e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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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 000-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
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Michigan
(State or other jurisdiction of
incorporation or organization)
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38-2007430
(IRS Employer
Identification No.) |
One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)
Registrants telephone number, including area code: (313) 227-7300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filero |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the
latest practicable date:
As of July 31, 2009, there were outstanding 237,536,867 shares of Common Stock, par value $.01, of
the registrant.
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
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4 |
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5 |
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6 |
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21 |
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22 |
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38 |
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38 |
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39 |
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39 |
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40 |
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41 |
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EX-15 |
EX-31.1 |
EX-31.2 |
EX-32 |
2
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
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June 30, |
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March 31, |
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2009 |
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2009 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
390,680 |
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$ |
278,112 |
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Accounts receivable, net |
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379,771 |
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472,011 |
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Deferred tax asset, net |
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41,231 |
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37,359 |
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Income taxes refundable |
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3,793 |
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2,578 |
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Prepaid expenses and other current assets |
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27,203 |
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41,350 |
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Assets held for sale |
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27,354 |
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Total current assets |
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842,678 |
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858,764 |
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PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION |
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349,258 |
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353,182 |
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CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION |
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36,114 |
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35,763 |
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OTHER: |
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Accounts receivable |
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217,207 |
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224,681 |
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Deferred tax asset, net |
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32,493 |
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30,851 |
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Goodwill |
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341,841 |
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339,134 |
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Other |
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32,960 |
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32,475 |
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Total other assets |
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624,501 |
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627,141 |
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TOTAL ASSETS |
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$ |
1,852,551 |
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$ |
1,874,850 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
24,101 |
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$ |
13,796 |
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Accrued expenses |
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74,193 |
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87,205 |
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Income taxes payable |
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39,927 |
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24,646 |
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Deferred revenue |
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398,624 |
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409,410 |
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Liabilities held for sale |
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26,470 |
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Total current liabilities |
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536,845 |
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561,527 |
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DEFERRED REVENUE |
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351,006 |
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378,094 |
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ACCRUED EXPENSES |
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28,214 |
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30,111 |
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DEFERRED TAX LIABILITY, NET |
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28,361 |
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24,470 |
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Total liabilities |
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944,426 |
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994,202 |
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SHAREHOLDERS EQUITY: |
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Common stock |
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2,378 |
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2,418 |
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Additional paid-in capital |
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626,421 |
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628,955 |
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Retained earnings |
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279,951 |
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249,897 |
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Accumulated other comprehensive loss |
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(625 |
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(622 |
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Total shareholders equity |
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908,125 |
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880,648 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,852,551 |
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$ |
1,874,850 |
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See notes to condensed consolidated
financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
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Three Months Ended |
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June 30, |
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2009 |
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2008 |
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REVENUES: |
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Software license fees |
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$ |
40,546 |
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$ |
61,442 |
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Maintenance fees |
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111,127 |
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126,527 |
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Professional services fees |
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62,715 |
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110,619 |
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Total revenues |
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214,388 |
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298,588 |
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OPERATING EXPENSES: |
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Cost of software license fees |
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3,949 |
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6,090 |
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Cost of maintenance fees |
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8,956 |
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11,994 |
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Cost of professional services |
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58,901 |
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103,822 |
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Technology development and support |
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21,482 |
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22,570 |
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Sales and marketing |
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53,148 |
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61,327 |
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Administrative and general |
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40,130 |
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41,144 |
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Restructuring costs |
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2,490 |
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682 |
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Gain on divestiture of product lines |
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(52,351 |
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Total operating expenses |
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136,705 |
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247,629 |
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INCOME FROM OPERATIONS |
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77,683 |
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50,959 |
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OTHER INCOME, NET |
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1,420 |
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3,221 |
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INCOME BEFORE INCOME TAXES |
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79,103 |
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54,180 |
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INCOME TAX PROVISION |
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28,056 |
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19,448 |
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NET INCOME |
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$ |
51,047 |
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$ |
34,732 |
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Basic earnings per share |
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$ |
0.21 |
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$ |
0.13 |
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Diluted earnings per share |
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$ |
0.21 |
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$ |
0.13 |
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See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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Three Months Ended |
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June 30, |
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2009 |
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2008 |
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: |
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Net income |
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$ |
51,047 |
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$ |
34,732 |
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Adjustments to reconcile net income to net cash provided
by operations: |
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Gain on divestiture of product lines |
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(52,351 |
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Depreciation and amortization |
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10,378 |
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13,463 |
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Property and equipment impairment |
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662 |
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Acquisition tax benefits |
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880 |
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1,311 |
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Stock award compensation |
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5,637 |
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2,326 |
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Deferred income taxes |
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1,017 |
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1,751 |
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Other |
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(10 |
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295 |
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Net change in assets and liabilities, net of effects from the divestiture
and currency fluctuations: |
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Accounts receivable |
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119,957 |
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34,044 |
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Prepaid expenses and other current assets |
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14,521 |
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12,212 |
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Other assets |
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(2,339 |
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1,851 |
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Accounts payable and accrued expenses |
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(23,061 |
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(42,527 |
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Deferred revenue |
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(64,745 |
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(22,649 |
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Income taxes |
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13,972 |
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10,365 |
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Net cash provided by operating activities |
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74,903 |
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47,836 |
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CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: |
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Purchase of: |
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Property and equipment |
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(1,674 |
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(2,384 |
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Capitalized software |
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(4,034 |
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(2,788 |
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Net proceeds from divestiture of product lines |
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64,992 |
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Investment proceeds |
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13,856 |
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Net cash provided by investing activities |
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59,284 |
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8,684 |
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CASH FLOWS USED IN FINANCING ACTIVITIES: |
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Net proceeds from exercise of stock options including excess tax benefits |
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1,628 |
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1,397 |
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Contribution to stock purchase plans |
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579 |
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934 |
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Repurchase of common stock |
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(32,305 |
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(58,891 |
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Net cash used in financing activities |
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(30,098 |
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(56,560 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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8,479 |
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554 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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112,568 |
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514 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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278,112 |
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215,943 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
390,680 |
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$ |
216,457 |
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See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of
Compuware Corporation and its wholly owned subsidiaries (collectively, the Company). All
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S.
GAAP for complete financial statements. U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, contingencies and results of
operations. While management has based their assumptions and estimates on the facts and
circumstances existing at June 30, 2009, final amounts may differ from these estimates.
In the opinion of management of the Company, the accompanying unaudited Condensed Consolidated
Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, that
are necessary for a fair presentation of the results for the interim periods presented. These
financial statements should be read in conjunction with the Companys audited Consolidated
Financial Statements and notes thereto for the year ended March 31, 2009 included in the Companys
Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). The Condensed
Consolidated Balance Sheet at March 31, 2009 has been derived from the audited financial statements
at that date but does not include all information and footnotes required by U.S. GAAP for complete
financial statements. The results of operations for interim periods are not necessarily indicative
of actual results achieved for full fiscal years.
For purposes of this interim financial information, August 6, 2009 is the date through which
subsequent events have been evaluated and represents the date the financial statements were issued.
Revenue Recognition The Company earns revenue from licensing software products,
providing maintenance and support for those products and rendering professional services. The
Companys revenue recognition policies are in accordance with U.S. GAAP, including Statements of
Position 97-2 Software Revenue Recognition and 98-9 Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 104 and Emerging Issues Task Force Issue 00-21 Revenue
Arrangements with Multiple Deliverables. Accordingly, in order to be eligible for revenue
recognition, the following criteria must be met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the fee is fixed or determinable and
collectibility is reasonably assured.
Software license fees The Companys software license agreements provide its customers with a
right to use its 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 vendor specific objective evidence (VSOE), of all undelivered elements of the agreement
(i.e., maintenance and professional services) is deferred. VSOE is based on rates charged for
maintenance and professional services when sold separately. The remaining portion of the fee is
recognized as license fee revenue upon delivery of the products, provided
that no significant obligations remain and collection of the related receivable is reasonably
assured.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
For revenue arrangements where there is a lack of VSOE of fair value for any undelivered elements,
license fee revenue is deferred and recognized upon delivery of those elements or when VSOE of fair
value can be established. When maintenance or services are the only undelivered elements, the
license fee revenue is recognized on a ratable basis over the longer of the maintenance term or
over the period in which the services are expected to be performed. Such transactions include term
licenses as the Company does not sell maintenance for term licenses separately and therefore cannot
establish VSOE for the undelivered elements in these arrangements. These arrangements do not
qualify for separate recognition of the software license fees, maintenance fees and as applicable,
professional services fees under SOP 97-2 as amended. However, to comply with SEC Regulation S-X,
Rule 5-03(b), which requires product, services and other categories of revenue to be displayed
separately on the income statement, the Company separates the license fee, maintenance fee and
professional services fee revenue based on its determination of fair value. The Company applies its
VSOE of fair value for maintenance related to perpetual license transactions and stand alone
services arrangements as a reasonable and consistent approximation of fair value to separate
license fee, maintenance fee and professional services fee revenue for income statement
classification purposes.
