees have been terminated.
In conjunction with the development of the restructuring plan, we evaluated the
carrying value of goodwill and other intangible assets related to the
professional services business, and recorded an impairment charge related to our
prior services acquisitions. Certain professional services offices acquired as
part of those acquisitions have not achieved critical mass or a sustained level
of profitability and were closed in April 2002 as part of the restructuring
plan. We utilized discounted cash flow analyses to value the remaining business,
and recognized goodwill impairment based upon current estimated fair market
values.
24
The following table summarizes the restructuring and impairment charges taken in
2002 (in thousands):
COMPLETED REMAINING
AS OF ACCRUAL AT
TOTAL CHARGES MARCH 31, 2002 MARCH 31, 2002
-------------- -------------- --------------
Employee termination benefits $ 19,012 $ 553 $ 18,459
Facilities costs (primarily lease
abandonments) 26,341 676 25,665
Legal, consulting and outplacement
costs 1,299 1,299
Other 278 278
-------- -------- --------
Restructuring charge 46,930 1,229 45,701
Goodwill impairment charge 342,922 342,922 --
-------- -------- --------
Total charges $389,852 $344,151 $ 45,701
======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, cash and investments totaled approximately $422.4 million.
Our primary source of liquidity is cash flow from operations. During 2002 and
2001, we generated $386.8 million and $336.6 million, respectively, in operating
cash flow. The increased operating cash flow was generated, in part, from the
collection of the current portion of prior years' installment receivables as
reflected in the decrease in total accounts receivable. During these periods, we
had capital expenditures that included property and equipment, capitalized
research and software development, and purchased software of $103.7 million and
$53.7 million, respectively.
As of February 13, 2002, our unsecured credit facility, which expires in August
2003, was reduced to a total of $500 million available. Interest may be
determined on a Eurodollar or base rate (as defined in the credit facility)
basis at our option. The credit agreement contains financial ratios and other
restrictive covenants and requires commitment fees in accordance with standard
banking practice. As of March 31, 2002, we had no long term debt, compared to
$140.0 million as of March 31, 2001. This balance represented borrowings under
the credit facility.
We believe available cash resources including the amount available under the
credit facility, together with cash flow from operations, will be sufficient to
meet our cash needs for the foreseeable future.
Although there were no acquisitions during 2002, we continue to evaluate
business acquisition opportunities that fit our strategic plans.
We are building a new corporate headquarters office building with a current
estimated cost of $350 million for the building and an estimated $50 million for
furniture and fixtures. Cash outlays will have no impact on the results of
operations until the building is ready for occupancy. When fully occupied, in
calendar 2003, the depreciation will result in an annual expense of
approximately $17 million. This will be partially offset by the savings realized
by the consolidation of offices. Capital expenditures to date total $106.8
million. Cash outlays for the next twelve months are expected to be
approximately $218.6 million. Currently, we intend to fund the building using
cash flow from operations.
25
Our cash flow from operations for the coming year is dependent upon the
Company's operating divisions meeting their projected levels of sales activity.
However, our solid base of accounts receivable installment payments that become
due throughout the year provides some level of predictability to cash flow.
For a description of our payment obligations in the future, see note 12 of Notes
to Consolidated Financial Statements included in Item 8 of this report.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
requires the purchase method of accounting be used for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
have not done any acquisitions since adopting this standard.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." We are required to adopt this statement for the year ending March 31,
2003. SFAS 142 requires that goodwill no longer be amortized but instead be
tested for impairment at least annually and that indefinite lived intangible
assets no longer be amortized over their useful lives. We have evaluated our
remaining goodwill as of April 1, 2002, and have determined there will be no
impairment upon adoption of SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement retains the impairment loss recognition and measurement
requirements of SFAS No. 121. In addition, it requires that one accounting model
be used for long-lived assets to be disposed of by sale, and broadens the
presentation of discontinued operations to include more disposal transactions.
We adopted this statement on April 1, 2002. It is not expected to have any
impact on our financial position or results of operations.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The accounting policies
discussed below are considered by management to be the most important to an
understanding of our financial statements, because their application places the
most significant demands on management's judgment and estimates about the effect
of matters that are inherently uncertain. Our assumptions and estimates were
based on the facts and circumstances known at March 31, 2002, future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment. These policies are also discussed in note 1 of the Notes to
Consolidated Financial Statements included in Item 8 of this report.
Revenue Recognition - A significant portion of license fee revenue is earned in
connection with multiyear contracts, for which deferred payments are allowed,
with installments collectible over the term of the contract. For most of these
contracts, generally accepted accounting principles provide that the license fee
portion of the contract should be recognized in income upon shipment of the
product, provided that no significant obligations remain and collection of the
related receivable is
26
deemed probable. As a result, revenue includes amounts for which the related
cash will not be received for an extended period of time. We have significant
experience with these types of contracts over a number of years, and believe we
have sufficient knowledge of our customers and products to appropriately
evaluate the collectibility of the receivables. However, changes in future
economic conditions or technological developments could adversely affect our
ability to collect these receivables.
Allowance for Doubtful Accounts - The collectibility of accounts receivable is
regularly evaluated and we believe our allowance for doubtful accounts is
appropriate for our accounts receivable balances. In evaluating the allowance,
we consider historical loss experience, including the need to adjust for current
conditions, and the aging of outstanding receivables. Larger accounts are
reviewed on a detail basis, giving consideration to collection experience and
any information on the financial viability of the customer. The allowance is
reviewed and adjusted each quarter based on the best information available at
the time.
Capitalized Software - The cost of purchased and internally developed software
is capitalized and stated at the lower of unamortized cost or net realizable
value. Software is subject to rapid technological obsolescence and estimates of
future revenues to be derived from the software could be significantly affected
by future developments. The amortization period for capitalized software is
generally five years, but adverse developments could result in a shorter life or
a write-off based on reduced estimates of net realizable value.
