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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2002, the last business day of the registrant's
most recently completed second fiscal quarter, was $903,217,194, based upon
the closing sales price of the common stock on that date of $3.05 as reported on
the Nasdaq Stock Market. 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.
There were 382,561,037 shares of $.01 par value common stock outstanding as of
June 2, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2003 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
1
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 13
3. Legal Proceedings 13
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 54
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
14. Controls and Procedures 55
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 56
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 currently
located at 31440 Northwestern Highway, Farmington Hills, Michigan 48334-2564,
and our telephone number is (248) 737-7300. Our executive offices are expected
to move to our new headquarters during the next two months. The new executive
offices will be at One Campus Martius, Detroit, Michigan 48226, and our new
telephone number will be (313) 227-7300.
We operate in two business segments in the software industry: products and
services. See Note 13 of Notes to Consolidated Financial Statements.
The following discussion may contain certain forward-looking statements within
the meaning of the federal securities laws. Numerous important factors,
including those discussed under Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations under the caption Forward-Looking
Statements could cause actual results to differ materially from those indicated
by such forward-looking statements.
Our Internet address is www.compuware.com. We make available, free of charge on
the web site, copies of reports we file with the Securities and Exchange
Commission as soon as reasonably practicable after we electronically file such
reports. The information contained on our web site should not be considered part
of this report.
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.
From our perspective, the application life cycle 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.
3
On March 31, 2002, we began to operate under a 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.
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 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
File-AID $182,224 $230,820 $259,835 13.2% 13.3% 12.8%
Abend-AID 155,769 186,827 211,375 11.3 10.7 10.4
XPEDITER 110,880 136,848 142,123 8.1 7.9 7.0
QA Center Mainframe 24,527 30,880 45,969 1.8 1.8 2.2
STROBE 80,080 101,911 103,476 5.8 5.8 5.1
-------- -------- -------- ---- ---- ----
Total Mainframe Revenue 553,480 687,286 762,778 40.2 39.5 37.5
-------- -------- -------- ---- ---- ----
UNIFACE and Optimal 42,283 43,353 43,083 3.1 2.5 2.1
File-AID/Client Server 4,400 5,303 8,911 0.3 0.3 0.4
DevPartner 24,290 26,722 35,944 1.8 1.5 1.8
QA Center Distributed 30,291 31,221 37,389 2.2 1.8 1.8
Vantage 53,152 57,497 64,001 3.9 3.3 3.2
-------- -------- -------- ---- ---- ----
Total Distributed Product Revenue 154,416 164,096 189,328 11.3 9.4 9.3
-------- -------- -------- ---- ---- ----
Total Product Revenue $707,896 $851,382 $952,106 51.5% 48.9% 46.8%
======== ======== ======== ==== ==== ====
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--Customers use our Abend-AID,
DevPartner, File-AID, Optimal, QACenter, STROBE, UNIFACE, Vantage and XPEDITER
products to achieve productivity gains.
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.
4
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 developers 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, analyze, edit, compare, move and transform data across
all strategic environments. File-AID is used to quickly resolve production data
problems and manage ongoing changes to data and databases at any stage of the
application life cycle.
ABEND-AID PRODUCTS
Abend-AID products assist IT professionals to quickly diagnose and resolve
application and system failures. The products automatically collect program and
environmental information, analyze the information and present diagnostic and
supporting data in a way that can be easily understood by all levels of IT
staff.
XPEDITER PRODUCTS
XPEDITER interactive debugging products help developers integrate enterprise
applications, build new applications and web-enable legacy ones, satisfying
corporate scalability, reliability and security requirements. XPEDITER tools
deliver powerful analysis and testing capabilities across multiple environments,
helping developers test more accurately and reliably, in less time.
QACENTER MAINFRAME PRODUCTS
QACenter Mainframe 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 these applications under production conditions without requiring actual
users at terminals. Its powerful functions and features enhance unit,
concurrency, integration, migration, capacity and stress testing.
5
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 applications, IT organizations
find themselves under increasing pressure to rapidly create reliable,
top-performing 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 the entire
development team, including architects, developers, testers and operating
analysts. These products support requirements management, application
development, unit and functional testing and application performance analysis.
Our distributed products also help the development team in application profiling
and rapid new application rollout, as well as in managing server and network
application availability on multiple platforms including Microsoft Windows and
Microsoft .NET, J2EE, AIX, Solaris and DC2000.
Our distributed systems software products are grouped into 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 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 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
6
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 test data management tool designed to
help developers, QA teams and DBAs work efficiently with data as they develop,
test and support distributed applications. With File-AID/CS application
developers can extract, load, copy, convert, transform, compare and edit all
their data without having to be an expert in each database environment. All data
related tasks are performed through an easy to use interface eliminating the
need to write programs or scripts, code SQL or use multiple utilities.
DEVPARTNER PRODUCTS
DevPartner Studio helps developers build reliable, high-performance applications
and components for Microsoft .NET and for native Windows by quickly solving
problems with .NET migration, legacy integration, locating errors in application
code and memory, tuning runtime performance across distributed applications, and
assuring thorough testing.
DevPartner Studio Enterprise Edition combines powerful error detection,
performance, memory, coverage and requirements management with comprehensive
project tracking, defect management, task management and workflow automation.
DevPartner Studio Enterprise Edition supports development of high-performing
applications and components for Microsoft .NET and for native Windows.
DevPartner Java Edition pinpoints runtime errors, memory problems and
performance bottlenecks and identifies code coverage/stability across all tiers
of a Java application environment. Using DevPartner Java Edition, developers and
testers can quickly prioritize and focus on solving the complexity, quality and
performance problems associated with Java development.