The Company offers flexibility to customers purchasing licenses for its products and related
maintenance. Terms of these transactions range from standard perpetual license sales that include
one year of maintenance to large multi-year (generally two to five years), multi-product contracts.
The Company allows deferred payment terms on contracts, with installments collectible over the term
of the contract. Based on the Companys successful collection history for deferred payments,
license fees (net of any finance fees) are generally recognized as revenue as discussed above. In
certain transactions where it cannot be concluded that the fee is fixed or determinable due to the
nature of the deferred payment terms, the Company recognizes revenue as payments become due.
Financing fees are recognized as interest income over the term of the receivable.
Maintenance fees The Companys 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. The first year of maintenance is
included with all license agreements. Maintenance revenue is recognized ratably over the term of
the maintenance arrangements, which generally range from one to five years.
Professional services fees Professional services fees are generally based on hourly or daily
rates. Revenues from professional services are recognized in the period the services are performed
provided that collection of the related receivable is reasonably assured. For development services
rendered under fixed-price contracts, revenues are recognized using the percentage of completion
method and if determined that costs will exceed revenue, the expected loss is recorded at the time
the loss becomes apparent. Certain professional services contracts include a project and on-going
operations for the project. Revenue associated with these contracts is recognized over the expected
service period as the customer derives value from the services, consistent with the proportional
performance method.
Deferred revenue Deferred revenue consists primarily of billed and unbilled maintenance fees
related to the remaining term of maintenance agreements in effect at those dates. Deferred
license fees and services fees are also included in deferred revenue for those arrangements
7
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
that are being recognized on a ratable basis. Commission costs associated with deferred revenue are also
deferred and recorded as current or non-current other assets, as applicable, in the Condensed
Consolidated Balance Sheet.
Capitalized Software Capitalized software includes the costs of purchased and internally
developed software products and is stated at the lower of unamortized cost or net realizable value.
For development costs related to the Companys mainframe and distributed products, the Company
follows the guidance of Statement of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. As such,
capitalization of internally developed software products begins when technological feasibility of
the product is established. Technology development and support includes primarily the costs of
programming personnel associated with product development and support net of amounts capitalized.
The Company also capitalizes development costs associated with its software-as-a-service platform
(application services).
The amortization for both internally developed and purchased software products is computed on a
product-by-product basis. The annual amortization is the greater of the amount computed using (a)
the ratio of current gross revenues compared with the total of current and anticipated future
revenues for that product or (b) the straight-line method over the remaining estimated economic
life of the product, including the period being reported on. Amortization begins when the product
is generally available to customers. The amortization period for capitalized software is generally
five years.
Capitalized software is reviewed for impairment each balance sheet date or when events and
circumstances indicate such asset may be impaired. Asset impairment charges are recorded when
estimated future undiscounted cash flows are not sufficient to recover the carrying value of the
capitalized software. The impairment charge is the amount by which the present value of future cash
flows is less than the carrying value of these assets.
Goodwill and Other Intangibles Goodwill for each business segment and those intangible
assets with indefinite lives are tested for impairment annually and/or when events or circumstances
indicate their fair value may have been reduced below carrying value. The Company evaluated its
goodwill and indefinite lived intangibles as of March 31, 2009 and determined there was no
impairment.
Income Taxes The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in the period that includes the
enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely
than not be realized. These deferred tax assets are subject to periodic assessments as to
recoverability and if it is determined that it is more likely than not that the benefits will not
be
realized, valuation allowances are recorded which would increase the provision for income taxes. In
making such determination, the Company considers all available positive and negative
8
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
evidence,
including future reversals of existing taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial operations.
Interest and penalties related to uncertain tax positions are included in the income tax provision.
Derivatives and Fair Value Measurement
The Company is exposed to foreign exchange rate risks associated with foreign currency
transactions. The Company enters into derivative contracts to sell or buy currencies with the
intent of mitigating foreign exchange rate risks related to current balances due to or from the
Companys foreign subsidiaries. The Company does not use foreign exchange contracts to hedge
anticipated transactions.
During the first three months of fiscal 2010 and 2009, the Company did not designate its foreign
exchange derivatives as hedges under SFAS No. 133. Accordingly, all foreign exchange derivatives
are recognized on the Condensed Consolidated Balance Sheets at fair value.
The following table presents the Companys assets and liabilities that are measured at fair value
on a recurring basis at June 30, 2009 and March 31, 2009 consistent with the fair value hierarchy
provisions of SFAS No. 157 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Quoted Prices in |
|
|
|
|
Fair Value |
|
Active Markets for |
|
Significant Other |
|
|
as of |
|
Identical Assets |
|
Observable Inputs |
|
|
June 30, 2009 |
|
(Level 1) |
|
(Level 2) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (1) |
|
$ |
302,665 |
|
|
$ |
302,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives (2) |
|
$ |
38 |
|
|
|
|
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Quoted Prices in |
|
|
|
|
Fair Value |
|
Active Markets for |
|
Significant Other |
|
|
as of |
|
Identical Assets |
|
Observable Inputs |
|
|
March 31, 2009 |
|
(Level 1) |
|
(Level 2) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (1) |
|
$ |
201,952 |
|
|
$ |
201,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives (2) |
|
$ |
30 |
|
|
|
|
|
|
$ |
30 |
|
|
|
|
(1) |
|
Money market funds are classified as Cash and cash equivalents in the Condensed Consolidated
Balance Sheets. |
|
(2) |
|
The foreign exchange derivatives are classified as current Accrued expenses in the Condensed
Consolidated Balance Sheets. As of June 30, 2009, the forward sales derivatives had a cost basis
and fair value basis of $5,723 and $5,683, respectively, and the forward purchases derivatives had a
cost basis and fair value basis of $2,699 and $2,701. |
9
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Hedging transaction gain (loss) recognized from foreign exchange derivative contracts is
recorded to Administrative and general in the Companys Consolidated Statement of Operations and
totaled $(559,000) and $587,000, respectively, for the three months ended June 30, 2009 and 2008.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168 FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification (Codification)
will become the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. On the effective date of this
Statement, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. This Statement is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The adoption of this
statement will not have an impact on the Companys Consolidated Financial Statements but will
result in a revision to our references to GAAP in our future filings.
In May 2009, the FASB issued SFAS No. 165 Subsequent Events which established general standards
of accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular, this Statement sets
forth: (1) the period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements; (2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements and (3) the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. This statement is to be applied prospectively and is effective for interim and annual
periods ending after June 15, 2009.
10
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 2 Divestiture of Product Lines
In May 2009, the Company sold its Quality and DevPartner distributed product lines to Micro Focus
International PLC (Micro Focus) for $80 million, less certain adjustments relating to cash
collected or invoiced for future maintenance and professional services obligations assumed by Micro
Focus as discussed below.
The sale included the following assets: (1) all rights to the proprietary software products and
other technologies associated with the Quality and DevPartner distributed product lines (other than
File-AID/CS), including trade names, trade secrets, copyrights, patents, related client
relationships and contracts, software and documentation; (2) the right to offer employment to
approximately 290 personnel related to the sales, sales support, development, maintenance and
delivery of the Quality and DevPartner product lines and (3) personal property associated with the
job requirements of the Companys personnel that are hired by Micro Focus and other assets
primarily used in connection with the products being sold.
Effective upon the closing date of the sale, Micro Focus assumed the obligation to perform future
maintenance and professional services related to the Quality and DevPartner product lines.