Impairment of Goodwill - Goodwill is evaluated at least annually to determine
whether events and circumstances have occurred that indicate the remaining
estimated useful life may warrant revision or that the remaining balance may not
be recoverable. To evaluate the carrying value of goodwill, we utilize a
discounted cash flow approach. This analysis requires judgment regarding
discount rates, revenue growth and other variables that impact the net
realizable value or fair value of the goodwill. Actual future cash flows and
other assumed variables could differ from estimates.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. We believe that we take the necessary
steps to appropriately reduce the potential impact of interest rate and foreign
exchange exposures on our financial position and operating performance. We do
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 used to calibrate risk and do not currently
represent management's view of future market developments. A discussion of our
accounting policies for derivative instruments is included in the Notes to
Consolidated Financial Statements.
INTEREST RATE RISK
Exposure to market risk for changes in interest rates relates primarily to our
cash investments and installment receivables. Derivative financial instruments
are not a part of our investment strategy. Investments are placed with high
quality issuers to preserve invested funds by limiting default and market risk.
In addition, all marketable debt securities and long term debt investments are
classified as "held to maturity" which does not expose the consolidated
statement of operations or balance sheet to fluctuations in interest rates.
The table below provides information about our investment portfolio, a
significant portion of which is in municipal securities or other tax advantaged
securities. 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 2003 FY 2004 FY 2005 TOTAL MARCH 31, 2002
------------- ------------ ------------ ------------- ----------------
Cash Equivalents $233,305 $233,305 $233,305
Average Interest Rate 1.96% 1.96%
Average Interest Rate (tax equivalent) 1.97% 1.97%
Investments $133,503 $51,057 $4,509 $189,069 $189,110
Average Interest Rate 2.54% 2.64% 2.48% 2.57%
Average Interest Rate (tax equivalent) 3.87% 3.88% 3.82% 3.87%
We offer financing arrangements with installment payment terms in connection
with our multiyear software sales. Installment accounts are generally receivable
over a three to five year period. As of March 31, 2002, non-current receivables
amount to $306.7 million and are due approximately $190.2 million, $85.8
million, $23.6 million, and $7.1 million in each of the years ended March 31,
2004 through 2007, 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,
2002, the fair value of such receivables is approximately $304.0 million,
compared to $349.2 million at March 31, 2001. Each 25 basis point increase in
interest rates would have an associated $1.1 million negative impact on the fair
value of non-current accounts receivable based on the balance of such
receivables at March 31, 2002 compared to a $1.4 million negative impact 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.
28
FOREIGN CURRENCY RISK
We have entered into forward foreign exchange contracts primarily to hedge
amounts due to or from select subsidiaries denominated in foreign currencies
(mainly in Europe and Asia/Pacific) against fluctuations in exchange rates. Our
accounting policies for these contracts are based on our designation of the
contracts as hedging transactions. The criteria we use 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 we enter
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. We operate in certain countries in Latin America and
Asia/Pacific where there are limited forward currency exchange markets and thus
we have unhedged transaction exposures in these currencies.
The table below provides information about our foreign exchange forward
contracts at March 31, 2002. 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, 2002 (in thousands, except contract rates):
CONTRACT MATURITY FORWARD FAIR
DATE IN DATE IN CONTRACT POSITION IN VALUE AT
2002 2002 RATE U.S. DOLLARS MARCH 31, 2002
------------------------------ --------------- ------------------ --------------------
Forward Sales
Australian Dollar March 29 April 30 1.89054 $ 423 $ 427
Canadian Dollar March 29 April 30 1.5962 188 188
Japanese Yen March 29 April 30 133.028 3,308 3,314
Norwegian Krone March 29 April 30 8.8873 720 723
Singapore Dollar March 29 April 30 1.84177 3,149 3,149
Swedish Krona March 29 April 30 10.3917 77 77
Swiss Franc March 29 April 30 1.6841 2,138 2,140
British Pound March 29 April 30 .70488 2,412 2,424
------- -------
12,415 12,442
Forward Purchases
Euro Dollar March 29 April 30 1.14991 6,896 6,912
Approximately 24% 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.
29
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2002. 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2002
30
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ASSETS NOTES 2002 2001
---------- ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 233,305 $ 53,340
Investments 3 133,503 185,176
Accounts receivable, less allowance for doubtful
accounts of $23,190 and $21,267 609,579 705,546
Deferred tax asset, net 10 41,811 32,011
Income taxes refundable, net 27,687 10,028
Prepaid expenses and other current assets 16,954 17,635
---------- ----------
Total current assets 1,062,839 1,003,736
---------- ----------
INVESTMENTS 3 55,566 16,488
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 199,365 125,800
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $169,611 AND $137,530 68,998 87,781
---------- ----------
OTHER:
Accounts receivable 306,751 356,431
Goodwill, less accumulated amortization and
impairment 2,6 211,792 631,609
Deferred tax asset, net 10 44,884
Other assets 5 43,743 57,529
---------- ----------
Total other assets 607,170 1,045,569
---------- ----------
TOTAL ASSETS $1,993,938 $2,279,374
========== ==========
CURRENT LIABILITIES:
Accounts payable $ 28,646 $ 39,846
Accrued expenses 6 141,825 127,854
Accrued bonuses and commissions 44,652 50,093
Deferred revenue 341,024 351,041
---------- ----------
Total current liabilities 556,147 568,834
LONG TERM DEBT 7 140,000
DEFERRED REVENUE 218,624 172,367
ACCRUED EXPENSES 6 29,316
DEFERRED TAX LIABILITY, NET 10 20,801
--------- ----------
Total liabilities 804,087 902,002
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY NOTES 2002 2001
---------- ----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 8
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
375,820,254 and 369,816,432 shares in 2002
and 2001, respectively 8,13 3,758 3,698
Additional paid-in capital 676,617 620,743
Retained earnings 528,804 774,059
Accumulated other comprehensive loss (19,328) (21,128)
---------- ----------
Total shareholders' equity 1,189,851 1,377,372
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,993,938 $2,279,374
========== ==========
See notes to consolidated financial statements.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTES 2002 2001 2000
--------------- ---------------- ----------------
REVENUES:
Software license fees $ 417,631 $ 495,572 $ 819,247
Maintenance fees 433,751 456,534 432,707
Professional services fees 877,165 1,057,944 978,674
---------- ---------- ----------
Total revenues 1,728,547 2,010,050 2,230,628
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 36,255 39,551 30,739
Cost of maintenance 39,662 53,076 45,367
Cost of professional services 879,953 1,039,237 946,710
Software product development 102,332 102,617 81,133
Sales and marketing 396,324 451,719 467,060
Administrative and general 5 73,670 89,126 64,800
Goodwill amortization and impairment 6 426,344 42,092 25,586
Restructuring costs 6 46,930
Purchased research and development 2 17,900
---------- ---------- ----------
Total operating expenses 2,001,470 1,817,418 1,679,295
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (272,923) 192,632 551,333
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and investment income 3 29,504 30,692 34,927
Interest expense (7,428) (31,255) (24,484)
---------- ---------- ----------
Total other income (expense) 22,076 (563) 10,443
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (250,847) 192,069 561,776
INCOME TAX PROVISION (BENEFIT) 10 (5,592) 72,986 209,800
---------- ---------- ----------
NET INCOME (LOSS) $ (245,255) $ 119,083 $ 351,976
========== ========== ==========
Basic earnings (loss) per share 9 $ (0.66) $ 0.33 $ 0.98
========== ========== ==========
Diluted earnings (loss) per share 9 $ (0.66) $ 0.32 $ 0.91
========== ========== ==========
See notes to consolidated financial statements.