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 and TestPartner--Functional test automation tools that allow organizations
to validate business-critical applications whether distributed, 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 management solution that serves as a central repository
and communication hub for all development-related activities and test-related
activities and data.
Reconcile--An enterprise-wide requirements management system. Reconcile allows
project teams to create, change, track, evaluate and report project
requirements.
QALoad--An automated load testing solution for distributed, ERP and e-commerce
applications.
7
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 new distributed
application rollout. Vantage products include:
ClientVantage--Monitors the performance and availability of critical business
applications at the point of delivery--the client user interface.
NetworkVantage--Shows how users and applications consume critical shared network
resources; provides the information necessary to troubleshoot problems related
to unplanned use, unauthorized use, or poor configuration of the network;
supports WAN bandwidth sizing decisions; and provides historical trending data
for use in network growth management.
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--Pinpoints the source of poor transaction performance.
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--Helps ensure successful deployment of new applications.
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 2003, we continued to experience a high customer
maintenance renewal rate.
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 Detroit,
Michigan, Cambridge, Massachusetts, La Jolla, California, Nashua, New Hampshire,
and in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee based on licensed or list price of the 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 2003, 2002 and 2001, maintenance fees
represented approximately 30.0%, 24.9% and 22.4%, respectively, of our total
revenues.
8
TECHNOLOGY DEVELOPMENT AND SUPPORT
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives are also
included here.
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.
Product development is performed primarily at our headquarters in Detroit,
Michigan; and at our offices in Amsterdam, The Netherlands; Cambridge,
Massachusetts; La Jolla, California; and Nashua, New Hampshire.
Total technology development and support costs were $154.7 million, $177.6
million and $200.7 million during fiscal 2003, 2002 and 2001, respectively, of
which $11.4 million, $13.3 million and $13.5 million, respectively, were
capitalized.
Our software products are distributed as object code on standard magnetic
cartridges, diskettes and CDs, together with printed documentation. We also
distribute product electronically. We purchase cartridges, diskettes, CDs and
documentation printing from outside vendors. The product duplication, packaging
and distribution to our customers is currently 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, NearShore
development services 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. In addition, Compuware
offers a NearShore Development Center that serves customers looking for
flexible, cost-effective and high-quality application services delivered
remotely from our facility in Montreal.
9
COMPUWARE APPLICATION RELIABILITY SOLUTION (CARS)
In June 2003, we announced the availability of CARS. CARS combines our
professional service team testing professionals with a proven methodology and
our software products configured in a unique, industry-leading tools workbench
to produce a complete quality management solution. Our Application Quality
Workbench (AQW) can be used to instill discipline, automate processes and ensure
consistency and repeatability throughout the testing life cycle, resulting in
the delivery of reliable, high quality applications. CARS allows our customers'
IT organizations to leverage their core competency of developing applications.
Data gathered from the AQW can be quickly shared with developers, thereby
improving the effectiveness of their efforts.
CUSTOMERS
Our products and professional services are used by the information technology
departments of a wide variety of commercial and government organizations.
Ford Motor Company accounted for approximately 12% of our total revenues during
fiscal 2003. None of our customers accounted for 10% or more of our total
revenues during fiscal 2002 or 2001.
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 giving us a presence in 54 countries.
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. We consider more than 40
firms to be directly competitive with one or more of our products. These
competitors include BMC Software, Inc., Borland, Computer Associates
International, Inc., International Business Machines Corporation (IBM) and
Mercury Interactive 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.
The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts International
Corporation, Keane, Inc. and numerous other regional and local firms in the
markets in which we have professional services offices. Several of these
competitors have substantially greater financial, marketing, recruiting and
training resources than we do. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
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We believe, based on our current market position, that we have competed
effectively in the software products and professional services 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 and services offerings.
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 21 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. See Item 3, Legal Proceedings, for a description of
certain pending litigation regarding proprietary rights.
11
EMPLOYEES
As of March 31, 2003, we employed 9,356 people worldwide, with 1,750 in products
sales, sales support and marketing; 1,505 in technology development and support;
5,317 in professional services and 784 in other general and administrative
functions. Only a small number of our international employees are 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 current executive officers, who serve at the discretion of our Board of
Directors, are listed below:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 60 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 50 President and Chief Strategy Officer
Tommi A. White 52 Chief Operating Officer
Henry A. Jallos 54 Executive Vice President, Global Account Management
Laura L. Fournier 50 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas Costello, Jr. 49 Vice President, General Counsel and Secretary
Peter Karmanos, Jr., is a founder of the Company and has served as Chairman of
the Board since November 1978, as Chief Executive Officer since July 1987 and as
President from January 1992 through October 1994.
Joseph A. Nathan has served as President since October 1994 and as Chief
Operating Officer from October 1994 through October 2001. Mr. Nathan was
appointed Chief Strategy Officer in April 2003. 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. 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.
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.
12
Thomas Costello, Jr., has served as General Counsel since January 1985, Vice
President since January 1995 and Secretary since May 1995. Mr. Costello joined
Compuware in June 1984 as Assistant General Counsel.
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 13 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 Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Software Products - 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 13 of Notes to
Consolidated Financial Statements, included in Item 8 of this report.