The Company recorded a gain on divestiture of $52.4 million to operating expenses during the first
quarter of fiscal 2010 (in thousands):
|
|
|
|
|
Sales price |
|
$ |
80,000 |
|
Credit issued to Micro Focus (1) |
|
|
(15,008 |
) |
|
|
|
|
|
|
|
|
|
Net proceeds from divestiture of product lines |
|
|
64,992 |
|
|
|
|
|
|
Assets and liabilities: |
|
|
|
|
Capitalized software |
|
|
(17,589 |
) |
Goodwill (2) |
|
|
(9,733 |
) |
Accounts receivable (1) |
|
|
(9,098 |
) |
Deferred revenue (1) |
|
|
25,458 |
|
Other |
|
|
(1,679 |
) |
|
|
|
|
|
|
|
|
|
Gain on divestiture of product lines |
|
$ |
52,351 |
|
|
|
|
|
|
|
|
(1) |
|
As of the transaction date, deferred revenue associated with Quality and DevPartner
products was $25.5 million and related to future maintenance and professional services that
became the obligation of Micro Focus. The Company issued a $15.0 million credit (net of an
administrative fee) to Micro Focus for the previously collected or invoiced portion of
deferred revenue at the date of close. The remaining $9.1 million in unbilled accounts
receivable will be either assigned to Micro Focus or collected by the Company and remitted
to Micro Focus, net of an administrative fee. A liability for this $9.1 million has been
recorded to accounts payable. |
|
(2) |
|
The goodwill adjustment of $9.7 million represents the fair value of the Quality and
DevPartner product lines in relation to the fair value of the product segment. |
11
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
The Quality and DevPartner product lines represent a portion of the products segment. The Companys
products segment does not account for operating expenses on a product-by-product basis, as such,
operating expenses cannot be directly associated with specific product lines. Therefore, the
Quality and DevPartner product lines were not reported as a discontinued operation in the
Consolidated Financial Statements.
Note 3 Computation of Earnings per Common Share
Earnings per common share data were computed as follows (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
51,047 |
|
|
$ |
34,732 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
240,784 |
|
|
|
259,694 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.21 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
51,047 |
|
|
$ |
34,732 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
240,784 |
|
|
|
259,694 |
|
Dilutive effect of stock options |
|
|
1,764 |
|
|
|
1,399 |
|
|
|
|
|
|
|
|
Total shares |
|
|
242,548 |
|
|
|
261,093 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.21 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2009 and 2008, stock options to purchase a total of
approximately 20,403,000 and 19,968,000 shares, respectively, were excluded from the diluted
earnings per share calculation because they were anti-dilutive.
Note 4 Comprehensive Income
Other comprehensive income includes foreign currency translation adjustments that have been
excluded from net income and reflected in equity. Total comprehensive income is summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
51,047 |
|
|
$ |
34,732 |
|
Foreign currency translation
adjustment, net of tax |
|
|
(3 |
) |
|
|
924 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
51,044 |
|
|
$ |
35,656 |
|
|
|
|
|
|
|
|
12
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 5 Stock Benefit Plans and Stock-Based Compensation
The Company has the following stock benefit plans: (1) the 2007 Long Term Incentive Plan (LTIP)
allows the Companys Compensation Committee the ability to grant stock options, stock appreciation
rights, restricted stock, restricted stock units, performance-based cash or stock awards and annual
cash incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase
Plan allows participating U.S. and Canadian employees the right to have up to 10% of their
compensation withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock
Ownership Plan (ESOP) and Trust allows the Company to make contributions to the ESOP for the
benefit of substantially all U.S. employees.
Stock Options
A summary of option activity under the Companys stock-based compensation plans as of June 30,
2009, and changes during the three months then ended is presented below (shares and intrinsic value
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term in Years |
|
|
Value |
|
Options outstanding as of March 31, 2009 |
|
|
34,245 |
|
|
$ |
9.59 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
250 |
|
|
|
7.22 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(243 |
) |
|
|
6.61 |
|
|
|
|
|
|
$ |
192 |
|
Forfeited |
|
|
(297 |
) |
|
|
8.92 |
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
(4,480 |
) |
|
|
16.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2009 |
|
|
29,475 |
|
|
$ |
8.51 |
|
|
|
4.75 |
|
|
$ |
1,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest, net of
estimated
forfeitures, as of
June 30, 2009 |
|
|
28,099 |
|
|
$ |
8.52 |
|
|
|
4.56 |
|
|
$ |
1,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2009 |
|
|
19,901 |
|
|
$ |
8.77 |
|
|
|
2.97 |
|
|
$ |
1,638 |
|
SFAS No. 123 (revised 2004), Share-Based Payment requires the use of a valuation model to
calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes
option pricing model, which incorporates various assumptions including volatility, expected term,
risk-free interest rates and dividend yields. The expected volatility assumption is based on
historical volatility of the Companys common stock over the most recent period commensurate with
the expected life of the stock option granted. The Company uses historical volatility because
management believes such volatility is representative of prospective trends. The risk-free interest
rate assumption is based upon observed interest rates appropriate for the expected life of the
stock option awarded. The expected life of the stock option is based on either historical exercise
data if available or the simplified method as described in SAB No. 107 and SAB No. 110. Dividend
yields were not a factor in determining fair value of stock options granted as the Company has
never issued cash dividends and does not anticipate issuing cash dividends in the future.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
The weighted average fair value of stock options granted during the periods and the assumptions
used to estimate those values using a Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2009 |
|
2008 |
Expected volatility |
|
|
45.98 |
% |
|
|
54.21 |
% |
Risk-free interest rate |
|
|
2.27 |
% |
|
|
3.23 |
% |
Expected lives at date of grant (in years) |
|
|
6.1 |
|
|
|
6.3 |
|
Weighted-average fair value of the options granted |
|
$ |
3.37 |
|
|
$ |
4.16 |
|
The fair value of equity awards vested during the three months ending June 30, 2009 was $4.21 per
share.
Restricted Stock Units
The Companys nonvested restricted stock units as of June 30, 2009, and the activity during the
year then ended is summarized as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested restricted stock units as of March 31, 2009 |
|
|
950 |
|
|
$ |
6.58 |
|
Granted |
|
|
800 |
|
|
|
7.33 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock units as of June 30, 2009 |
|
|
1,750 |
|
|
$ |
6.92 |
|
|
|
|
|
|
|
|
14
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Stock Award Compensation
Stock award compensation expense was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Stock-based compensation classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance fees |
|
$ |
105 |
|
|
$ |
65 |
|
Cost of professional services |
|
|
278 |
|
|
|
386 |
|
Technology development and support |
|
|
251 |
|
|
|
123 |
|
Sales and marketing |
|
|
1,946 |
|
|
|
718 |
|
Administrative and general |
|
|
3,057 |
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
before income taxes |
|
|
5,637 |
|
|
|
2,326 |
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(2,012 |
) |
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
after income taxes |
|
$ |
3,625 |
|
|
$ |
1,477 |
|
|
|
|
|
|
|
|
As of June 30, 2009, $30.7 million of total unrecognized compensation cost, net of estimated
forfeitures, related to unvested equity awards is expected to be recognized over a weighted-average
period of approximately 2.75 years.
15
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 6 Intangible Assets and Goodwill
The components of the Companys intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks (1) |
|
$ |
5,857 |
|
|
|
|
|
|
$ |
5,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (2) |
|
$ |
295,578 |
|
|
$ |
(259,464 |
) |
|
$ |
36,114 |
|
Customer relationship agreements (3) |
|
|
12,029 |
|
|
|
(9,764 |
) |
|
|
2,265 |
|
Non-compete agreements (3) |
|
|
2,377 |
|
|
|
(2,372 |
) |
|
|
5 |
|
Other (4) |
|
|
6,506 |
|
|
|
(6,395 |
) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
$ |
316,490 |
|
|
$ |
(277,995 |
) |
|
$ |
38,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks (1) |
|
$ |
5,784 |
|
|
|
|
|
|
$ |
5,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (2) |
|
$ |
317,569 |
|
|
$ |
(281,806 |
) |
|
$ |
35,763 |
|
Customer relationship agreements (3) |
|
|
13,218 |
|
|
|
(10,751 |
) |
|
|
2,467 |
|
Non-compete agreements (3) |
|
|
2,561 |
|
|
|
(2,516 |
) |
|
|
45 |
|
Other (4) |
|
|
6,849 |
|
|
|
(6,684 |
) |
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
$ |
340,197 |
|
|
$ |
(301,757 |
) |
|
$ |
38,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain trademarks were acquired as part of the Covisint, LLC and Changepoint Corporation
acquisitions in fiscal 2004 and 2005. These trademarks are deemed to have an indefinite life
and therefore are not being amortized. |
|
(2) |
|
Amortization and impairments of capitalized software are primarily included in Cost of
Software License Fees in the Condensed Consolidated Statements of Operations. Capitalized
software is generally amortized over five years. |
|
(3) |
|
Customer relationship agreements and non-compete agreements were acquired as part of past
acquisitions. The customer relationship agreements are being amortized over periods up to five
years. The non-compete agreements are being amortized over periods up to three years. |
|
(4) |
|
Other amortized intangible assets include trademarks associated with product acquisitions and
are being amortized over periods up to ten years. |
16
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Changes in the carrying amounts of goodwill are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
Application |
|
|
|
|
Goodwill |
|
Products |
|
|
Services |
|
|
Services |
|
|
Total |
|
Balance at March 31, 2009, net |
|
$ |
187,166 |
|
|
$ |
140,436 |
|
|
$ |
11,532 |
|
|
$ |
339,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation |
|
|
2,007 |
|
|
|
700 |
|
|
|
|
|
|
|
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009, net |
|
$ |
189,173 |
|
|
$ |
141,136 |
|
|
$ |
11,532 |
|
|
$ |
341,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluated its goodwill and other intangible assets for all reporting segments as
of March 31, 2009 and determined there was no impairment. The Company determined the fair value of
each segment using a discounted cash flow analysis supported by market multiples of revenue.