32
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Common Stock Additional
----------------------------- Paid-In Retained
Shares Amount Capital Earnings
-------------- -------------- --------------- ---------------
BALANCE AT APRIL 1, 1999 367,926,388 $ 3,679 $ 304,825 $ 777,318
Net income 351,976
Foreign currency translation, net of tax
Comprehensive income
Issuance of common stock 1,325,761 13 33,764
Purchase and retirement of common stock (15,335,259) (153) 126,098 (474,318)
Acquisition tax benefits 7,219
Exercise of employee stock options
and related tax benefit (Note 13) 7,704,344 77 79,844
Other 4,400
------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2000 361,621,234 3,616 556,150 654,976
Net income 119,083
Foreign currency translation, net of tax
Comprehensive income
Issuance of common stock 5,735,834 57 40,301
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 13) 2,459,364 25 16,838
------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2001 369,816,432 3,698 620,743 774,059
Net loss (245,255)
Foreign currency translation, net of tax
Comprehensive loss
Issuance of common stock 1,981,659 20 17,636
Issuance of warrant (Note 8) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 13) 4,022,163 40 24,492
Other 4,067
------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2002 375,820,254 $ 3,758 $ 676,617 $ 528,804
============= ============= ============= =============
Accumulated
Other Total
Comprehensive Shareholders' Comprehensive
Gain (Loss) Equity Income (Loss)
---------------- ----------------- ---------------
BALANCE AT APRIL 1, 1999 $ (6,300) $ 1,079,522
Net income 351,976 $ 351,976
Foreign currency translation, net of tax (4,570) (4,570) (4,570)
-------------
Comprehensive income $ 347,406
=============
Issuance of common stock 33,777
Purchase and retirement of common stock (348,373)
Acquisition tax benefits 7,219
Exercise of employee stock options
and related tax benefit (Note 13) 79,921
Other 4,400
------------- -------------
BALANCE AT MARCH 31, 2000 (10,870) 1,203,872
Net income 119,083 $ 119,083
Foreign currency translation, net of tax (10,258) (10,258) (10,258)
-------------
Comprehensive income $ 108,825
=============
Issuance of common stock 40,358
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 13) 16,863
------------- -------------
BALANCE AT MARCH 31, 2001 (21,128) 1,377,372
Net loss (245,255) $ (245,255)
Foreign currency translation, net of tax 1,800 1,800 1,800
-------------
Comprehensive loss $ (243,455)
=============
Issuance of common stock 17,656
Issuance of warrant (Note 8) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 13) 24,532
Other 4,067
------------- -------------
BALANCE AT MARCH 31, 2002 $ (19,328) $ 1,189,851
============= =============
See notes to consolidated financial statements
33
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (245,255) $ 119,083 $ 351,976
Adjustments to reconcile net income (loss) to cash provided by
operations:
Purchased research and development 17,900
Goodwill and acquired technology impairment 391,747
Depreciation and amortization 98,216 103,663 71,510
Tax benefit from exercise of stock options 8,384 10,283 45,962
Issuance of common stock to Employee Stock Ownership Trust 10,657 10,685 6,496
Acquisition tax benefits 6,854 7,454 7,219
Deferred income taxes (75,485) 105 (5,758)
Gain on sale of marketable securities (10,918)
Other 3,589 (4,080) 994
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 145,647 67,799 (385,102)
Prepaid expenses and other current assets 681 8,298 2,962
Other assets 2,595 13,199 (27,716)
Accounts payable and accrued expenses 20,578 (51,012) (19,222)
Deferred revenue 36,240 39,034 137,954
Income taxes (17,659) 12,084 (28,858)
------------ ------------ ------------
Net cash provided by operating activities 386,789 336,595 165,399
------------ ------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (17,576) (700,266)
Property and equipment:
Headquarters building (81,644) (25,166)
Other (8,784) (14,637) (34,922)
Capitalized software (13,300) (13,881) (15,698)
Investments:
Proceeds from maturity 221,716 175,787 339,797
Proceeds from sales of securities 14,194
Purchases (210,784) (144,515) (98,419)
------------ ------------ ------------
Net cash used in investing activities (92,796) (39,988) (495,314)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 18,000 533,000
Payment of long term debt (140,000) (328,000) (83,000)
Net proceeds from sale of common stock 6,999 29,673 31,681
Repurchase of common stock (348,373)
Proceeds from sale of warrant 2,825
Net proceeds from exercise of stock options 16,148 6,580 33,959
------------ ------------ ------------
Net cash (used in) provided by financing activities (114,028) (273,747) 167,267
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 179,965 22,860 (162,648)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 53,340 30,480 193,128
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 233,305 $ 53,340 $ 30,480
============ ============ ============
See notes to consolidated financial statements.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
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 include 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, 2002 and 2001 and
the results of operations for the years ended March 31, 2002, 2001 and 2000.