ITEM 2. PROPERTIES
We are building a new corporate headquarters office building in the city of
Detroit which will consolidate our corporate office functions and Detroit-area
operations. As of June 2, 2003, approximately 40% of the metropolitan
Detroit-based employees have relocated to the new headquarters building. We own
the new building which is approximately 1.1 million square feet, including
approximately 60,000 square feet to be leased to third parties for retail and
related amenities. We also own a Farmington Hills, Michigan facility which is
approximately 225,000 square feet and a building in nearby West Bloomfield which
is approximately 40,000 square feet. In addition, we lease approximately 80,000
square feet in a Farmington Hills office park, as well as approximately 133,000
square feet in nearby Southfield. We intend to sell our Farmington Hills
facility once all employees have been relocated. These metropolitan Detroit
facilities house our executive offices, primary research and development lab,
principal marketing department, a professional services office, customer service
and support teams and our production and distribution facilities.
We lease approximately 80 professional services and sales offices in 25
countries, including four remote product research and development facilities.
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 (i) IBM has copied and misappropriated portions of
our mainframe software tools and has wrongfully used our technology to develop
competing products; (ii) IBM made false representations regarding our software
products in violation of the Lanham Act; and (iii) 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.
On January 21, 2003, the Company filed suit against Moody's Investors Services,
Inc. in the United States District Court in the Eastern District of Michigan
alleging breach of contract, defamation, silent fraud, and violation of the
Investment Advisors Act. The Company claims, among other things, that Moody's
failed to deal fairly and did not operate in good faith when it lowered the
Company's credit
13
rating two full levels on August 13, 2002. The suit seeks $245,000 in
compensatory damages (the total fees paid to Moody's during the course of the
business relationship), punitive damages, the costs related to the litigation
and reasonable attorney fees.
The Company is a party to a consolidated class action proceeding filed in the
United States District Court for the Eastern District of Michigan. The original
lawsuits were filed on September 20, 2002 and October 10, 2002 respectively. On
May 1, 2003, the cases were consolidated. The matter is now titled In re
Compuware Securities Litigation. The suit was brought on behalf of purchasers of
the Company's common stock from January 1, 1999 to April 3, 2002. Principal
defendants include the Company and Peter Karmanos, Jr., Joseph A. Nathan and
Elizabeth Chappell. The plaintiffs allege that the Company failed to disclose
under the securities laws its problems with the misappropriation of its software
source code by IBM. The plaintiffs further allege that the Company omitted
and/or disseminated materially false and misleading statements concerning its
deteriorating relationship with IBM. The plaintiffs request that the court award
them monetary damages and expenses of litigation, including reasonable attorneys
fees. The Company strongly disagrees with the allegations and intends to
vigorously defend against the lawsuit. At this time, the Company's legal counsel
is preparing a responsive pleading to the lawsuit.
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 2, 2003, there were approximately 7,222 shareholders
of record of our common stock. We have not paid any cash dividends on our common
stock since fiscal 1986. 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, 2003 HIGH LOW
Fourth quarter $ 5.06 $ 3.22
Third quarter 5.78 2.75
Second quarter 5.73 2.35
First quarter 12.49 5.50
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
The Company has several stock option plans pursuant to which it grants
performance-based stock options to employees, officers, and directors, as well
as an Employee Stock Ownership Plan (ESOP), an Employee Stock Purchase Plan, and
a Replacement Stock Option Award Program. For more information about our equity
compensation plans, see Note 15 of Notes to Consolidated Financial Statements,
included in Item 8 of this report.
The following table sets forth certain information, with respect to our equity
compensation plans at March 31, 2003 (shares in thousands):
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 39,350 $13.44 7,019
Equity compensation plans not
approved by security holders 24,883 9.07 24,577
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,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 295,720 $ 417,631 $ 495,572 $ 819,247 $ 683,354
Maintenance fees 412,176 433,751 456,534 432,707 334,371
Professional services fees 667,444 889,162 1,083,050 996,120 636,636
------------ ------------ ------------ ------------ ------------
Total revenues 1,375,340 1,740,544 2,035,156 2,248,074 1,654,361
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of software license fees 30,740 34,102 37,885 28,835 26,578
Cost of professional services 611,644 840,149 973,854 877,453 466,996
Technology development and support 143,289 164,280 187,155 154,086 120,951
Sales and marketing 264,012 294,496 351,214 377,920 344,214
Administrative and general 191,131 207,166 250,324 214,961 185,817
Goodwill amortization and impairment (1 and 2) 426,344 42,092 25,586 4,817
Restructuring costs (2) 46,930
Purchased research and development 17,900 4,350
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,240,816 2,013,467 1,842,524 1,696,741 1,153,723
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 134,524 (272,923) 192,632 551,333 500,638
Interest and investment income (expense), net 21,691 22,076 (563) 10,443 29,403
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 156,215 (250,847) 192,069 561,776 530,041
Income tax provision (benefit) 53,113 (5,592) 72,986 209,800 180,178
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 103,102 $ (245,255) $ 119,083 $ 351,976 $ 349,863
============ ============ ============ ============ ============
Basic earnings (loss) per share (3) $ 0.27 $ (0.66) $ 0.33 $ 0.98 $ 0.95
Diluted earnings (loss) per share (3) 0.27 (0.66) 0.32 0.91 0.87
Shares used in computing net income (loss) per
share:
Basic earnings computation 377,028 371,786 365,192 358,560 366,734
Diluted earnings computation 378,440 371,786 372,809 384,691 402,036
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 581,266 $ 506,692 $ 434,902 $ 391,801 $ 550,586
Total assets 2,122,685 1,993,938 2,279,374 2,415,907 1,676,683
Long term debt - - 140,000 450,000 -
Total shareholders' equity (4) 1,331,691 1,189,851 1,377,372 1,203,872 1,079,522
(1) Effective April 1, 2002, in accordance with SFAS No. 142, the goodwill
balance is no longer being amortized on a monthly basis. Instead it is
tested at least annually for impairment. Exclusive of amortization of
goodwill, net income (loss) and earnings (loss) per share (diluted
computation) would have been ($212.4 million) and (57 cents), $153.9
million and 41 cents, $375.9 million and 98 cents and $353.9 million and
88 cents, in fiscal 2002, 2001, 2000 and 1999, respectively.