Since the second half of fiscal 2009, the Company has been restructuring its professional services
segment. For the first quarter of fiscal 2010, the professional services segment expense reductions
were consistent with managements internal plan. However, if the professional services segments
profitability assumptions used in the March 31, 2009 goodwill impairment analysis are not attained,
an impairment of some or all of the $141.1 million of goodwill related to the professional services
segment at June 30, 2009 could be recorded in the future as a non-cash charge to earnings.
The portion of capitalized software and goodwill that relates to the Quality and DevPartner product
lines were reclassified to Assets held for sale in the Consolidated Balance Sheet as of March 31,
2009 due to the pending sale of these product lines to Micro Focus which occurred in May 2009 (see
Note 2 for more details).
17
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 7 Segment Information
The Company operates in three business segments in the technology industry: products, professional
services and application services. The Company provides software products, professional services
and application services to information technology (IT) organizations that help IT professionals
efficiently develop, implement and support the applications that run their businesses.
Financial information for the Companys business segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
Products: |
|
|
|
|
|
|
|
|
Mainframe |
|
$ |
99,585 |
|
|
$ |
122,458 |
|
Distributed systems |
|
|
52,088 |
|
|
|
65,511 |
|
|
|
|
|
|
|
|
Total product revenue |
|
|
151,673 |
|
|
|
187,969 |
|
Professional services |
|
|
53,045 |
|
|
|
101,832 |
|
Application services |
|
|
9,670 |
|
|
|
8,787 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
214,388 |
|
|
$ |
298,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
Products (1) |
|
$ |
116,489 |
|
|
$ |
85,988 |
|
Professional services |
|
|
2,930 |
|
|
|
8,322 |
|
Application services |
|
|
884 |
|
|
|
(1,525 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
120,303 |
|
|
|
92,785 |
|
Administrative and general |
|
|
(40,130 |
) |
|
|
(41,144 |
) |
Restructuring costs |
|
|
(2,490 |
) |
|
|
(682 |
) |
|
|
|
|
|
|
|
Income from operations |
|
|
77,683 |
|
|
|
50,959 |
|
Other income, net |
|
|
1,420 |
|
|
|
3,221 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
79,103 |
|
|
$ |
54,180 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ended June 30, 2009, income from the products segment includes a
$52.4 million gain on divestiture of the Quality and DevPartner product lines (see Note 2
for more details). |
Financial information regarding geographic operations is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
United States |
|
$ |
133,700 |
|
|
$ |
189,219 |
|
Europe and Africa |
|
|
56,028 |
|
|
|
79,288 |
|
Other international operations |
|
|
24,660 |
|
|
|
30,081 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
214,388 |
|
|
$ |
298,588 |
|
|
|
|
|
|
|
|
18
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 8 Restructuring Accrual
In recent years, the Company has incurred restructuring charges associated with the following
initiatives: (1) aligning the professional services segment headcount and operating expenses after
initiating a plan during the second half of fiscal 2009 to exit low-margin engagements and (2)
managements evaluation of the product segment and general and administrative business processes to
identify operating efficiencies with the goal of reducing operating expenses.
In the first quarter of fiscal 2010, the Company incurred a restructuring charge of $2.5 million of
which $2.4 million related to employee termination benefits. The Company terminated 192 employees
within the professional services segment to align operating expenses with revenues as the Company
continued to exit engagements considered low-margin during the first quarter of fiscal 2010. The
Company also terminated approximately 38 employees from various other functions of the
organization, primarily within technology development and support.
Management continues to review the Companys costs and will, based on future results of operations,
determine if additional restructuring actions are needed. The total amount of any potential future
charges for such actions will depend upon the nature, timing and extent of those actions.
The following table summarizes the restructuring accrual as of March 31, 2009, and changes to the
accrual during the first three months of fiscal 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed |
|
|
Paid |
|
|
|
|
|
|
Accrual |
|
|
During the Three |
|
|
During the Three |
|
|
Accrual |
|
|
|
Balance at |
|
|
Months Ended |
|
|
Months Ended |
|
|
Balance at |
|
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Employee termination benefits |
|
$ |
1,274 |
|
|
$ |
2,388 |
|
|
$ |
(2,900 |
) |
|
$ |
762 |
|
Facilities costs (primarily lease
abandonments) |
|
|
2,271 |
|
|
|
51 |
|
|
|
(252 |
) |
|
|
2,070 |
|
Other |
|
|
13 |
|
|
|
51 |
|
|
|
(56 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,558 |
|
|
$ |
2,490 |
|
|
$ |
(3,208 |
) |
|
$ |
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, $1.7 million of the restructuring accrual is recorded in current accrued
expenses. The remaining balance of $1.1 million is recorded to long-term accrued expenses in the
Condensed Consolidated Balance Sheets and primarily relates to facility costs.
The accruals for employee termination benefits at June 30, 2009 primarily represent cash payments
to be paid to employees that have been terminated as a result of initiatives described above.
The accruals for facilities costs at June 30, 2009 represent the remaining fair value of lease
obligations for exited and demised locations, as determined at the cease-use dates of those
facilities, net of estimated sublease income that could be reasonably obtained in the future, and
will be paid out over the remaining lease terms, the last of which ends in fiscal 2013. Projected
sublease income is based on managements estimates, which are subject to change.
19
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)
Note 9 Debt
The Company has no long term debt.
The Company has an unsecured revolving credit agreement (the credit facility) with Comerica Bank
and other lenders. The credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The credit facility also permits the Company to
increase the revolving line of credit by up to an additional $150 million subject to receiving
further commitments from lenders and certain other conditions.
The credit facility contains various covenant requirements, including limitations on liens;
indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans
and advances from the Company; transactions with affiliates and limits additional borrowing outside
of the facility to $250 million. The credit facility is also subject to maximum total debt to
EBITDA and minimum fixed charge coverage financial covenants. The Company is in compliance with the
covenants under the credit facility.
Any borrowings under the credit facility bear interest at the prime rate or the Eurodollar rate
plus the applicable margin (based on the level of maximum total debt to EBITDA ratio), at the
Companys option. The Company pays a quarterly facility fee on the credit facility based on the
applicable margin grid. The Company has never used the credit facility.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Compuware Corporation
Detroit, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and
subsidiaries (the Company) as of June 30, 2009, and the related condensed consolidated statements
of operations and cash flows for the three-month periods ended June 30, 2009 and 2008. These
interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and
subsidiaries as of March 31, 2009, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated May 27, 2009, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of March 31, 2009 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
August 6, 2009
21
COMPUWARE CORPORATION AND SUBSIDIARIES
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements within the meaning of the
federal securities laws. When we use words such as may, might, will, should, believe,
expect, anticipate, estimate, continue, predict, forecast, projected, intend or
similar expressions, or make statements regarding our future plans, objectives or expectations, we
are making forward-looking statements. Numerous important factors, risks and uncertainties affect
our operating results and 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.
The material risks and uncertainties that we believe affect us are summarized below (see Item 1A
Risk Factors in our 2009 Form 10-K). These risks and uncertainties are not the only ones we face.
Additional risks and uncertainties discussed elsewhere in the reports we file with the Securities
and Exchange Commission, as well as other risks and uncertainties that we are not aware of or
focused on or that we currently deem immaterial, may also impair business operations. This report
is qualified in its entirety by these risk factors and those listed below. If any of the following
risks actually occur, our financial condition and results of operations could be materially and
adversely affected. If this were to happen, the value of our common stock could decline
significantly, and shareholders could lose all or part of their investment.
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.
|
|
|
The majority of our software products revenue is dependent on our customers continued
use of International Business Machines Corp. (IBM) and IBM-compatible products. |
|
|
|
|
Our software product revenue is dependent on the acceptance of our pricing structure for
software licenses and maintenance. |
|
|
|
|
Our strategy of packaging distributed products and services as a single offering may not
be accepted by our customers, negatively impacting our revenue. |
|
|
|
|
We may fail to achieve our forecasted financial results due to inaccurate sales
forecasts or other factors. If we fail to meet the expectations of analysts or investors,
our stock price could decline substantially. |
|
|
|
|
Our quarterly financial results vary and may be adversely affected by a number of
unpredictable factors. |
|
|
|
|
The continuing weakening in the United States and global economies may reduce demand for
our software products, professional services and application services, which may negatively
affect our revenues and operating results. |
|
|
|
|
If we are not successful in implementing our professional services strategy, our
operating margins may decline. |
|
|
|
|
The continuation of the decline in the U.S. domestic automotive manufacturing business
could adversely affect our professional services and application services businesses. |
22
COMPUWARE CORPORATION AND SUBSIDIARIES
|
|
|
If the fair value of our long-lived assets deteriorated below their carrying value,
recognition of an impairment loss would be required, which would adversely affect our
financial results. |
|
|
|
|
Our software and technology may infringe the proprietary rights of others. |
|
|
|
|
Our results could be adversely affected if our operating margin or operating margin
percentage decline. |
|
|
|
|
Our results could be adversely affected by increased competition, pricing pressures and
technological changes. |
|
|
|
|
The market for professional services is highly competitive, fragmented and characterized
by low barriers to entry. |
|
|
|
|
The market for application services is in its early stages with emerging competitors. As
the market matures, competition may increase and could have a negative impact on our
results of operations. |
|
|
|
|
We must develop or acquire product enhancements and new products to succeed. |
|
|
|
|
Acquisitions may be difficult to integrate, disrupt our business or divert the attention
of our management and may result in financial results that are different than expected. |
|
|
|
|
The divestiture of our Quality and DevPartner product lines may cause a reduction in
customer satisfaction, which could adversely affect our revenues and results of operations. |
|
|
|
|
We are exposed to exchange rate risks on foreign currencies and to other international
risks that may adversely affect our business and results of operations. |
|
|
|
|
Current laws may not adequately protect our proprietary rights. |
|
|
|
|
The loss of certain key employees and technical personnel or our inability to hire
additional qualified personnel could have a material adverse effect on our business. |
|
|
|
|
Maintenance revenue could decline. |
|
|
|
|
Unanticipated changes in our operating results or effective tax rates, or exposure to
additional income tax liabilities, could affect our profitability. |
|
|
|
|
Our stock repurchase plan may be suspended or terminated at any time, which may result
in a decrease in our stock price. |
|
|
|
|
Acts of terrorism, acts of war and other unforeseen events may cause damage or
disruption to us or our customers, which could adversely affect our business, financial
condition and operating results. |
|
|
|
|
Our articles of incorporation, bylaws and rights agreement as well as certain provisions
of Michigan law may have an anti-takeover effect. |
23
COMPUWARE CORPORATION AND SUBSIDIARIES
OVERVIEW
In this section, we discuss our results of operations on a segment basis for each of our three
business segments in the technology industry: products, professional services and application
services. We evaluate segment performance based primarily on segment contribution before corporate
expenses. References to years are to fiscal years ended March 31. This discussion and analysis
should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and
notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year
ended March 31, 2009, particularly Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.
We deliver value to businesses worldwide by providing software products, professional services and
application services that improve the performance of IT organizations. Originally founded in 1973
as a professional services company, in the late 1970s we began to offer mainframe productivity
tools for fault diagnosis, file and data management, and application debugging.
In the 1990s, IT moved toward distributed and web-based platforms. Our solutions portfolio grew in
response, and we now market a comprehensive portfolio of IT solutions across the full range of
enterprise computing platforms that help:
|
|
|
Develop and deliver high quality, high performance enterprise business applications in a
timely and cost-effective manner. |
|
|
|
|
Measure, manage and communicate application service in business terms, and maintain
consistent, high levels of service delivery. |
|
|
|
|
Provide executive visibility, decision support and process automation across the entire
IT organization to enable all available resources to be harnessed in alignment with
business priorities. |
Additionally, to be competitive in todays global economy, enterprises must securely share
applications, information and business processes. We address this market need through our
application services, which are marketed under the brand name Covisint. Our application services
offerings provide a software-as-a-service platform that enables industries and business communities
to securely integrate vital information and processes across users, business partners, customers,
vendors and suppliers.
24
COMPUWARE CORPORATION AND SUBSIDIARIES
Quarterly Update
The following occurred during the first quarter of 2010:
|
|
|
Sold our Quality and DevPartner product lines to Micro Focus International PLC (Micro
Focus) realizing a gain of $52.4 million to operating income (see Note 2 of the Condensed
Consolidated Financial Statements included in this report). |
|
|
|
|
Experienced an increase in product contribution margin to 76.8% in the first quarter of
2010 from 45.7% in the first quarter of 2009, largely as a result of the gain on the sale
to Micro Focus. |
|
|
|
|
Experienced a decline in professional services segment contribution margin to 5.5% in
the first quarter of 2010 from 8.2% in the first quarter of 2009. |
|
|
|
|
Realized an increase in application services segment contribution margin to 9.1% in the
first quarter of 2010 from a negative contribution margin of 17.4% in the first quarter of
2009. |
|
|
|
|
Experienced a decline in mainframe and distributed product revenue of 18.7% and 20.5%,
respectively, compared to the first quarter of 2009. |
|
|
|
|
Experienced a charge of $2.5 million from restructuring actions to improve operating
efficiencies. |
|
|
|
|
Released 4 mainframe and 7 distributed product updates designed to increase the
productivity of the IT departments of our customers, including Vantage 11. |
Our ability to achieve our strategies and objectives is subject to a number of risks and
uncertainties, some of which we may not be able to control. See Forward-Looking Statements.
25
COMPUWARE CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational data from the
Condensed Consolidated Statements of Operations as a percentage of total revenues and the
percentage change in such items compared to the prior period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
Total Revenues |
|
|
|
|
Three Months Ended |
|
Period- |
|
|
June 30, * |
|
to-Period |
|
|
2009 |
|
2008 |
|
Change |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees |
|
|
18.9 |
% |
|
|
20.6 |
% |
|
|
(34.0 |
)% |
Maintenance fees |
|
|
51.8 |
|
|
|
42.4 |
|
|
|
(12.2 |
) |
Professional services segment revenue |
|
|
24.8 |
|
|
|
34.1 |
|
|
|
(47.9 |
) |
Application services segment revenue |
|
|
4.5 |
|
|
|
2.9 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
(28.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
1.8 |
|
|
|
2.0 |
|
|
|
(35.2 |
) |
Cost of maintenance fees |
|
|
4.2 |
|
|
|
4.0 |
|
|
|
(25.3 |
) |
Professional services segment expenses |
|
|
23.4 |
|
|
|
31.3 |
|
|
|
(46.4 |
) |
Application services segment expenses |
|
|
4.1 |
|
|
|
3.5 |
|
|
|
(14.8 |
) |
Technology development and support |
|
|
10.0 |
|
|
|
7.6 |
|
|
|
(4.8 |
) |
Sales and marketing |
|
|
24.8 |
|
|
|
20.5 |
|
|
|
(13.3 |
) |
Administrative and general |
|
|
18.7 |
|
|
|
13.8 |
|
|
|
(2.5 |
) |
Restructuring costs |
|
|
1.2 |
|
|
|
0.2 |
|
|
|
265.1 |
|
Gain on divestiture of product lines |
|
|
(24.4 |
) |
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
63.8 |
|
|
|
82.9 |
|
|
|
(44.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
36.2 |
|
|
|
17.1 |
|
|
|
52.4 |
|
Other income, net |
|
|
0.7 |
|
|
|
1.0 |
|
|
|
(55.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
36.9 |
|
|
|
18.1 |
|
|
|
46.0 |
|
Income tax provision |
|
|
13.1 |
|
|
|
6.5 |
|
|
|
44.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
23.8 |
% |
|
|
11.6 |
% |
|
|
47.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported
as professional services on the Condensed Consolidated Statement of Operations included in
this report. |
26
COMPUWARE CORPORATION AND SUBSIDIARIES
PRODUCTS SEGMENT
Financial information for the products segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
151,673 |
|
|
$ |
187,969 |
|
Expenses |
|
|
35,184 |
|
|
|
101,981 |
|
|
|
|
|
|
|
|
Products segment contribution |
|
$ |
116,489 |
|
|
$ |
85,988 |
|
|
|
|
|
|
|
|
The products segment generated contribution margins of 76.8% and 45.7% during the first
quarter of 2010 and 2009. The increase in margin for the first quarter of 2010 was primarily due to
the $52.4 million gain on divestiture of our Quality and DevPartner product lines (see Note 2 of
the Condensed Consolidated Financial Statements included in this report for more details).
Products Segment Revenue
Revenue for the products segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Software License Fees |
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
$ |
19,193 |
|
|
$ |
33,934 |
|
|
|
(43.4 |
)% |
Distributed |
|
|
21,353 |
|
|
|
27,508 |
|
|
|
(22.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Software License Fees |
|
|
40,546 |
|
|
|
61,442 |
|
|
|
(34.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Maintenance Fees |
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
|
80,392 |
|
|
|
88,524 |
|
|
|
(9.2 |
) |
Distributed |
|
|
30,735 |
|
|
|
38,003 |
|
|
|
(19.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Maintenance Fees |
|
|
111,127 |
|
|
|
126,527 |
|
|
|
(12.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Product Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
|
99,585 |
|
|
|
122,458 |
|
|
|
(18.7 |
) |
Distributed |
|
|
52,088 |
|
|
|
65,511 |
|
|
|
(20.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Product Revenue |
|
$ |
151,673 |
|
|
$ |
187,969 |
|
|
|
(19.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Products segment revenue by geographic location is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
80,608 |
|
|
$ |
99,328 |
|
Europe and Africa |
|
|
49,077 |
|
|
|
61,654 |
|
Other international operations |
|
|
21,988 |
|
|
|
26,987 |
|
|
|
|
|
|
|
|
Total products segment revenue |
|
$ |
151,673 |
|
|
$ |
187,969 |
|
|
|
|
|
|
|
|
27
COMPUWARE CORPORATION AND SUBSIDIARIES
Our software products are designed to enhance the effectiveness of key disciplines throughout the
IT organization from application development and delivery to service management and IT portfolio
management supporting all major enterprise computing platforms. Product revenue, which consists of
software license fees and maintenance fees, comprised 70.7% and 63.0% of total revenue during the
first quarter of 2010 and 2009, respectively.
Software license fees
Software license fees (license fees) decreased $20.9 million or 34.0%, which included a negative
impact from foreign currency fluctuations of $4.0 million, during the first quarter of 2010 to
$40.5 million from $61.4 million during the first quarter of 2009.
Mainframe license fees for the first quarter of 2010 declined $14.7 million and distributed license
fees for the first quarter of 2010 declined $6.2 million compared to the same period from the prior
year.
The decline in software license fees for the first quarter 2010 as compared to 2009 was a result of
the economic slowdown experienced since the end of the first quarter of 2009 affecting the closure
of license transactions across all product lines within mainframe and the Vantage and Changepoint
distributed product lines.
During the first quarter of 2010, for software license transactions that are required to be
recognized ratably, we deferred $10.7 million of license revenue relating to such transactions that
closed during the period. We recognized as revenue $24.4 million of previously deferred license
revenue relating to such transactions that closed and had been deferred prior to the beginning of
the period, including $7.2 million related to our divested products.
Maintenance fees
Maintenance fees decreased $15.4 million or 12.2%, which included a negative impact from foreign
currency fluctuations of $8.1 million, during the first quarter of 2010 to $111.1 million from
$126.5 million during the first quarter of 2009.
Mainframe maintenance fees for the first quarter of 2010 declined $8.1 million and distributed
maintenance fees for the first quarter of 2010 declined $7.3 million compared to the same period
from the prior year.
The decrease in maintenance fees for the quarter was primarily due to the negative impact of
foreign currency fluctuations of $8.1 million and having one less month of Quality and DevPartner
maintenance of approximately $3.0 million as these product lines were divested at the end of May
2009 (see Note 2 of the Condensed Consolidated Financial Statements included in this report).
28
COMPUWARE CORPORATION AND SUBSIDIARIES
Products Segment Expenses
Products segment expenses include cost of software license fees, cost of maintenance fees,
technology development and support costs, sales and marketing expenses and the gain on divestiture
of our Quality and DevPartner product lines to Micro Focus. As part of this divestiture,
approximately 250 personnel related to the sales, sales support, development, maintenance and
delivery of the Quality and DevPartner product lines were transferred to Micro Focus as of June 1,
2009 which reduced the product segments compensation and benefit costs for the first quarter of
2010 compared to 2009. Changes to product segment expenses are discussed below.
Cost of software license fees includes amortization of capitalized software, the cost of
duplicating and disseminating products to customers, including associated hardware costs, and the
cost of author royalties. Cost of software license fees decreased $2.2 million or 35.2% during the
first quarter of 2010 to $3.9 million from $6.1 million in the first quarter of 2009. The decrease
was primarily due to a reduction in capitalized software amortization as $17.6 million of
capitalized software was sold to Micro Focus as part of the Quality and DevPartner divestiture.
This capitalized software was classified as held for sale at March 31, 2009, as a result, no
amortization was recorded in the first quarter of 2010 (see Note 2 of the Condensed Consolidated
Financial Statements included in this report).
As a percentage of software license fees, cost of software license fees were 9.7% and 9.9% in the
first quarter of 2010 and 2009, respectively.
Cost of maintenance fees consists of the direct costs allocated to maintenance and product
support such as helpdesk and technical support. Customers who subscribe to maintenance are also
eligible to receive the benefit of new releases as well as technical support. Cost of maintenance
fees decreased $3.0 million or 25.3% during the first quarter of 2010 to $9.0 million from $12.0
million in the first quarter of 2009. The decreases were primarily due to lower compensation and
benefit costs resulting from employee headcount reductions as part of the restructuring actions
taken during 2009 (see Note 8 of the Condensed Consolidated Financial Statements included in this
report) and to a lesser extent the transfer of employees to Micro Focus as discussed above. As a
percentage of maintenance fees, cost of maintenance fees were 8.1% and 9.5% in the first quarter of
2010 and 2009, 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. Also included are personnel costs associated with developing and
maintaining internal systems and hardware/software costs required to support all technology
initiatives. As a percentage of product revenue, costs of technology development and support were
14.2% and 12.0% in the first quarter of 2010 and 2009, respectively.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
Capitalization of internally developed software products begins when technological feasibility of
the product is established. Total technology development and support costs incurred internally and
capitalized in the first quarter of 2010 and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Technology development and support costs incurred |
|
$ |
24,376 |
|
|
$ |
25,059 |
|
Capitalized technology development and support costs |
|
|
(2,894 |
) |
|
|
(2,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology development and support costs expensed |
|
$ |
21,482 |
|
|
$ |
22,570 |
|
|
|
|
|
|
|
|
Before the capitalization of internally developed software products, total technology
development and support costs decreased $700,000 or 2.7% during the first quarter of 2010 to $24.4
million from $25.1 million in the first quarter of 2009. The decrease in expenses was primarily due
to lower compensation and benefit costs resulting from employee headcount reductions as part of the
restructuring actions taken during 2009 (see Note 8 of the Condensed Consolidated Financial
Statements included in this report) and to a lesser extent the transfer of employees to Micro Focus
as discussed above.
Sales and marketing costs consist primarily of personnel related costs associated with
product sales, sales support and marketing for our product offerings. Sales and marketing costs
decreased $8.2 million or 13.3% during the first quarter of 2010 to $53.1 million from $61.3
million in the first quarter of 2009. The decrease in sales and marketing costs was primarily a
result of the following: (1) a decrease in bonus and commission costs of $4.6 million due to the
decline in software license sales in 2010 and (2) a decrease in compensation and benefit costs of
$3.3 million resulting from employee headcount reductions as part of the restructuring actions
taken during 2009 (see Note 8 of the Condensed Consolidated Financial Statements included in this
report) and to a lesser extent the transfer of personnel to Micro Focus as discussed above.
As a percentage of product revenue, sales and marketing costs were 35.0% and 32.6% in the first
quarter of 2010 and 2009.
Gain on divestiture of product lines relates to the sale of our Quality and DevPartner
product lines to Micro Focus that occurred in May 2009. We recognized a gain of $52.4 million
during the first quarter of 2010 relating to this transaction. See Note 2 of the Condensed
Consolidated Financial Statements included in this report for more details.
30
COMPUWARE CORPORATION AND SUBSIDIARIES
PROFESSIONAL SERVICES SEGMENT
Financial information for the professional services segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, * |
|
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
53,045 |
|
|
$ |
101,832 |
|
Expenses |
|
|
50,115 |
|
|
|
93,510 |
|
|
|
|
|
|
|
|
Professional services segment contribution |
|
$ |
2,930 |
|
|
$ |
8,322 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported
as professional services on the Condensed Consolidated Statement of Operations included in this
report. |
Professional services segment revenue by geographic location is presented in the table below
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
44,749 |
|
|
$ |
82,617 |
|
Europe and Africa |
|
|
6,194 |
|
|
|
16,762 |
|
Other international operations |
|
|
2,102 |
|
|
|
2,453 |
|
|
|
|
|
|
|
|
Total professional services segment revenue |
|
$ |
53,045 |
|
|
$ |
101,832 |
|
|
|
|
|
|
|
|
During the first quarter of 2010 and 2009, the professional services segment generated a
contribution margin of 5.5% and 8.2%, respectively. The decrease in contribution margin was
primarily due to lower employee utilization rates within our Solutions Delivery Group resulting
from a decline in license sales during the last two quarters and higher costs associated with
certain fixed price projects.