While management has based their assumptions and estimates on the facts and
circumstances known at March 31, 2002, final amounts may differ from estimates.
Certain amounts in the fiscal 2001 and 2000 financial statements have been
reclassified to conform to the fiscal 2002 presentation.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services.
Software license fees - The Company's software license agreements typically
provide for perpetual licenses with maintenance included for terms ranging
generally from one to five years. License fee revenue is recognized using the
residual method, under which the fair value, based on Compuware-specific
objective evidence, of all undelivered elements of the agreement (e.g.,
maintenance) is deferred. The remaining portion of the fee (the residual) is
recognized as license fee revenue upon shipment of the products, provided that
no significant obligations remain and collection of the related receivable is
deemed probable. For agreements in which the fair value of the undelivered
elements cannot be determined using Compuware-specific objective evidence (e.g.,
transactions that include an option to exchange or select products in the
future), the Company recognizes the license fee revenue on a ratable basis over
the term of the license agreement.
The Company offers flexibility to customers purchasing their products and
related maintenance. Terms vary, ranging from the standard perpetual license
sale, including one year of maintenance, to large multiyear, multiproduct
contracts. For fiscal years 2002, 2001 and 2000, multiyear contracts greater
than $5 million represented approximately 6.9%, 12.8% and 26.5%, respectively,
of license fee revenue. The Company allows deferred payment terms on multiyear
contracts, with installments collectible over the term of the contract. For
these contracts, the license fee portion of the receivable is discounted to its
net present value. The discount is recognized as interest income over the term
of the receivables, and amounted to $19,562,000, $18,219,000 and $9,312,000 for
fiscal 2002, 2001 and 2000, respectively. At March 31, 2002, current accounts
receivable includes installments on multiyear contracts totaling $292,105,000
due within the year ending March 31, 2003. Non-current accounts receivable at
March 31, 2002 amounted to $306,751,000, and are due approximately $190,182,000,
$85,836,000, $23,619,000 and $7,114,000 in each of the years ending March 31,
2004 through 2007, respectively.
35
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all mainframe
software license agreements for at least one year, and for most distributed
product agreements for three months. Maintenance is renewable thereafter for an
annual fee. Maintenance fees are deferred and recognized as revenue on a ratable
basis over the maintenance period.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees are also included in deferred revenue for those
contracts that are being recognized on a ratable basis.
Professional services fees - Revenues from professional services are recognized
in the period the services are performed, provided that collection of the
related receivable is deemed probable. Professional services fees are generally
based on hourly or daily rates; however, for services rendered under fixed-price
contracts, revenue is recognized using the percentage of completion method.
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 zero coupon bonds, U.S.
Treasury notes, 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
current assets. 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,
which are generally estimated to be 39 years for buildings and three to ten
years for furniture and fixtures, computer equipment and software. Leasehold
improvements are amortized over the term of the lease, or the estimated life of
the improvement, whichever is less. Depreciation and amortization of property
and equipment totaled $26,993,000, $28,031,000 and $23,069,000 for the years
ended March 31, 2002, 2001 and 2000, respectively.
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, 2002 and 2001 is $29,723,000 and $48,353,000, 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
Company were $115,626,000, $116,147,000 and $95,629,000 in fiscal 2002, 2001 and
2000, respectively, of which $13,292,000, $13,530,000 and $14,496,000,
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 amounted to $32,081,000, $28,126,000
and $20,672,000 in fiscal 2002, 2001 and 2000, respectively. Included in the
fiscal 2002 total is additional amortization of $4,328,000 related to acquired
technology that is no longer utilized in the Company's products.
Goodwill has been amortized over periods ranging from ten to twenty years using
the straight-line method. Goodwill amortization expense was $38,926,000,
$42,092,000 and $25,586,000, for the years ended March 31, 2002, 2001 and 2000,
respectively. The Company regularly evaluates the
36
remaining goodwill to determine whether later events and circumstances warrant
revised estimates of useful lives or impairment charges. To evaluate the
carrying value of these assets, the Company utilizes a discounted cash flow
approach. This analysis requires judgement regarding discount rates, revenue
growth and other variables that impact the net realizable value or fair value of
those assets, as applicable. Actual future cash flows and other assumed
variables could differ from estimates. During fiscal 2002, the Company recorded
an aggregate charge of $387,418,000 to recognize impairment of goodwill
resulting from the restructuring announced on March 31, 2002 ($342,922,000), the
transfer of the professional services engineering division to an unrelated third
party in December 2001 ($9,298,000) and a change in technology related to its
distributed products ($35,198,000).
Effective April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under this pronouncement, goodwill and those intangible
assets with indefinite lives will no longer be amortized, but rather will be
tested for impairment annually and/or when events or circumstances indicate that
their fair value has been reduced below carrying value. The Company has
evaluated its remaining goodwill as of April 1, 2002, and has determined there
will be no impairment upon adoption of SFAS No. 142.
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, 2002, the fair
value of non-current receivables was approximately $304,043,000 compared to the
carrying amount of $306,751,000. At March 31, 2001, the fair value of
non-current receivables was approximately $349,216,000 compared to the carrying
amount of $356,431,000. Fair value 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 their
respective local currency as their functional currency. Accordingly, assets and
liabilities in the consolidated balance sheets have been translated at the rate
of exchange at the respective balance sheet dates, and revenues and expenses
have been translated at average exchange rates prevailing during the year the
transactions occurred. Translation adjustments have been excluded from the
results of operations and are reported as accumulated other comprehensive 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 balances due to or 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
$1,321,000, $2,487,000 and $464,000 for the years ended March 31, 2002, 2001 and
2000, respectively. These amounts are included in "sales and marketing" in the
consolidated statements of operations.