(2) Amortization and impairment of goodwill during 2002 included impairment
charges of $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 7 of Notes to Consolidated Financial Statements for more details on
these charges.
(3) See Notes 1 and 11 of Notes to Consolidated Financial Statements for the
basis of computing earnings per share.
(4) No dividends were paid during the periods presented.
All prior years have been reclassified to conform to the 2003
presentation.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates," "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect our operating results, including, without
limitation, those discussed below and contained elsewhere in this report. These
risks and uncertainties could cause actual results to differ materially from the
results implied by these or any other forward-looking statements made by us, or
on our behalf. 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.
- - Historical seasonality in license revenue cannot be relied on as an
indicator of future performance due to the current economic conditions
affecting the IT industry.
- - 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 25% to 30% 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.
- - In 2002, we filed a lawsuit against IBM alleging, among other things,
copyright infringement, misappropriation of trade secrets, intentional
interference with contractual relations and economic expectancy, false
advertising and various violations of the Lanham Act, as well as various
anti-trust law violations. We claim that IBM has misappropriated portions
of our software tools, used our technology to develop competing products,
used its monopoly power to engage in unlawful tying arrangements and
subverted competition on the merits. IBM has filed a counterclaim against
us alleging violation of six of their patents. Pursuit of this litigation
will be costly, time-consuming and may divert management's time and
attention. Our legal expenses have increased substantially and our general
and administrative expenses could further increase as a result of these
factors. In addition, IBM may seek to influence our customers and potential
customers to reduce or eliminate the amount of our products and services
that they purchase, or our lawsuit against IBM may otherwise be viewed
negatively by our customers and potential customers and cause them to
refrain from buying our products and services. Any of the foregoing
developments could adversely affect our position in the marketplace and our
results of operations.
- - 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.
17
- - In addition to the IBM claims discussed above, there can be no assurance
that other 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 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.
- - Our results could be adversely affected by increased competition and
pricing pressures. We consider over 40 firms to be directly competitive
with one or more of our products. These competitors include BMC Software,
Inc., Borland, Computer Associates International, Inc., International
Business Machines Corporation (IBM) and Mercury Interactive Corporation.
Some of these competitors have substantially greater financial, marketing,
recruiting and training resources than we do.
- - The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts
International Corporation, Keane, Inc. and numerous other regional and
local firms in the markets in which we have professional services offices.
Several of these competitors have substantially greater financial,
marketing, recruiting and training resources than we do.
- - The 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 or to reduce their
requirements for professional services, and this could adversely affect our
operating results.
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of income as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of
Total Revenues Period-to-Period
----------------------------------------- Change
Fiscal Year Ended -------------------------
March 31, 2002 2001
----------------------------------------- to to
2003 2002* 2001* 2003 2002
----------- ---------- ---------- ---------- -----------
REVENUE:
Software license fees 21.5% 24.0% 24.4% (29.2)% (15.7)%
Maintenance fees 30.0 24.9 22.4 (5.0) (5.0)
Professional services fees 48.5 51.1 53.2 (24.9) (17.9)
----------- ----------- -----------
Total revenues 100.0 100.0 100.0 (21.0) (14.5)
----------- ----------- -----------
OPERATING EXPENSES:
Cost of software license fees 2.2 2.0 1.9 (9.9) (10.0)
Cost of professional services 44.5 48.3 47.9 (27.2) (13.7)
Technology development and support 10.4 9.4 9.2 (12.8) (12.2)
Sales and marketing 19.2 16.9 17.2 (10.4) (16.1)
Administrative and general 13.9 11.9 12.3 (7.7) (17.2)
Goodwill amortization 24.5 2.1 (100.0) **
Restructuring cost 2.7 (100.0) **
----------- ----------- -----------
Total operating expenses 90.2 115.7 90.6 (38.4) 9.3
----------- ----------- -----------
Income (loss) from operations 9.8 (15.7) 9.4 149.3 (241.7)
----------- ----------- -----------
Other income (expense):
Interest and investment income 2.0 1.7 1.5 (5.8) (3.9)
Interest and other expense (0.4) (0.4) (1.5) 17.9 76.2
----------- ----------- -----------
Total other income 1.6 1.3 0.0 (1.7) **
----------- ----------- -----------
Income (loss) before income taxes 11.4 (14.4) 9.4 162.3 (230.6)
Income tax provision (benefit) 3.9 (0.3) 3.5 ** (107.7)
----------- ----------- -----------
Net income (loss) 7.5% (14.1)% 5.9% 142.0% (306.0)%
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
**Not meaningful.
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. We evaluated the carrying amount of goodwill at March
31, 2003 and determined there was no impairment in 2003. See Note 8 of Notes to
Consolidated Financial Statements included in Item 8 of this report for a
discussion of net income and earnings per share excluding amortization of
goodwill.
Effective April 1, 2002, we reorganized our operations to better allow the
products and professional services organizations to focus on meeting customer
needs. We have reclassified certain expense items to better reflect our new
operating structure and are no longer allocating costs associated with the
facilities, finance and human resource departments to the various operating
groups. Instead, these costs are now included in administrative and general
expenses. All technology costs, including costs associated with internal
systems, are included in the technology development and support expense line.