2009 and 2010 Restructuring
During the second half of 2009 and the first quarter of 2010, management focused on improving the
professional services segments margins by initiating a plan to exit engagements that were
considered low-margin and by reducing headcount and operating costs resulting in restructuring
charges.
As a result, professional services revenues are expected to decline by approximately 40% in 2010
compared to 2009 but we expect improvement in the operating margin percentage of the segment as we
progress through 2010. Actions initiated to date have included exiting low margin accounts,
including our largest professional services client in the automotive industry. We expect
approximately 20% of our professional services segment revenue in 2010 to be concentrated in the
automotive industry.
If these actions do not improve the operating profit percentage of the professional services
segment as currently projected, an impairment of some or all of the $141.1 million of goodwill
related to the professional services segment at March 31, 2009 may be recorded in the future as a
non-cash charge to earnings in the period in which the carrying value exceeds fair value.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
Professional Services Segment Revenue
We offer a broad range of IT services to help businesses make the most of their IT assets. Some of
these services include outsourcing and co-sourcing, application management, product solutions,
project management, enterprise resource planning and customer relationship management services.
Professional services segment revenue decreased $48.8 million or 47.9%, which included a negative
impact from foreign currency fluctuations of $1.9 million, during the first quarter of 2010 to
$53.0 million compared to $101.8 million in the first quarter of 2009. The decrease in revenue was
a result of the actions taken during 2009 and during first quarter 2010 to exit low-margin accounts
as previously discussed.
Professional Services Segment Expenses
Professional services segment expenses consist primarily of personnel-related costs of providing
services, including billable staff, subcontractors and sales personnel. Professional services
segment expenses decreased $43.4 million or 46.4% during the first quarter of 2010 to $50.1 million
from $93.5 million in the first quarter of 2009. The decrease in expenses was primarily
attributable to lower compensation and benefit costs due to reductions in employee headcount and
reductions in subcontractor costs resulting from the 2009 and 2010 restructuring program
implemented to align operating costs with the decline in revenue (see 2009 and 2010 Restructuring
within this section).
APPLICATION SERVICES SEGMENT
Our application services, which are marketed under the brand name Covisint, provide a
software-as-a-service platform that enables industries and business communities to securely
integrate vital information and processes across users, business partners, customers, vendors and
suppliers.
Financial information for the application services segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, * |
|
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
9,670 |
|
|
$ |
8,787 |
|
Expenses |
|
|
8,786 |
|
|
|
10,312 |
|
|
|
|
|
|
|
|
Application services segment contribution (loss) |
|
$ |
884 |
|
|
$ |
(1,525 |
) |
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported
as professional services on the Condensed Consolidated Statement of Operations included in this
report. |
32
COMPUWARE CORPORATION AND SUBSIDIARIES
Application services segment revenue by geographic location is presented in the table below
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
8,343 |
|
|
$ |
7,274 |
|
Europe and Africa |
|
|
757 |
|
|
|
872 |
|
Other international operations |
|
|
570 |
|
|
|
641 |
|
|
|
|
|
|
|
|
Total application services segment revenue |
|
$ |
9,670 |
|
|
$ |
8,787 |
|
|
|
|
|
|
|
|
During the first quarter of 2010, the application services segment generated a contribution
margin of 9.1%, compared to a negative contribution margin of 17.4% during the first quarter of
2009. The improvement in contribution for the first quarter of 2010 was primarily due to growth in
revenue from the healthcare industry and reductions in expenses resulting from capitalization of
software development costs, as described below.
Application Services Segment Revenue
Application services segment revenue increased $900,000 or 10.0% during the first quarter of 2010
to $9.7 million from $8.8 million in the first quarter of 2009. The increase in revenue during the
first quarter of 2010 was due to our continued expansion into the healthcare industry.
Our application services segment generates a significant amount of revenue from the automotive
industry. We anticipate approximately 50% of our application services segment revenue in 2010 will
be derived from this industry.
Application Services Segment Expenses
Application services segment expenses consist primarily of personnel-related costs of providing
services, including technical staff, subcontractors and sales personnel. Application services
segment expenses decreased $1.5 million or 14.8% during the first quarter of 2010 to $8.8 million
from $10.3 million in the first quarter of 2009. The decrease in expenses during the first quarter
was primarily due to $850,000 in incremental cost deferrals associated with customer
implementations for which corresponding revenue and expenses will be recognized in the future and
the capitalization of $840,000 in software development costs related to the testing of product
enhancements that have reached technological feasibility.
33
COMPUWARE CORPORATION AND SUBSIDIARIES
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist primarily of costs associated with the
corporate executive, finance, human resources, administrative, legal, communications and investor
relations departments. In addition, administrative and general expenses include all
facility-related costs, such as rent, building depreciation, maintenance and utilities, associated
with worldwide sales, professional services and software development offices. Administrative and
general expenses decreased $1.0 million or 2.5% during the first quarter of 2010 to $40.1 million
from $41.1 million during the first quarter of 2009.
The decrease in expense was primarily due to the following: (1) reductions in compensation and
benefits and lower facility costs of $4.7 million primarily due to the headcount reductions and
facility closures that took place as part of the 2009 restructuring program and (2) a decrease in
director deferred compensation of $1.9 million. Prior to January 1, 2009, directors participated in
a director phantom stock program that required liability accounting. Due to the increase in our
stock price from April 1, 2008 to June 30, 2008, an expense of $1.9 million was recorded in the
first quarter of 2009. Effective January 1, 2009, the Director Phantom Stock program was terminated
with phantom shares being converted to restricted stock units eliminating the need for liability
accounting.
The decreases in expense were offset by a net gain of $5.6 million that was recorded during the
first quarter of 2009 associated with a transaction that transitioned the employment of 170 of our
professional services staff to a customer.
Other income, net (other income) consists primarily of interest income realized from cash
equivalents and investments (investments), interest earned on deferred customer receivables, and
income generated from our investment in a partially owned company. Other income decreased $1.8
million or 55.9% during the first quarter of 2010 to $1.4 million from $3.2 million in the first
quarter of 2009. The decrease in other income was primarily attributable to a decline in investment
interest income resulting from lower interest rates during first quarter 2010 compared to 2009,
partially offset by a higher average investment balance during first quarter of 2010 compared to
2009.
Income taxes are accounted for 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 $28.1 million in the
first quarter of 2010 compared to an income tax provision of $19.4 million in the first quarter of
2009 representing an effective tax rate of 35.5% and 36.0%, respectively.
RESTRUCTURING COSTS AND ACCRUAL
In the first quarter of 2010, we incurred a restructuring charge of $2.5 million (as discussed in
Note 8 of the Condensed Consolidated Financial Statements included in this report). We will
continue to evaluate our business processes to identify opportunities to streamline operations and
reduce costs, which may result in additional restructuring charges.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. 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. Assumptions and estimates were based on the facts and circumstances known at June 30, 2009.
However, future events rarely develop exactly as forecast, and the best estimates routinely require
adjustment. The accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the
year ended March 31, 2009 are considered by management to be the most important to an understanding
of the financial statements, because their application places the most significant demands on
managements judgment and estimates about the effect of matters that are inherently uncertain.
These policies are also discussed in Note 1 of the Consolidated Financial Statements included in
Item 8 of that report. There have been no material changes to that information since the end of
fiscal 2009.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2009, cash and cash equivalents totaled approximately $390.7 million, compared to
$278.1 million at March 31, 2009.
Net cash provided by operating activities:
Net cash provided by operating activities during the first quarter of 2010 was $74.9 million, an
increase of $27.1 million from the first quarter of 2009. The increase was due to the following:
(1) reduction in disbursements for employee payroll and benefits of $42 million primarily resulting
from savings achieved through our 2009 and 2010 restructuring initiatives; (2) reduction in bonus
and commission payments of $23 million and (3) reduction in payments for subcontractors of $8
million primarily within the professional services segment resulting from our strategy to exit
low-margin engagements. The increases to operating activities were partially offset by the
following: (1) reduction in customer collections of $39 million due to our declines in revenue,
primarily professional services and license fees; (2) increase in income taxes paid during 2010
compared to 2009 of $5 million and (3) decrease in investment interest received of $2 million.