At March 31, 2002, the Company had contracts maturing through April 2002 to sell
$12,415,000 and purchase $6,896,000 in foreign currencies. At March 31, 2001,
the Company had contracts maturing through April 2001 to sell $43,115,000 in
foreign currencies.
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.
37
Business Segments - The Company's two principal operating segments are products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
Recently Issued Accounting Pronouncements - Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and is effective
for all fiscal years beginning after December 15, 2001. This statement retains
the impairment loss recognition and measurement requirements of SFAS No. 121. In
addition, it requires that one accounting model be used for long-lived assets to
be disposed of by sale, and broadens the presentation of discontinued operations
to include more disposal transactions. The Company adopted this statement on
April 1, 2002; however, it is not expected to have any impact on its financial
position or results of operations.
2. ACQUISITIONS
Fiscal 2001 Acquisitions:
During fiscal 2001, the Company completed the acquisitions of Optimal Networks
Corporation, a developer of e-business performance measurement tools, for
$5,000,000 in cash and assumed liabilities and Nomex, Inc., a privately-held
provider of web design and development services located in Montreal, Canada, for
approximately $8,900,000 in cash. These acquisitions have been accounted for as
purchases, and, accordingly, assets and liabilities acquired have been recorded
at fair value as of their respective acquisition dates. The aggregate amount by
which the acquisition cost exceeded the fair value of the net assets acquired
was approximately $10,500,000.
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.
The pro forma unaudited consolidated results of operations, assuming the fiscal
2000 acquisitions had occurred as of the beginning of fiscal 2000, would include
revenues of $2,394,000,000, net income of $342,000,000 and diluted earnings per
share of $0.89. 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 fiscal 2000, nor are they necessarily
indicative of future consolidated results.
38
3. INVESTMENTS
A summary of securities classified as held to maturity at March 31, 2002 and
2001 is set forth below (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2002: Cost Gains Losses Value
- --------------- --------- ---------- ---------- ---------
Municipal Obligations $ 94,987 $ 286 $ 207 $ 95,066
Tax Advantage Auction
Rate Securities 13,200 13,200
Tax Free Auction
Rate Securities 71,176 1 71,175
US Treasury Notes 4,956 17 4,939
Zero Coupon Bonds 4,750 20 4,730
--------- --------- --------- ---------
Securities classified as
held to maturity $ 189,069 $ 286 $ 245 $ 189,110
========= ========= ========= =========
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
========= ========= ========= =========
Scheduled maturities of securities classified as held to maturity at March 31,
2002 were as follows (in thousands):
Amortized Fair
Cost Value
---------- ---------
Due in:
2003 $ 133,503 $ 133,645
2004 51,057 51,014
2005 4,509 4,451
--------- ---------
Total $ 189,069 $ 189,110
========= =========
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 or 2002. The Company uses the specific identification method
as a basis for determining cost and calculating realized gains.
39
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
<Table>
<Caption>
March 31,
------------------------
2002 2001
-------- --------
Land $ 1,776 $ 1,776
Construction in progress 117,160 25,166
Buildings 28,788 28,780
Leasehold improvements 26,099 24,226
Furniture and fixtures 52,621 52,780
Computer equipment and software 86,438 101,105
-------- --------
312,882 233,833
Less accumulated depreciation and
amortization 113,517 108,033
-------- --------
Total $199,365 $125,800
======== ========
</Table>
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 building with retail and related amenities for a current
estimated cost of $350 million. All amounts included in construction in progress
relate to this building.
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2002, the Company held a 33.3% interest in CareTech Solutions, Inc.
(CareTech) and a 49% interest in Foresee Results, Inc. (Foresee). For the years
ended March 31, 2001 and 2000, the Company held investments in two other
companies in similar lines of business. These two companies were closed in
fiscal 2001. The investments in these companies are accounted for under the
equity method. The Company records its share of income or loss against its net
investment in the company. The net investment balance is included in other
assets. At March 31, 2002, the net investment balance in partially owned
companies was $1,280,000. At March 31, 2001, the net amount was a credit of
$1,232,000. For the years ended March 31, 2002, 2001 and 2000, the Company
recognized a net loss of $819,000, $21,693,000 and $764,000, respectively, from
these investments, which is included in general and administrative expenses.
At March 31, 2002, CareTech owes the Company $18,800,000 resulting from the
transfer of a contract to provide professional services to a large hospital
complex from the Company to CareTech. The note, which equaled the Company's
investment in the contract, is included in other assets and is payable over ten
years, the term of the transferred contract. Interest is payable quarterly at
5.25%. Prior to this transfer, CareTech was providing services under this
agreement as a sub-contractor to the Company. As of January 1, 2002, CareTech
bills these services directly to the hospital.
Foresee was incorporated in October 2001. The Company has pledged $4,000,000 in
equity funding and $6,000,000 in additional loans, provided that Foresee meets
certain milestones in their development process. As of March 31, 2002,
$3,000,000 was paid against the equity pledge, with the balance of $1,000,000
paid in April 2002.
6. RESTRUCTURING AND IMPAIRMENT CHARGES
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
which will reorganize its operating divisions, primarily the professional
services segment. The plan resulted in total charges of $389,852,000, including
$342,922,000 for the impairment of goodwill recognized in the acquisition of
certain professional services businesses, principally Data Processing Resources
Corporation. These
40
changes are designed to increase profitability in the future by better aligning
cost structures with current market conditions.
The restructuring plan includes a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees will be terminated as a
result of the reorganization. Prior to year end, the Company communicated
benefits available to employees under the plan. A majority of affected employees
are expected to be terminated during the first quarter of fiscal 2003. As of
March 31, 2002, 74 employees have been terminated.
In conjunction with the development of the restructuring plan, the Company
evaluated the carrying value of goodwill and other intangible assets related to
the professional services business, and recorded an impairment charge related to
the Company's prior services acquisitions. Certain professional services offices
acquired as part of those acquisitions have not achieved critical mass or a
sustained level of profitability and were closed in April 2002 as part of the
restructuring plan. The Company utilized discounted cash flow analyses to value
the remaining business, and recognized goodwill impairment based upon current
estimated fair market values.