This reclassification did not change total operating expenses. In accordance
with EITF No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred", we have also reclassified
travel expense reimbursements paid by customers as revenue rather than as a
reduction to the related expense. This reclassification has resulted in a slight
change to professional services fees and cost of professional services without
changing income from operations.
19
We operate in two business segments in the technology industry: products and
professional services. We evaluate the performance of our segments based
primarily on segment contribution before corporate expenses. References to years
are to fiscal years ended March 31.
SOFTWARE PRODUCTS
REVENUE
Our products are designed to support four key activities within the application
development process: development and integration, quality assurance, production
readiness and performance management of the application to optimize performance
in production. Products revenue consists of software license fees and
maintenance fees and comprised 51.5%, 48.9% and 46.8% of total revenue during
2003, 2002 and 2001, respectively. OS/390 product revenue (mainframe revenue)
decreased $133.8 million or 19.5% during 2003 and decreased $75.5 million or
9.9% during 2002. Revenue from distributed software products decreased $9.7
million or 5.9% during 2003 and decreased $25.2 million or 13.3% during 2002.
The overall declines in product revenue from 2002 to 2003 and from 2001 to 2002
were primarily attributable to decreases in license fees and maintenance fees
associated with an overall decrease in technology spending and a decrease in
customer demand for large enterprise license agreements ("ELAs") which are
multi-year, and often multi-payment contracts. License revenue decreased $121.9
million or 29.2% during 2003 to $295.7 million from $417.6 million during 2002
and decreased $78.0 million or 15.7% from $495.6 million during 2001. Multi-year
contracts greater than $5 million represented approximately 4.5%, 6.9% and 12.8%
of license revenue in 2003, 2002 and 2001, respectively. The decrease in license
revenue for 2003 and 2002 was due to market and competitive pressure on pricing
attributed to the continued softness in the economy as a whole and the IT
industry in particular. Maintenance fees decreased $21.6 million or 5.0% to
$412.2 million during 2003 from $433.8 million during 2002 and decreased $22.8
million or 5.0% from $456.5 million in 2001. The decreases in maintenance fees
were primarily attributable to lower license fees during both 2003 and 2002
resulting in minimal increases to the maintenance base and to market pressure on
pricing.
We license our software to our clients using two types of software licenses,
perpetual and term. Generally, perpetual software licenses allow our customers a
perpetual right to run our software on hardware up to a licensed aggregate MIPS
(Millions of Instructions Per Second) capacity. Term licenses allow our
customers a right to run our software for a limited period of time on hardware
up to a licensed aggregate MIPS capacity. Also, our customers purchase
maintenance services that provide technical support and advice, including
problem resolution services and assistance in product installation, error
corrections and any product enhancements released during the maintenance period.
Furthermore, based on client needs, we allow our clients the option to license
additional software and purchase multiple years of maintenance in a single
transaction (multi-year transactions). In support of these multi-year
transactions, we allow extended payment terms to qualifying customers.
To recognize revenue for these multi-year transactions the contract price is
allocated between maintenance revenue and license revenue. All license revenue
associated with perpetual license agreements is recognized when the customer
commits unconditionally to the transaction, the software products and quantities
are fixed, the software has been shipped to the customer and there are no known
problems with respect to payment. License revenue associated with term
transactions or with transactions that include an option to exchange or select
products in the future is deferred and recognized over the term of the
agreement. 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 revenue associated
with all sales is deferred and is recognized over the applicable maintenance
period.
20
Products revenue by geographic location is presented in the table below (in
thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
United States $ 409,441 $ 532,772 $ 597,290
Europe and Africa 221,272 223,636 245,431
Other international operations 77,183 94,974 109,385
----------- ----------- -----------
Total products revenue $ 707,896 $ 851,382 $ 952,106
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
PRODUCTS CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
Revenue $ 707,896 $ 851,382 $ 952,106
Expenses 438,041 492,878 576,254
----------- ----------- -----------
Products contribution $ 269,855 $ 358,504 $ 375,852
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
The products segment generated contribution margins of 38.1%, 42.1% and 39.5%
during 2003, 2002 and 2001, respectively. Products expenses include cost of
software license fees, technology development and support costs, and sales and
marketing expenses. The decrease in contribution margin during 2003 was
primarily a result of the decrease in software license revenue offset, in part,
by a decrease in products expenses. The increase in the contribution margin from
2001 to 2002 was a result of cost reductions offset, in part, by a decrease in
license and maintenance revenue.
Cost of license fees includes amortization of capitalized software, the cost of
preparing and disseminating products to customers and the cost of author
royalties. The decrease in these costs in 2003 was due primarily to decreased
amortization of purchased software. 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. As a percentage of software license fees, cost of software license
fees were 10.4%, 8.2% and 7.6% in 2003, 2002 and 2001, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives are also
included here. The decrease in these costs in 2003 was primarily attributable to
decreased bonus expense, decreased depreciation of computer equipment, decreased
amortization of purchased software, and reduced travel and communication costs.