The Condensed Consolidated Statements of Cash Flows included in this report compute net cash from
operating activities using the indirect cash flow method. Therefore non-cash adjustments and net
changes in assets and liabilities (net of the effects of the divestiture and currency fluctuations)
are adjusted from net income to derive net cash from operating activities. Changes in accounts
receivable and deferred revenue have typically had the largest impact on the reconciliation of net
income to compute cash flows from operating activities as we allow for deferred payment terms on
multi-year products contracts. The combined net change in accounts receivable and deferred revenue
increased cash flow from operating activities by $43.8 million in the first quarter of 2010 as
compared to the same period in 2009. The decline in revenue over the past year, primarily
professional services and software license fees, has caused the accounts receivable and deferred
revenue balances at June 30, 2009 to be lower compared to June 30, 2008.
The other significant changes in our reconciliation of net income to derive net cash from operating
activities during the first quarter of 2010 as compared to the first quarter of 2009 were as
follows:
35
COMPUWARE CORPORATION AND SUBSIDIARIES
|
(1) |
|
Adjustment to net income of $52.4 million resulting from the gain on divestiture of our
Quality and DevPartner product lines for which proceeds from sale were recorded to
investing activities. See Note 2 of the Condensed Consolidated Financial Statements
included in this report for more details. |
|
(2) |
|
The increase to cash flows from operating activities resulting from the net change in
accounts payable and accrued expenses of $19.5 million was primarily due to lower
commission and bonus accruals recorded at March 31, 2009 compared to March 31, 2008 causing
a lesser cash outflow impact to operating activities from the changes in accruals during
the first quarter of 2010 compared to 2009. |
As of June 30, 2009, $2.8 million was accrued related to restructuring actions (see Note 8 of the
Condensed Consolidated Financial Statements included in this report). We continue to evaluate our
business processes to identify ways to reduce costs. Any further actions will likely result in
additional restructuring charges. The amount of such charges will depend upon the nature, timing
and extent of the restructuring actions taken.
We believe our existing cash resources and cash flow from operations will be sufficient to meet
operating cash needs for the foreseeable future.
Net cash provided by investing activities:
Net cash provided by investing activities during the first quarter of 2010 was $59.3 million, an
increase of $50.6 million from the first quarter of 2009. The increase was primarily due to $65
million of proceeds received from the sale of the Quality and DevPartner product lines to Micro
Focus during the first quarter of 2010 (see Note 2 of the Condensed Consolidated Financial
Statements for more details) offset by a decline in the amount of investments liquidated. In the
first quarter of 2009, we received $13.9 million of proceeds from the liquidation of investments.
There were no investments liquidated during the first quarter of 2010.
During the first quarter of 2010 and 2009, capital expenditures for property and equipment and
capitalized research and software development totaled $5.7 million and $5.2 million, respectively,
and were funded with cash flows from operations.
There were no business acquisitions in the first quarter of 2010 or 2009. However, we continue to
evaluate business acquisition opportunities that fit our strategic plans.
Net cash used in financing activities:
Net cash used in financing activities during the first quarter of 2010 was $30.1 million, a
decrease of $26.5 million from the first quarter of 2009.
The decrease was primarily due to reductions in the amount of common stock repurchased during first
quarter of 2010 compared to 2009. We used $32.3 million in cash to repurchase common stock during
the first quarter of 2010 compared to $58.9 million in 2009, a decline of $26.6 million.
Since May 2003, the Board of Directors has authorized the repurchase of a total of $1.7 billion of
our common stock under a Discretionary Plan. Purchases of common stock under the Discretionary Plan
may occur on the open market, or through negotiated or block transactions based upon market and
business conditions, subject to applicable legal limitations.
36
COMPUWARE CORPORATION AND SUBSIDIARIES
During the first quarter of 2010, we repurchased approximately 4.3 million shares of our common
stock at an average price of $7.52 per share for a total cost of $32.3 million. As of June 30,
2009, approximately $505 million remains authorized for future purchases under the Discretionary
Plan.
We intend to continue repurchasing shares under the Discretionary Plan, funded primarily through
our operating cash flow and, if needed, funds from our credit facility. Our long-term goal is to
reduce our outstanding common share count to approximately 200 million shares. We reserve the right
to change the timing and volume of our repurchases at any time without notice. The maximum amount
of repurchase activity under the Discretionary Plan, excluding block purchases and negotiated
transactions, continues to be limited on a daily basis to 25% of the average daily trading volume
of our common stock during the previous four week period. In addition, no purchases are made during
our self-imposed trading black-out periods in which the Company and our insiders are prohibited
from trading in our common shares. Our standard quarterly black-out period commences 10 business
days prior to the end of each quarter and terminates one full market day following the public
release of our earnings.
The Company has a credit facility with Comerica Bank and other lenders to provide leverage for the
Company if needed. The credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The credit facility also permits us to increase the
facility by an additional $150 million, subject to receiving further commitments from lenders and
certain other conditions. The credit facility also limits borrowing outside of the facility to $250
million. No borrowings have occurred under this credit facility.
Recently Issued Accounting Pronouncements
See Note 1 of the Condensed Consolidated Financial Statements included in this report for recently
issued accounting pronouncements that could affect the Company.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended March 31, 2009. Except as described elsewhere in this report on Form 10-Q, there have
been no material changes to those obligations or arrangements outside of the ordinary course of
business since the end of fiscal 2009.
37
COMPUWARE CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed primarily to market risks associated with movements in interest rates and foreign
currency exchange rates. There have been no material changes to our foreign exchange risk
management strategy or our investment standards subsequent to March 31, 2009, therefore the market
risks remain substantially unchanged since we filed the Annual Report on Form 10-K for the fiscal
year ending March 31, 2009.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information
required to be disclosed in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that a control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any,
with a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective, at the reasonable
assurance level, to cause information required to be disclosed in the reports that we file or
submit under the Exchange Act to be recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required financial disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the fiscal quarter
ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
38
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes to the Risk Factors as previously disclosed in our Form 10-K
for the fiscal year ended March 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth, the repurchases of common stock for the quarter ended June 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of shares |
|
|
|
|
|
|
|
|
|
|
Total number of |
|
that may yet be |
|
|
|
|
|
|
Average |
|
shares purchased |
|
purchased under |
|
|
Total number of |
|
price paid |
|
as part of publicly |
|
the plan or |
Period |
|
shares purchased |
|
per share |
|
announced plans |
|
program (1) |
For the month ended April 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
536,861,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the month ended May 31, 2009 |
|
|
1,200,000 |
|
|
$ |
7.54 |
|
|
|
1,200,000 |
|
|
|
527,815,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the month ended June 30, 2009 |
|
|
3,094,000 |
|
|
|
7.52 |
|
|
|
3,094,000 |
|
|
|
504,555,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,294,000 |
|
|
$ |
7.52 |
|
|
|
4,294,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our purchases of common stock may occur on the open market or in negotiated or
block transactions based upon market and business conditions. Unless terminated
earlier by resolution of our Board of Directors, the discretionary share repurchase
plan will expire when we have repurchased all shares authorized for repurchase
thereunder. The maximum amount of repurchase activity under the discretionary
program continues to be limited on a daily basis to 25% of the average trading
volume of our common stock for the previous four week period. In addition, no
purchases are made during our self-imposed trading black-out periods in which the
Company and our insiders are prohibited from trading in our common shares. |
39
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
2.8
|
|
Asset Purchase Agreement between Compuware Corporation and Micro
Focus Holdings Limited, dated as of May 5, 2009 (filed with the Companys Form
8-K filed on May 11, 2009 and incorporated herein by reference) |
|
|
|
10.122
|
|
Executive Incentive Plan Corporate, as of June 10, 2009 (filed with the
Companys Form 8-K filed on June 12, 2009 and incorporated herein by reference) |
|
|
|
10.123
|
|
Form of Restricted Stock Unit Award Agreement as of June 10, 2009 (filed with
the Companys Form 8-K filed on June 12, 2009 and incorporated herein by
reference) |
|
|
|
15
|
|
Independent Registered Public Accounting Firms Awareness Letter
(1) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b)
of the Securities Exchange Act. (1) |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
COMPUWARE CORPORATION
|
|
Date: August 6, 2009 |
By: |
/s/ Peter Karmanos, Jr.
|
|
|
Peter Karmanos, Jr. |
|
|
Chief Executive Officer
(duly authorized officer) |
|
|
|
|
|
Date: August 6, 2009 |
By: |
/s/ Laura L. Fournier
|
|
|
Laura L. Fournier |
|
|
Executive Vice President,
Chief Financial Officer and
Treasurer
(principal financial officer) |
|
|
41