The following table summarizes the restructuring and impairment charges taken in
fiscal 2002 (in thousands):
<Table>
<Caption>
Completed Remaining
as of Accrual at
Total Charges March 31, 2002 March 31, 2002
------------- -------------- --------------
Employee termination benefits $ 19,012 $ 553 $ 18,459
Facilities costs (primarily lease
abandonments) 26,341 676 25,665
Legal, consulting and outplacement
costs 1,299 1,299
Other 278 278
-------- -------- --------
Restructuring charge 46,930 1,229 45,701
Goodwill impairment charge 342,922 342,922 --
-------- -------- --------
Total charges $389,852 $344,151 $ 45,701
======== ======== ========
</Table>
7. 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 2002, the maximum borrowings under the credit facility were $140
million; average borrowings were $16.7 million at a weighted average interest
rate of 7.97%. At March 31, 2002, there was no amount outstanding under this
facility.
The total commitment under the credit facility was permanently reduced to $500
million on February 13, 2002.
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.
41
Cash paid for interest totaled approximately $3,622,000, $28,627,000 and
$21,861,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
8. CAPITAL STOCK
Preferred Stock Purchase Rights - Under the Company's shareholder rights plan,
each 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.
Common Stock Warrant - In November 2001, the Company issued a non-transferrable
warrant entitling a customer to purchase one million shares of common stock at
$10.51 per share in exchange for approximately $2,800,000 in cash, which was the
warrant's fair value at the date of issue. The warrant expires on November 16,
2004 or on the fifth day after the Company's common stock trades at an average
price of $20.00 per share for five consecutive days.
9. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share data were computed as follows (in thousands,
except for per share data):
Year Ended March 31,
------------------------------------
2002 2001 2000
--------- -------- --------
Basic earnings (loss) per share:
--------------------------------
Numerator: Net income (loss) $(245,255) $119,083 $351,976
--------- -------- --------
Denominator:
Weighted-average common shares outstanding 371,786 365,192 358,560
--------- -------- --------
Basic earnings (loss) per share $ (0.66) $ 0.33 $ 0.98
========= ======== ========
Diluted earnings (loss) per share:
----------------------------------
Numerator: Net income (loss) $(245,255) $119,083 $351,976
--------- -------- --------
Denominator:
Weighted-average common shares outstanding 371,786 365,192 358,560
Dilutive effect of stock options and warrants - 7,617 26,131
--------- -------- --------
Total shares 371,786 372,809 384,691
--------- -------- --------
Diluted earnings (loss) per share $ (0.66) $ 0.32 $ 0.91
========= ======== ========
42
10. INCOME TAXES
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows (in thousands):
<Table>
<Caption>
March 31,
---------------------
2002 2001
-------- --------
Deferred tax assets:
Deferred maintenance $ 11,915 $ 374
Amortization of intangible assets 69,774 17,388
Restructuring accrual 15,702
Allowance for doubtful accounts 5,307 5,743
Net operating loss carryforwards 24,201 29,670
Other 34,399 35,874
-------- --------
161,298 89,049
Less valuation allowance 1,686 5,551
-------- --------
Net deferred tax assets 159,612 83,498
Current portion 41,995 32,358
-------- --------
Long term portion $117,617 $ 51,140
======== ========
Deferred tax liabilities:
Capitalized research and development costs $ 13,746 $ 13,800
Depreciation 10,892 5,059
Other 48,279 53,429
-------- --------
Total deferred tax liabilities 72,917 72,288
Current portion 184 347
-------- --------
Long term portion $ 72,733 $ 71,941
======== ========
</Table>
The income tax provision (benefit) includes the following (in thousands):
<Table>
<Caption>
Year Ended March 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal $ 56,794 $ 50,711 $ 181,664
Foreign 8,673 16,370 9,268
State 4,426 5,800 24,626
--------- --------- ---------
Total current tax provision 69,893 72,881 215,558
--------- --------- ---------
Deferred:
Federal (71,435) (3,297) (1,638)
Foreign 1,081 3,402 (4,120)
State (5,131)
--------- --------- ---------
Total deferred tax expense (benefit) (75,485) 105 (5,758)
--------- --------- ---------
Total income tax provision (benefit) $ (5,592) $ 72,986 $ 209,800
========= ========= =========
</Table>
43
The Company's income tax expense (benefit) differed from the amount computed on
pre-tax income (loss) at the U.S. federal income tax rate of 35% for the
following reasons (in thousands):
<Table>
<Caption>
Year Ended March 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Federal income tax (benefit) at
statutory rates $ (87,796) $ 67,224 $ 196,622
Increase (decrease) in taxes:
Export sales benefit (4,290) (8,024) (9,537)
State income taxes, net (458) 3,770 16,007
Goodwill amortization and impairment 88,600 8,831 5,291
Other, net (1,648) 1,185 1,417
--------- --------- ---------
Provision (benefit) for income taxes $ (5,592) $ 72,986 $ 209,800
========= ========= =========
</Table>
At March 31, 2002 the Company has net operating loss carryforwards for income
tax purposes of approximately $84,196,000 which expire as follows (in
thousands):
<Table>
Year ending March 31:
2003 $ 5,101
2004 3,979
2005 5,879
2006 6,046
2008 832
2009 18
2010 2,077
2011 3,835
2014 899
Unlimited carryforward 55,530
</Table>
Of this amount, approximately $2,229,000 is available to offset U.S. federal
income taxes and approximately $81,967,000 relates to various foreign
jurisdictions.
Cash paid for income taxes totaled approximately $65,935,000, $41,538,000 and
$136,838,000 for the years ended March 31, 2002, 2001 and 2000, respectively.
11. SEGMENT INFORMATION
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help IT professionals efficiently
develop, implement and support the applications that run their businesses.
The Company's products are designed to support three key activities within the
application development process: building, testing and managing the application
to optimize performance in production. The Company also offers a broad range of
data processing professional services including business systems analysis,
design and programming, software conversion and system planning and consulting.