The decrease in technology costs from 2001 to 2002 was primarily related to
reduced salaries and benefits and reduced travel expenditures offset, in part,
by increased amortization of purchased software. As a percentage of product
revenue, costs of technology development and support were 20.2%, 19.3% and 19.7%
in 2003, 2002 and 2001, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total technology
development and support costs for 2003 decreased $22.9 million, or 12.9%, to
$154.7 million from $177.6 million in 2002. In 2002, total technology
development and support costs decreased $23.1 million, or 11.5%, to $177.6
million from $200.7 million in 2001. The major
21
development projects that achieved technological feasibility during 2003
included 6 new interactive and debugging products, 9 new fault management
products, 11 new file and data management products, 5 new automated testing
products, 21 new systems management products, 53 new application development
products, 1 new licensing product, 2 new application performance management
products, and 69 new windows development tools.
Though we continue to place significant emphasis on direct sales through our own
sales force, we also market our products through indirect channels. Sales and
marketing costs consist primarily of personnel related costs associated with
products direct sales and sales support, marketing for all Company offerings,
and personnel related costs associated with new sales initiatives. The decrease
in sales and marketing costs in 2003 was primarily attributable to decreased
salaries and benefits, decreased travel expenses, and decreased commissions. The
decrease in sales and marketing costs from 2001 to 2002 was primarily
attributable to decreased salaries and benefits, decreased distributor
commissions associated with decreased software license revenue, decreased travel
expenses, and decreased advertising expenditures. As a percentage of license
fees, sales and marketing costs were 89.3%, 70.5% and 70.9% in 2003, 2002 and
2001, respectively.
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
$221.7 million or 24.9% during 2003 and decreased $193.9 million or 17.9% during
2002. These decreases in revenue were due, primarily, to a reduction in customer
demand for professional services, the January 2002 assignment of our prime
contract with a client to a company in which we have a minority equity
investment, and to a lesser extent, the transfer of our engineering business to
an unrelated third party in December 2001. Professional services revenue was
further negatively impacted by the closing of certain underperforming branch
offices associated with the restructuring discussed below.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
United States $ 599,913 $ 795,284 $ 988,044
Europe and Africa 64,816 90,536 89,017
Other international operations 2,715 3,342 5,989
----------- ----------- -----------
Total professional services revenue $ 667,444 $ 889,162 $ 1,083,050
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
Revenue $ 667,444 $ 889,162 $ 1,083,050
Expenses 611,644 840,149 973,854
----------- ----------- -----------
Professional services contribution $ 55,800 $ 49,013 $ 109,196
=========== =========== ===========
* Reclassified to conform to the 2003 presentation.
22
The professional services segment generated contribution margins of 8.4%, 5.5%
and 10.1% during 2003, 2002 and 2001, respectively. The increase in professional
services margin in 2003 is primarily a result of the branch closings and other
changes discussed in the revenue section above. The decrease in professional
services margin in 2002 was 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 consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. The decrease in these costs from 2002 to 2003 is due, primarily, to
reductions in staff associated with the restructuring discussed below, resulting
in lower salaries and benefits, and decreased use of subcontractors for special
services. The decrease in these costs from 2001 to 2002 is due, primarily, to
reductions in staff, resulting in lower salaries and benefits, reduced travel
expenditure and decreased use of subcontractors for special services. The
professional services billable staff decreased 1,861 people to 5,164 people as
of March 31, 2003 from 7,025 people at March 31, 2002. This compares to a
decrease of 1,016 professional billable staff, to 7,025 at March 31, 2002 from
8,041 people at March 31, 2001.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist of all other costs associated with
the operations and administration of the Company. These costs include the
corporate executive, finance, human resources, legal and corporate
communications departments. In addition, administrative and general costs
include all facility-related costs, such as rent, maintenance, utilities, etc,
associated with our local sales and professional services offices.
Administrative and general expenses decreased 7.7% during 2003 and decreased
17.2% during 2002. The decrease in administrative and general expenses in 2003
was primarily attributable to decreased building rent, decreased telephone
costs, and decreased salaries and benefits resulting from the restructuring
discussed below offset, in part, by increased legal costs. Legal expenses
associated with the IBM litigation increased significantly during the fourth
quarter of 2003. External legal fees for all litigation and other matters were
$34.6 million, $12.5 million and $9.9 million in 2003, 2002 and 2001,
respectively. These costs are expected to fluctuate in relation to legal
activity. The decrease in administrative and general expenses during 2002 was
primarily attributable to decreased charges against investments in joint
ventures.
Interest and investment income for 2003 was $27.8 million compared to $29.5
million in 2002 and $30.7 million in 2001. The decrease from 2002 to 2003 was
due to lower interest earnings on deferred customer receivables offset, in part,
by an increase in interest on investments due to higher investment balances. The
decrease from 2001 to 2002 was due to lower interest earnings on investments due
to reduced interest rates, offset, in part, by increased interest related to
customers' deferred installments. Interest and other expense includes
amortization of deferred interest associated with future lease obligations
related to facilities no longer used by the Company as well as amortization of
the initial financing fees and fees associated with the unutilized balance of
the prior credit facility discussed in the Liquidity and Capital Resources
section below. Interest and other expense for 2003 was $6.1 million as compared
to $7.4 million in 2002 and $31.3 million in 2001. The decrease in interest and
other expense for 2003 is due to the decrease in amortization of initial
financing fees and fees associated with the unutilized balance of the credit
facility offset, in part, by the increase in amortized interest associated with
lease obligations. The decrease in interest expense from 2001 to 2002 was
primarily attributable to the July 2001 payoff of debts previously outstanding
under the prior credit facility.
We account for income taxes using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax provision was $53.1 million in 2003, which represents an effective tax rate
of 34%. This compares to an income tax benefit of $5.6 million in 2002 and an
income tax provision of $73.0 million in 2001, which represents an effective tax
rate of 38%. Our
23
effective tax rate for 2002 differed significantly from the US federal income
tax rate of 35% primarily as a result of nondeductible goodwill amortization and
impairment charges. See Note 12 of Notes to Consolidated Financial Statements
included in Item 8 of this report for additional analysis of income taxes.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, the Company adopted a restructuring plan to
reorganize its operating divisions, primarily the professional services segment.
These changes were designed to increase profitability in the future by better
aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization. Payments continue to be made to certain
terminated employees in accordance with their separation agreements.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002 and 2003 (in thousands):
Employee Facilities costs Legal, consulting Total
termination (primarily lease and outplacement restructuring
benefits abandonments)* costs Other charge
------------ ---------------- ----------------- -------- -------------
Restructuring charge $ 19,012 $ 26,341 $ 1,299 $ 278 $ 46,930
Incurred during year ended
March 31, 2002 (553) (676) (1,229)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2002 18,459 25,665 1,299 278 45,701
Incurred during year ended
March 31, 2003 (16,405) (8,589) (691) (215) (25,900)
Reclassification (1,356) 2,012 (593) (63)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
============ ================ ================= ======== =============
*Lease obligations will end in March of 2009.
During the year ended March 31, 2003, we determined the accruals associated with
employee terminations, legal and outplacement were in excess of actual costs
incurred. These excess accruals have been reclassified to the accrual for
facilities costs, since we have not been as successful in subleasing abandoned
leased space as originally anticipated. Approximately 70% of the accrual related
to facilities costs is included in "long term accrued expenses" in the
consolidated balance sheet at March 31, 2003.
GOODWILL AMORTIZATION AND IMPAIRMENT CHARGES
In fiscal 2002, 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
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Note 1 of the Consolidated Financial Statements contains a summary of our
significant accounting policies.
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Our assumptions and
estimates were based on the facts and circumstances known at March 31, 2003;
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. These 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.
Revenue Recognition -
We earn revenue from licensing software products, providing maintenance and
support for those products and rendering professional services. Our revenue
recognition policies are based on US GAAP including Statements of Position 97-2
and 98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101.
Accordingly, we recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment has occurred or services
have been rendered, the fee is fixed or determinable, and collectibility is
reasonably assured.
Software license fees - Our software license agreements provide our customers
with a right to use our software perpetually (perpetual licenses) or during a
defined term (term licenses). Perpetual license fee revenue is recognized using
the residual method, under which the fair value, based on Compuware-specific
objective evidence (CSOE), of all undelivered elements of the agreement (e.g.,
maintenance and professional services) is deferred. CSOE is based on rates
charged for maintenance and professional services when sold separately. The
remaining portion of the fee, (the residual), net of discretionary discounts, 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 term licenses and for agreements in which the fair value of
the undelivered elements cannot be determined using CSOE (e.g., transactions
that include an option to exchange or select products in the future), we
recognize the license fee revenue on a ratable basis over the term of the
license agreement.
We offer flexibility to customers purchasing products and related maintenance.
Terms vary ranging from the standard perpetual license sale to large multi-year,
multi-product contracts. We allow installment payment terms on multi-year
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.
Generally, revenues from license and maintenance transactions that include
installment payment terms are recognized in the same manner as those requiring
current payment. This is because we have an established business practice of
offering installment payment terms to customers and have a history of
successfully enforcing original payment terms without making concessions.
However, because a significant portion of our license fee revenue is earned in
connection with installment sales, changes in future economic conditions or
technological developments could adversely affect our ability to immediately
record license fees for these types of transaction and/or limit our ability to
collect these receivables.
Based on our interpretation of US GAAP including Statements of Position 97-2 and
98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101 we
believe our revenue has been properly reported. New interpretations or
pronouncements related to software revenue recognition policies could result in
changes to our method of revenue recognition in the future.
25
Maintenance fees - Our 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.
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 expected 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 - We are required to assess the impairment of goodwill
annually, or more frequently if events or changes in circumstances indicate that
the carrying value may exceed the fair value.
The assessment of goodwill impairment is performed in two steps. First, the
carrying value of each reporting unit (Products and Services) is compared to the
fair value of the reporting unit including the goodwill. If the carrying amount
of the reporting unit is greater than the fair value of the reporting unit, we
move to the second step of the impairment test. The second step of the
impairment test, used to measure the amount of impairment loss, compares the
implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of the goodwill, the impairment loss shall be recognized as
an operating expense in an amount equal to that excess. We measure fair value
using an estimate of the related business's discounted cash flow. The discounted
cash flow approach uses significant assumptions, including projected future cash
flows, the discount rate reflecting the risk inherent in future cash flows, and
a terminal growth rate. These estimates and assumptions, and unknown future
events or circumstances (e.g. economic conditions or technological developments)
could have a significant impact on whether or not an impairment charge is
recognized and the magnitude of any such charge.
Other - Other accounting policies, although not generally subject to the same
level of estimation as those discussed above, are nonetheless important to an
understanding of the financial statements. Many assets, liabilities, revenues
and expenses require some degree of estimation or judgment in determining the
appropriate accounting.
26
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, cash and investments totaled approximately $571.3 million.
During 2003 and 2002, we generated $377.3 million and $386.8 million,
respectively, in operating cash flow. A significant portion of operating cash
flow is generated 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 $236.7 million and $103.7 million, respectively.
As of March 31, 2003, we had no long-term debt. The credit facility agreement
which would have expired in August 2003 was terminated effective November 4,
2002. In May 2003, we entered into a $100 million revolving credit agreement
with a bank. See Note 17 of Notes to Consolidated Financial Statements for a
discussion of this revolving credit agreement. There is currently no outstanding
balance under the new credit agreement.
We believe available cash resources together with cash flow from operations,
will be sufficient to meet our cash needs for the foreseeable future.
Although there were no acquisitions during 2003, we continue to evaluate
business acquisition opportunities that fit our strategic plans.
We are building a new corporate headquarters building with a current estimated
cost of $350 million for the building and an estimated $50 million for
furniture, fixtures and equipment. Future annual depreciation expense will be
approximately $17 million. This will be partially offset by the savings realized
by the consolidation of offices. Capital expenditures to date total $325.9
million. Remaining cash outlays are expected to be completed in calendar 2003.
Currently, we intend to fund the building using cash on hand and cash flow from
operations.
On May 6, 2003, the Board of Directors authorized a stock repurchase plan of up
to $125 million. We intend to purchase our common stock on the open market
through negotiated or block transactions, periodically, based upon market and
business conditions. As of June 13, 2003, no repurchases have been made under
this plan.
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 in Item 8 of this report.
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, 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. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates (in thousands, except
interest rates):
Year Ended March 31,
--------------------------------- Fair Value at
2004 2005 2006 Total March 31, 2003
-------- -------- ------- -------- --------------
Cash Equivalents $319,466 $319,466 $319,466
Average Interest Rate 1.38% 1.38%
Average Interest Rate (tax equivalent) 1.39% 1.39%
Investments $156,737 $ 88,921 $ 6,174 $251,832 $252,527
Average Interest Rate 1.78% 1.90% 1.42% 1.81%
Average Interest Rate (tax equivalent) 2.56% 2.72% 2.19% 2.61%
We offer financing arrangements with installment payment terms in connection
with our multi-year software sales. Installment accounts are generally
receivable over a three to five year period. As of March 31, 2003, non-current
receivables amount to $260.7 million and are due approximately $164.0 million,
$59.3 million, $29.3 million, $5.8 million and $2.3 million in each of the years
ended March 31, 2005 through 2009, 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, 2003, the fair value of such receivables is approximately $262.3 million.
Each 25 basis point increase in interest rates would have an associated $900,000
negative impact on the fair value of non-current accounts receivable based on
the balance of such receivables at March 31, 2003. A change in interest rates
will have no impact on cash flows or net income associated with non-current
accounts receivable.
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
28
recognized in income, offsetting foreign exchange gains or losses on the foreign
balances being hedged. 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, 2003. 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, 2003 (in thousands, except contract rates):
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2003 2003 Rate U.S. Dollars March 31, 2003
-------- -------- -------- ------------ --------------
Forward Sales
Canadian Dollar March 31 April 30 1.4778 $ 812 $ 816
Japanese Yen March 31 April 30 118.7980 741 744
Norwegian Krone March 31 April 30 7.2965 809 810
Singapore Dollar March 31 April 30 1.7620 1,022 1,020
Swiss Franc March 31 April 30 1.3498 963 960
---------- -----------
$ 4,347 $ 4,350
========== ===========
Forward Purchases
Australian Dollar March 31 April 30 1.6587 $ 4,522 $ 4,525
Danish Krone March 31 April 30 6.7706 871 866
Euro Dollar March 31 April 30 1.0875 9,951 9,973
Swedish Krona March 31 April 30 8.4400 1,540 1,535
---------- -----------
$ 16,884 $ 16,899
========== ===========
Approximately 25% to 30% 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 (the "Company") as of March 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 2003. 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, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, effective April 1, 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to SFAS No. 142, "Goodwill and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2003
30
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS NOTES 2003 2002
------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 319,466 $ 233,305
Investments 3 156,737 133,503
Accounts receivable, less allowance for doubtful
accounts of $26,543 and $23,190 515,819 609,579
Deferred tax asset, net 12 30,605 41,811
Income taxes refundable, net 10,853 27,687
Prepaid expenses and other current assets 16,951 16,954
---------- ----------
Total current assets 1,050,431 1,062,839
---------- ----------
INVESTMENTS 3 95,095 55,566
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 386,678 199,365
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $195,464 AND $169,611 8 54,514 68,998
---------- ----------
OTHER:
Accounts receivable 260,735 306,751
Goodwill, less accumulated amortization 2,8 212,288 211,792
Deferred tax asset, net 12 20,174 44,884
Other assets 5 42,770 43,743
---------- ----------
Total other assets 535,967 607,170
---------- ----------
TOTAL ASSETS $2,122,685 $1,993,938
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 37,588 $ 28,646
Accrued expenses 7 101,196 141,825
Accrued bonuses and commissions 33,383 44,652
Deferred revenue 296,998 341,024
---------- ----------
Total current liabilities 469,165 556,147
DEFERRED REVENUE 299,079 218,624
ACCRUED EXPENSES 7 22,750 29,316
---------- ----------
Total liabilities 790,994 804,087
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 10
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
382,367,156 and 375,820,254 shares in 2003
and 2002, respectively 10,15 3,824 3,758
Additional paid-in capital 704,190 676,617
Retained earnings 631,906 528,804
Accumulated other comprehensive loss (8,229) (19,328)
---------- ----------
Total shareholders' equity 1,331,691 1,189,851
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,122,685 $1,993,938
========== ==========
See notes to consolidated financial statements.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES 2003 2002 2001
------- ---------- ---------- ----------
REVENUES:
Software license fees $ 295,720 $ 417,631 $ 495,572
Maintenance fees 412,176 433,751 456,534
Professional services fees