No single customer provides more than 10% of the Company's revenue.
44
The Company evaluates the performance of its segments based primarily on
operating profit (loss) before corporate expenses, and other income (expense)
including restructuring charges, goodwill impairment, purchased research and
development and net interest income (expense). The allocation of income taxes is
not evaluated at the segment level. Financial information for the Company's
business segments is as follows (in thousands):
Year Ended March 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues:
Products:
Mainframe $ 687,286 $ 762,778 $ 1,031,273
Distributed systems 164,096 189,328 220,681
----------- ----------- -----------
Total products revenue 851,382 952,106 1,251,954
Services 877,165 1,057,944 978,674
----------- ----------- -----------
Total revenues $ 1,728,547 $ 2,010,050 $ 2,230,628
=========== =========== ===========
Income (loss) from operations:
Products $ 276,809 $ 305,143 $ 627,655
Services (2,788) 18,707 31,964
Corporate staff (73,670) (89,126) (64,800)
Goodwill amortization (38,926) (42,092) (25,586)
----------- ----------- -----------
Income (loss) from operations before goodwill
impairment and other charges 161,425 192,632 569,233
Goodwill impairment charge (387,418)
Restructuring charge (46,930)
Purchased research and development (17,900)
Other income (expense) 22,076 (563) 10,443
----------- ----------- -----------
Income (loss) before income taxes $ (250,847) $ 192,069 $ 561,776
=========== =========== ===========
Financial information regarding geographic operations are presented in the table
below (in thousands):
Year Ended March 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues:
United States $1,316,536 $1,560,798 $1,736,511
Europe 307,831 323,882 351,427
Other international operations 104,180 125,370 142,690
---------- ---------- ----------
Total revenue $1,728,547 $2,010,050 $2,230,628
========== ========== ==========
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than 10% of the
Company's long-lived assets, other than financial instruments, are located
outside of the United States.
45
12. 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 2016. 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 Total Accrued as of Remaining
March 31, Commitment March 31, 2002 Commitment
- ------------ ---------- -------------- -----------
2003 $ 38,948 $ 7,330 $ 31,618
2004 31,791 6,755 25,036
2005 23,295 5,133 18,162
2006 17,421 4,505 12,916
2007 15,030 4,519 10,511
Thereafter 21,904 10,507 11,397
--------- -------- ---------
Total $ 148,389 $ 38,749 $ 109,640
========= ======== =========
Accrued amounts at March 31, 2002 represent the remaining commitments on
abandoned leases. Lease expense for the years ended March 31, 2002, 2001 and
2000 under all operating leases amounted to approximately $54,960,000,
$39,652,000 and $34,180,000, respectively.
13. BENEFIT PLANS
Employee Stock Ownership Plan - In July 1986, the Company established an
Employee Stock Ownership Plan (ESOP) and Trust. Under the terms of the ESOP, the
Company makes annual contributions to the Plan for the benefit of substantially
all employees of the Company. The contribution may be in the form of cash or
common shares of the Company. The Board of Directors may authorize contributions
between a maximum of 25% of eligible compensation and a minimum sufficient to
cover current obligations of the Plan. The Company made contributions of
$10,657,000, $10,685,000 and $6,496,000 in fiscal 2002, 2001 and 2000,
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 under which the
Company was authorized to issue up to eight million shares of common stock to
eligible employees, all of which were distributed as of March 2001. During
fiscal 2002, the shareholders approved international and domestic employee stock
purchase plans authorizing 15 million shares for issuance to eligible employees.
Currently, the offering periods commence on April 1 and October 1 each year.
Under the terms of the plan, employees can elect to have up to 10% of their
compensation withheld to purchase Company stock at the close of the offering
period. The value of the stock purchased in any calendar year cannot exceed
$25,000. The purchase price is 85% of the first or last day's average high and
low price for each offering period, whichever is lower. During fiscal 2002, 2001
and 2000, the Company sold approximately 1,007,000, 4,515,000 and 1,009,000
shares, respectively, to eligible employees under the plan.
Employee Stock Option Plans - The Company adopted five employee stock option
plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees and directors
of the Company, of which approximately 39,613,000 options were outstanding at
March 31, 2002. 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 2002, the Company granted approximately 4,375,000 options under the five
different Employee Stock Option Plans. Options granted under these plans vest in
cumulative annual installments over a three to five year period. All options
were granted at fair market value and expire ten years from the date of grant.
46
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval. 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. 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. During
fiscal 2002, the Company granted approximately 26,997,000 options under the
Broad Based Stock Option Plan. Approximately 24,667,000 options were outstanding
at March 31, 2002. Options granted under the Broad Based Stock Option Plan vest
every six months over a four year period. All options were granted at fair
market value and expire ten years from the date of grant.
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 2002, approximately 8,600 options were granted under the
Non-Employee Director Stock Option Plan. Approximately 1,491,000 options were
outstanding at March 31, 2002.
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 have been granted stock options out of the Non-Employee
Director Stock Option Plan or the Fiscal 1999 Stock Option Plan.
At March 31, 2002, approximately 93,000 options were outstanding under plans
that were terminated by the Company, of which virtually all 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 2002, approximately 1,072,000 options were exercised under the
Replacement Stock Option Award program for which approximately 878,000
replacement options were granted.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Stock options are granted at current market prices at the date of
grant, therefore, no compensation cost has been recognized for its fixed stock
option plans and its stock purchase plan.
47
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 2002, 2001 and
2000 consistent with the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", Compuware's net income (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated below:
Year Ended March 31,
--------------------------------------
2002 2001 2000
--------- -------- --------
Net income (loss):
As reported $(245,255) $119,083 $351,976
Pro forma (307,170) 62,154 286,403
Earnings (loss) per share:
As reported:
Basic earnings (loss) per share (0.66) 0.33 0.98
Diluted earnings (loss) per share (0.66) 0.32 0.91
Pro forma:
Basic earnings (loss) per share (0.83) 0.17 0.80
Diluted earnings (loss) per share (0.83) 0.17 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 2002, 2001 and 2000,
respectively: expected volatility of 64.55%, 95.55% and 85.85%; risk-free
interest rates of 4.7%, 4.6% and 6.4%; and expected lives at date of grant of
4.1, 5.0 and 4.8 years. Dividend yields were not a factor as the Company has not
issued cash dividends since 1986, 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 2002, 2001
and 2000 were $2.13, $3.12 and $12.00, respectively.
48
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2002, 2001 and 2000, and changes
during the years ending on those dates is as follows (shares in thousands):
2002 2001 2000
--------------------------- ----------------------------- ---------------------------
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 46,272 $ 13.53 44,965 $ 13.93 48,801 $ 11.21
Granted 31,380 9.46 11,482 9.80 8,392 20.90
Exercised (4,022) 5.02 (2,459) 5.52 (7,704) 4.77
Exchanged (878) 12.07 (1,973) 11.43 (1,703) 22.58
Forfeited (6,888) 12.62 (5,743) 15.45 (2,821) 17.20
-------- -------- --------
Outstanding at
year end 65,864 $ 12.30 46,272 $ 13.53 44,965 $ 13.93
======== ======== ========
Options exercisable
at year end 27,581 $ 12.42 20,140 $ 9.77 14,769 $ 8.79
======== ======== ========
Weighted-average
fair value of options
granted during the
year $ 5.09 $ 7.30 $ 15.52
======== ======== ========
The following tables summarize information about stock options outstanding at
March 31, 2002 (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 42,440 7.68 $ 8.38 15,148 $ 6.85
10.01 TO 20.00 13,210 6.24 14.96 6,663 13.80
20.01 TO 30.00 9,356 5.53 24.55 5,344 24.58
30.01 TO 42.00 858 6.35 32.14 426 32.65
-------- ----------
65,864 7.07 12.30 27,581 12.42
======== ==========
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
------------------------ ----------------------- -------------------------
Equity compensation plans
approved by security holders 41,197 $14.05 7,257
Equity compensation plans not
approved by security holders 24,667 9.39 24,801
The maximum number of shares for which additional options may be granted was
32,058,441 at March 31, 2002, 55,672,142 at March 31, 2001 and 9,437,993 at
March 31, 2000. At March 31, 2002, a total of 98,921,972 shares of the Company's
common stock are reserved for issuance under the warrant and all option plans.
Income tax benefits associated with the exercise of stock options are reflected
as adjustments to additional paid-in capital.
49
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2002 and 2001 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Fiscal 2002:
Revenues $ 446,748 $ 424,028 $ 450,553 $ 407,218 $ 1,728,547
Operating income (loss) 51,026 36,961 42,049 (402,959) (272,923)
Pre-tax income (loss) 55,413 42,750 48,047 (397,057) (250,847)
Net income (loss) 34,356 26,505 29,789 (335,905) (245,255)
Basic earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
Diluted earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
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
The fourth quarter of fiscal 2002 was impacted by an impairment charge of $35.2
million associated with a change in technology related to distributed products,
restructuring costs of $46.9 million and an impairment of goodwill related to
the restructuring of $342.9 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
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 in
Note 13 in the Notes to Consolidated Financial Statements which are included in
this report in Item 8 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.
51
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 30
Consolidated Balance Sheets as of March 31, 2002 and 2001 31
Consolidated Statements of Operations for each of the years
ended March 31, 2002, 2001 and 2000 32
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2002, 2001 and 2000 33
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2002, 2001 and 2000 34
Notes to Consolidated Financial Statements 35-50
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 56
Schedule II - Valuation and Qualifying Accounts and Reserves 57
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, 2002.
52
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, 2002.
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:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/S/ PETER KARMANOS, JR. Chairman of the Board, Chief Executive Officer June 25, 2002
--------------------------------- and Director (Principal Executive Officer)
Peter Karmanos, Jr.
/S/ THOMAS THEWES Vice Chairman of the Board and Director June 25, 2002
---------------------------------
Thomas Thewes
/S/ JOSEPH A. NATHAN President and Director June 25, 2002
---------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 25, 2002
--------------------------------- and Treasurer (Chief Financial and Accounting Officer)
Laura L. Fournier
/S/ DENNIS W. ARCHER Director June 25, 2002
---------------------------------
Dennis W. Archer
/S/ ELIZABETH A. CHAPPELL Director June 25, 2002
---------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 25, 2002
---------------------------------
Elaine K. Didier
/S/ BERNARD M. GOLDSMITH Director June 25, 2002
---------------------------------
Bernard M. Goldsmith
/S/ WILLIAM O. GRABE Director June 25, 2002
---------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 25, 2002
---------------------------------
William R. Halling
/S/ W. JAMES PROWSE Director June 25, 2002
---------------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director June 25, 2002
---------------------------------
G. Scott Romney
/S/ LOWELL P. WEICKER, JR. Director June 25, 2002
---------------------------------
Lowell P. Weicker, Jr.
</Table>
53
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. (11)
3(i).5 Amended and Restated Bylaws of Compuware Corporation, as of
October 2001. (12)
4.0 Rights Agreement dated as of October 25, 2000 between
Compuware Corporation and Equiserve Trust Company, N.A., as
Rights Agent. (8)
4.1 Warrant dated November 16, 2001 (13)
*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.
(9) Incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2000.
54
(10) Incorporated by reference to Exhibit 99.(B)(2) to the
Company's Amendment No. 3 (Final Amendment) to
Schedule 14D-1.
(11) Incorporated by reference to the corresponding
exhibit to the fiscal 2001 Annual Report on Form
10-K.
(12) Incorporated by reference to the corresponding
exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001.
(13) Incorporated by reference to the corresponding
exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2001.
55
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, 2002 and 2001 and for each of the three years
in the period ended March 31, 2002, and have issued our report thereon dated May
6, 2002; 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 6, 2002
56
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(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, 2002 $ 21,267 10,037 8,114 23,190
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
- -----------------------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
57
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent