UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
COMMISSION FILE NUMBER 000-20900
COMPUWARE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE CAMPUS MARTIUS, DETROIT, MI 48226-5099
(Address of principal executive offices including zip code)
Registrant's 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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
As of January 31, 2007, there were outstanding 324,242,394 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 35 pages
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2006 and March 31, 2006 3
Condensed Consolidated Statements of Operations
for the three and nine months ended December 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 2006 and 2005 5
Notes to Condensed Consolidated Financial
Statements 6
Report of Independent Registered Public Accounting Firm 19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 6. Exhibits 33
SIGNATURES 34
2
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
2006 2006
------------ ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 284,051 $ 612,062
Investments 222,397 265,131
Accounts receivable, net 421,935 418,745
Deferred tax asset, net 32,038 32,015
Income taxes refundable, net 75,942 77,956
Prepaid expenses and other current assets 27,589 24,455
Building - held for sale 14,816
---------- ----------
Total current assets 1,063,952 1,445,180
---------- ----------
INVESTMENTS 83,460 32,149
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 388,891 395,653
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 66,599 61,918
---------- ----------
OTHER:
Accounts receivable 190,217 206,964
Deferred tax asset, net 15,579 13,983
Goodwill 334,769 320,082
Other 34,853 35,039
---------- ----------
Total other assets 575,418 576,068
---------- ----------
TOTAL ASSETS $2,178,320 $2,510,968
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,841 $ 24,468
Accrued expenses 166,123 170,590
Deferred revenue 331,601 350,349
---------- ----------
Total current liabilities 524,565 545,407
DEFERRED REVENUE 308,300 343,246
ACCRUED EXPENSES 12,168 17,244
DEFERRED TAX LIABILITY, NET 36,806 25,572
---------- ----------
Total liabilities 881,839 931,469
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 3,282 3,779
Additional paid-in capital 683,755 763,420
Retained earnings 597,872 805,781
Accumulated other comprehensive income 11,572 6,519
---------- ----------
Total shareholders' equity 1,296,481 1,579,499
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,178,320 $2,510,968
========== ==========
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
2006 2005 2006 2005
-------- -------- -------- --------
REVENUES:
Software license fees $ 86,013 $ 83,253 $210,187 214,864
Maintenance fees 114,432 107,647 339,881 325,922
Professional services fees 114,703 115,005 349,905 355,093
-------- -------- -------- --------
Total revenues 315,148 305,905 899,973 895,879
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 7,529 5,791 21,124 17,030
Cost of maintenance fees 10,157 10,249 30,079 30,703
Cost of professional services 102,189 101,894 313,449 313,083
Technology development and support 27,047 24,361 83,904 73,960
Sales and marketing 73,346 73,547 206,825 213,782
Administrative and general 52,139 43,029 143,523 142,557
-------- -------- -------- --------
Total operating expenses 272,407 258,871 798,904 791,115
-------- -------- -------- --------
INCOME FROM OPERATIONS 42,741 47,034 101,069 104,764
OTHER INCOME, NET 9,012 9,234 30,506 23,819
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 51,753 56,268 131,575 128,583
INCOME TAX PROVISION 15,267 18,568 40,959 42,070
-------- -------- -------- --------
NET INCOME $ 36,486 $ 37,700 $ 90,616 $ 86,513
======== ======== ======== ========
Basic earnings per share $ 0.11 $ 0.10 $ 0.25 0.22
======== ======== ======== ========
Diluted earnings per share $ 0.11 $ 0.10 $ 0.25 0.22
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
---------------------
2006 2005
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 90,616 $ 86,513
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 40,547 37,869
Acquisition tax benefits 3,860 5,254
Stock option compensation 7,211
Deferred income taxes 9,864 23,016
Other (183) 9,848
Net change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable 36,782 51,226
Prepaid expenses and other current assets (2,689) 1,570
Other assets (166) (964)
Accounts payable and accrued expenses (18,155) (20,195)
Deferred revenue (76,125) (70,026)
Income taxes 1,704 (9,827)
--------- ---------
Net cash provided by operating activities 93,266 114,284
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses, net of cash acquired (20,484) (30,917)
Property and equipment (15,317) (11,101)
Capitalized software (16,003) (14,266)
Proceeds from sale of property 15,466
Investments:
Proceeds 368,120 312,169
Purchases (376,387) (264,042)
--------- ---------
Net cash used in investing activities (44,605) (8,157)
--------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 11,899 10,513
Contribution to stock purchase plans 3,688 6,527
Repurchase of common stock (398,741) (77,459)
--------- ---------
Net cash used in financing activities (383,154) (60,419)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,482 (6,491)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (328,011) 39,217
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 612,062 497,687
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 284,051 $ 536,904
========= =========
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(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 ("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 GAAP for complete
financial statements. Generally accepted accounting principles require
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 December 31, 2006, 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 Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 2006 included in the
Company's Annual Report to Shareholders on Form 10-K filed with the Securities
and Exchange Commission ("SEC"). The condensed consolidated balance sheet at
March 31, 2006 has been derived from the audited financial statements at that
date but does not include all information and footnotes required by GAAP for
complete financial statements. The results of operations for interim periods are
not necessarily indicative of actual results achieved for full fiscal years.
The Company disclosed cost of maintenance fees as a separate line in the income
statement during the third quarter of fiscal 2007. As a result, the fiscal 2006
financial statements have been reclassified to conform to the fiscal 2007
presentation. This reclassification does not affect net income and is immaterial
to the financial statements overall.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services. The Company's revenue recognition policies are consistent
with 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 104 and Emerging Issues Task Force Issue 00-21 "Revenue Arrangements
with Multiple Deliverables". Accordingly, the Company recognizes revenue when
all of the following criteria are 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 Company's 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 (e.g., 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, net of discretionary discounts
(the residual), is recognized as license fee revenue upon delivery of the
products, provided that no significant obligations remain and collection of the
related receivable is deemed probable. For term licenses and for agreements in
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
which the fair value of the undelivered elements cannot be determined using
VSOE, the Company recognizes the license fee revenue on a ratable basis over the
term of the license agreement or when all elements have been delivered,
depending on the nature of the undelivered elements.
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 multi-year contracts, with installments collectible
over the term of the contract. Based on the Company's successful collection
history for deferred payments, the license fee portion of the receivable is
discounted to its net present value and recognized as discussed above. The
discount is recognized as interest income over the term of the receivable.
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all license
agreements for up to one year. Maintenance is renewable thereafter for an annual
fee. Maintenance fees are deferred and recognized as revenue on a ratable basis
over the maintenance period.
Professional services fees - Professional services fees are generally based on
hourly or daily rates; therefore, revenues from professional services are
recognized in the period the services are performed provided that collection of
the related receivable is deemed probable. However, for development services
rendered under fixed-price contracts, revenue is recognized using the percentage
of completion method. Certain professional services contracts include a project
and on-going operations for the project. Revenue associated with these contracts
is recognized over the service period as the customer derives value from the
services, consistent with the proportional performance method.
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 in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed". 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 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 available for general release to customers. The amortization
period for capitalized software is generally five years.
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
Goodwill and Other Intangibles - Goodwill that is allocated to each operating
segment and those intangible assets with indefinite lives are tested for
impairment annually and/or when events or circumstances indicate that their fair
value may have been reduced below carrying value. The Company evaluated its
goodwill as of March 31, 2006 and determined there was no impairment.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. Deferred income taxes are provided for the differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements.
Stock-Based Compensation - Effective April 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") using the modified
prospective transition method and therefore has not restated results for prior
periods. Under this transition method, stock-based compensation expense for the
first nine months of fiscal 2007 includes compensation expense for all
stock-based compensation awards ("awards") granted prior to, but not yet vested
as of April 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Stock-based compensation expense for all awards
granted after April 1, 2006 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). The Company recognizes these
compensation costs net of an estimated forfeiture rate on a straight-line basis
over the requisite service period of the award, which is generally the vesting
term of five years. In March 2005, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's
interpretation of SFAS 123(R) and the valuation of share-based payments for
public companies. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123(R). See Note 5 to the condensed consolidated financial
statements for a further discussion on stock-based compensation including the
impact on net income during the period.
Prior to the adoption of SFAS 123(R), the Company measured compensation expense
for its stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Awards were granted at current market prices at
the date of grant. Therefore, no compensation cost was recognized for the
Company's fixed stock option plans or its stock purchase plans. The Company
applied the disclosure provisions of SFAS 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure", as if
the fair-value-based method had been applied in measuring compensation expense.
Recently Issued Accounting Pronouncements - In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109",
which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements
the impact of a tax position if that position is more likely than not to be
sustained on audit, based on the technical merits of the position. This
Interpretation is effective for fiscal years beginning after December 15, 2006,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. Management is currently considering the
impact this Interpretation will have on the Company's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit)
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
assets or liabilities to be measured at fair value, and therefore, does not
expand the use of fair value in any new circumstances. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact this Statement will have on the Company's
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), codified as SAB Topic 1.N, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements." SAB 108 describes the approach that should
be used to quantify the materiality of a misstatement and provides guidance for
correcting prior year errors. The Company adopted SAB 108 in the second quarter
of 2007. The adoption of SAB 108 did not result in any adjustments to the
Company's financial statements.
NOTE 2 - ACQUISITION
In April 2006, the Company acquired SteelTrace Limited, a privately held
provider of requirements management products that align application delivery to
business needs through a structured, visual approach to the management of
enterprise application requirements, for approximately $20.7 million in cash.
The acquisition has been accounted for using the purchase method in accordance
with SFAS No. 141, "Business Combinations" and, accordingly, the assets and
liabilities acquired have been recorded at preliminary fair value as of the
acquisition date. The purchase price exceeded the fair value of the acquired
assets and liabilities by $14.2 million, which was recorded to goodwill.
Intangible assets subject to amortization totaled $6.5 million of which $4.7
million and $1.5 million related to purchased software and customer
relationships with a useful life of five and three years, respectively. The
remaining intangible assets subject to amortization have a useful life of one
year.
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
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 Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
BASIC EARNINGS PER SHARE:
Numerator: Net income $ 36,486 $ 37,700 $ 90,616 $ 86,513
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 342,078 385,081 360,833 386,874
-------- -------- -------- --------
Basic earnings per share $ 0.11 $ 0.10 $ 0.25 $ 0.22
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Numerator: Net income $ 36,486 $ 37,700 $ 90,616 $ 86,513
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 342,078 385,081 360,833 386,874
Dilutive effect of stock options 1,021 3,194 510 2,405
-------- -------- -------- --------
Total shares 343,099 388,275 361,343 389,279
-------- -------- -------- --------
Diluted earnings per share $ 0.11 $ 0.10 $ 0.25 $ 0.22
======== ======== ======== ========
During the three and nine months ended December 31, 2006, stock options to
purchase a total of approximately 36,019,000 and 44,215,000 shares,
respectively, were excluded from the diluted earnings per share calculation
because they were anti-dilutive. During the three and nine months ended December
31, 2005, stock options to purchase a total of approximately 38,860,000 and
39,143,000 shares, respectively, were excluded from the diluted earnings per
share calculation because they were anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gains and losses on marketable
securities and foreign currency translation gains and losses that have been
excluded from net income and reflected in equity. Total comprehensive income is
summarized as follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income $36,486 $37,700 $90,616 $86,513
Unrealized gain (loss) on marketable
securities, net of tax 31 71 (196)
Foreign currency translation
adjustment, net of tax 1,770 (850) 4,982 (2,320)
------- ------- ------- -------
Total comprehensive income $38,256 $36,881 $95,669 $83,997
======= ======= ======= =======
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
NOTE 5 - STOCK BENEFIT PLANS AND STOCK-BASED COMPENSATION
Employee Stock Purchase Plan - During fiscal 2002, the shareholders approved
international and domestic employee stock purchase plans under which the Company
was authorized to issue up to 15 million shares of common stock to eligible
employees. Effective April 1, 2005, the offering periods were based on a three
month period. Under the terms of the plan, employees can elect to have up to ten
percent of their compensation withheld to purchase Company stock at the close of
the offering period. The value of the stock purchased in any calendar year
cannot exceed $25,000 per employee. Effective April 1, 2006, the purchase price
is 95% of the last day's average high and low price for each offering period
consistent with the non-compensatory requirements of SFAS 123(R).
Employee Stock Option Plans - The Company adopted five employee stock option
plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees and directors
of the Company. Under the terms of the plans, the Company may grant nonqualified
options at the fair market value of the stock on the date of grant. Fifty
percent of the option shares granted under these plans become exercisable on the
third year anniversary of the date of grant, and 25 percent of the option shares
vest on each of the fourth year and fifth year anniversaries of the date of
grant. All options were granted at fair market value and expire ten years from
the date of grant.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval, as shareholder approval was not required at the time.
The plan provides for grants of options to purchase up to 50,000,000 shares of
the Company's common stock to employees or directors of the Company. Under the
terms of the plan, the Company may grant nonqualified stock options at the fair
market value of the stock on the date of grant. Option shares granted under the
Broad Based Stock Option Plan either vest every six months over a four year
period or fifty percent of the option shares become exercisable on the third
year anniversary of the date of grant, and 25 percent of the option shares vest
on each of the fourth year and fifth year anniversaries of the date of grant.
All options were granted at fair market value and expire ten years from the date
of grant.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming a
director.
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction.
11
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
The following is a summary of the status of fixed stock option grants under
Compuware's stock-based compensation plans as of December 31, 2006 and changes
during the nine months ended December 31, 2006 (intrinsic values and shares in
thousands):
Nine Months Ended December 31, 2006
----------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term Value (1)
--------- -------- ----------- ---------
Options outstanding as of April 1, 2006 55,710 $11.66
Granted 2,130 7.37
Exercised (1,604) 7.14 $ 1,952
Forfeited (650) 6.68
Cancelled/expired (2,351) 12.18
------ ------
Options outstanding as of December 31, 2006 53,235 $11.66
====== ======
Options vested and expected to vest, net of
estimated forfeitures, as of December 31, 2006 51,488 $11.81 3.43 $16,399
Options exercisable as of December 31, 2006 44,647 $12.52 2.78 $ 8,087
(1) For options exercised during the nine months ended December 31, 2006, the
aggregate intrinsic value represents the difference between the Company's
closing common stock price on the date the option was exercised and the
exercise price, multiplied by the number of options exercised. For options
vested and expected to vest, net of estimated forfeitures and options
exercisable as of December 31, 2006, the aggregate intrinsic value
represents the difference between the Company's closing common stock price
on the last trading day of the third quarter of fiscal 2007 and the
exercise price, multiplied by the number of in-the-money options that would
have been received by the option holders had the vested options been
exercised on December 31, 2006. This amount changes based upon changes in
the fair market value of the Company's common stock.
SFAS 123(R) 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 volatility is
based on historical volatility of the Company's common stock over the most
recent period commensurate with the estimated expected term of the stock option
granted. The Company uses historical volatility because management believes such
volatility is representative of prospective trends. The expected term of an
award is based on the "short-cut" method as described in SAB 107. The risk-free
interest rate assumption is based upon observed interest rates appropriate for
the expected term of our awards. The dividend yield assumption is based on the
Company's history and expectation regarding dividend payouts.
12
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
For the nine months ended December 31, 2006, the weighted average fair value of
stock options granted and the assumptions used to estimate those values using a
Black-Scholes option pricing model were as follows:
Nine Months Ended
December 31, 2006
-----------------
Expected volatility 68.87%
Risk-free interest rate 4.82%
Expected lives at date of grant (in years) 6.9
Weighted average fair value of the options granted $ 5.04
For the three and nine months ended December 31, 2006 stock-based compensation
expense was allocated as follows (in thousands):
Three Months Ended Nine Months Ended
December 31, 2006 December 31, 2006
------------------ -----------------
Stock-based compensation classified as:
Cost of software license fees $ 1 $ 2
Cost of maintenance fees 80 206
Cost of professional services 415 1,202
Technology development and support 213 574
Sales and marketing 866 3,036
Administrative and general 774 2,191
------ -------
Total stock-based compensation expense
before income taxes 2,349 7,211
Income tax benefit (799) (2,452)
------ -------
Total stock-based compensation expense
after income taxes $1,550 $ 4,759
====== =======
Effect on basic earnings per share $ 0.00 $ (0.01)
Effect on diluted earnings per share 0.00 (0.01)
As of December 31, 2006, $17.9 million of total unrecognized compensation cost,
net of estimated forfeitures, related to unvested stock options is expected to
be recognized over a weighted-average period of approximately 2.84 years.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based
awards using the intrinsic value method in accordance with APB 25. Under the
intrinsic value method, no stock based compensation expense had been recognized
in the results of operations for stock-based awards because the exercise price
of the stock options granted equaled the fair market value of the underlying
stock at the date of grant. By electing the modified prospective transition
method allowed under SFAS 123(R), the Company's Consolidated Statements of
Operations prior to April 1, 2006 have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
13
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
If compensation cost for the Company's stock-based compensation plans had been
recorded based on the fair value at the grant dates for the three and nine
months ended December 31, 2005 consistent with the method prescribed by SFAS
123(R), the Company's net income and earnings per share would have been adjusted
to the pro forma amounts indicated below (in thousands, except earnings per
share data):
Three Months Ended Nine Months Ended
December 31, 2005 December 31, 2005
------------------ -----------------
Net income:
As reported $37,700 $86,513
Compensation cost, net of tax (2,451) (7,479)
------- -------
Pro forma $35,249 $79,034
======= =======
Earnings per share:
As reported:
Basic earnings per share $ 0.10 $ 0.22
Diluted earnings per share 0.10 0.22
Pro forma:
Basic earnings per share 0.09 0.20
Diluted earnings per share 0.09 0.20
For the nine months ended December 31, 2005, the weighted average fair value of
stock options granted and the assumptions used to estimate those values using a
Black-Scholes option pricing model were as follows:
Nine Months Ended
December 31, 2005
-----------------
Expected volatility 74.22%
Risk-free interest rate 3.63%
Expected lives at date of grant (in years) 5.0
Weighted average fair value of the options granted $ 4.31
Dividend yields have never been 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.
14
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
December 31, 2006
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,853 $ 5,853
======== =======
Amortized intangible assets:
Capitalized software (2) $317,230 $(250,631) $66,599
Customer relationship agreements (3) 10,794 (4,812) 5,982
Non-compete agreements (3) 2,287 (1,910) 377
Other (4) 6,730 (5,708) 1,022
-------- --------- -------
Total amortized intangible assets $337,041 $(263,061) $73,980
======== ========= =======
March 31, 2006
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,853 $ 5,853
======== =======
Amortized intangible assets:
Capitalized software (2) $295,996 $(234,078) $61,918
Customer relationship agreements (3) 9,235 (2,935) 6,300
Non-compete agreements (3) 2,057 (1,164) 893
Other (4) 6,381 (5,091) 1,290
-------- --------- -------
Total amortized intangible assets $313,669 $(243,268) $70,401
======== ========= =======
(1) Certain trademarks were acquired as part of the Covisint, LLC ("Covisint")
and Changepoint Corporation ("Changepoint") acquisitions in fiscal 2004 and
2005. These trademarks are deemed to have an indefinite life and therefore
are not amortized.
(2) Amortization of capitalized software is primarily included in "cost of
software license fees" in the consolidated statements of operations.
Capitalized software is generally amortized over five years.
(3) Customer relationship agreements and non-compete agreements were recorded
as part of recent 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.
15
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
Changes in the carrying amounts of goodwill are summarized as follows (in
thousands):
Goodwill Products Services Total
-------- -------- --------
Balance at March 31, 2006, net $178,910 $141,172 $320,082
Acquisition 14,175 14,175
Adjustments to previously recorded purchase price 79 79
Effect of foreign currency translation (6) 439 433
-------- -------- --------
Balance at December 31, 2006, net 193,158 141,611 334,769
======== ======== ========
NOTE 7 - PROPERTY AND EQUIPMENT
During fiscal 2005, the Company implemented a plan to market and sell the former
headquarters building located in Farmington Hills, Michigan. The building was
classified in current assets as held for sale with a carrying value of $13.0
million at March 31, 2006. This building was sold during the second quarter of
fiscal 2007 for $13.4 million.
During fiscal 2006, the Company implemented a plan to market and sell the former
distribution center located in West Bloomfield, Michigan. The building was
classified in current assets as held for sale with a carrying value of $1.8
million at March 31, 2006. This building was sold during the first quarter of
fiscal 2007 for approximately $2.0 million.
16
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
NOTE 8 - SEGMENTS
The Company operates in two business segments in the technology industry:
products and professional services. The Company provides software products and
professional services to IT organizations that help IT professionals efficiently
develop, implement and support the applications that run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ---------------------
2006 2005 2006 2005
-------- -------- --------- ---------
Revenues:
Products:
Mainframe $132,194 $129,775 $ 365,881 $ 375,380
Distributed systems 68,251 61,125 184,187 165,406
-------- -------- --------- ---------
Total product revenue 200,445 190,900 550,068 540,786
Professional services 114,703 115,005 349,905 355,093
-------- -------- --------- ---------
Total revenues $315,148 $305,905 $ 899,973 $ 895,879
======== ======== ========= =========
Operating expenses:
Products $118,079 $113,948 $ 341,932 $ 335,475
Professional services 102,189 101,894 313,449 313,083
Corporate expenses 52,139 43,029 143,523 142,557
-------- -------- --------- ---------
Total operating expenses $272,407 $258,871 $ 798,904 $ 791,115
======== ======== ========= =========
Income (loss) from operations
before other income:
Products $ 82,366 $ 76,952 $ 208,136 $ 205,311
Professional services 12,514 13,111 36,456 42,010
Corporate expenses (52,139) (43,029) (143,523) (142,557)
-------- -------- --------- ---------
Income from operations
before other income 42,741 47,034 101,069 104,764
Other income, net 9,012 9,234 30,506 23,819
-------- -------- --------- ---------
Income before income taxes $ 51,753 $ 56,268 $ 131,575 $ 128,583
======== ======== ========= =========
Financial information regarding geographic operations is presented in the table
below (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenues:
United States $203,470 $203,183 $598,748 $599,493
Europe and Africa 80,975 76,672 217,948 224,842
Other international operations 30,703 26,050 83,277 71,544
-------- -------- -------- --------
Total revenues $315,148 $305,905 $899,973 $895,879
======== ======== ======== ========
17
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
NOTE 9 - RESTRUCTURING ACCRUAL
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
to reorganize its operating divisions, primarily the professional services
segment. These changes were designed to increase profitability by better
aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization.
The following table summarizes the restructuring accrual as of March 31, 2006,
and charges against the accrual during the first nine months of fiscal 2007 (in
thousands):
Charges and Charges and
adjustments against adjustments against
Balance at the accrual during the accrual during Balance at
March 31, the six months ended the quarter ended December 31,
2006 September 30, 2006 December 31, 2006 2006
---------- -------------------- ------------------- ------------
Facilities costs (primarily
lease abandonments) $5,950 $2,321 $428 $3,201
During the second quarter of 2007, the Company recorded a reduction of $1.5
million in the restructuring accrual related to subleases of abandoned lease
space in excess of what was originally anticipated. These adjustments were
included in administrative and general expense.
NOTE 10 - DEBT
The Company has no long term debt.
The Company holds a $100 million revolving credit facility. On July 27, 2006,
the Company amended the credit agreement extending the maturity to July 26,
2007. The amended credit agreement eliminated the liquidity and net worth
covenants and no longer restricts merger and acquisition activity when the
Company is the continuing or surviving entity. Interest is payable at 1% over
the Eurodollar rate or at the prime rate (8.25% at December 31, 2006), at the
Company's option. No borrowings have occurred under this facility.
NOTE 11 - SUBSEQUENT EVENTS
In January 2007, the Company acquired Proxima Technology Group, Inc. ("Proxima")
for approximately $37.0 million in cash. Proxima is a privately held provider of
the Centauri product that will complement our Vantage product line by giving
customers the ability to manage service delivery from a business perspective.
The acquisition will be accounted for as a purchase and, accordingly, assets and
liabilities acquired will be recorded at fair value as of the acquisition date.
18
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 December 31, 2006,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended December 31, 2006 and 2005 and cash
flows for the nine-month periods ended December 31, 2006 and 2005. These interim
financial statements are the responsibility of the Company's 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.
As discussed in Note 1 to the condensed consolidated financial statements,
effective April 1, 2006, the Company changed its method of accounting for stock
based compensation to conform to Statement of Financial Accounting Standards No.
123R, Share-Based Payment.
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, 2006, 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 15, 2006, 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, 2006 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 7, 2007
19
COMPUWARE CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates," "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect our operating results 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. A summary of the
material risks and uncertainties that we believe affect us are highlighted below
and have not materially changed since the end of fiscal 2006 (see Item 1A Risk
Factors in our 2006 10-K for a more detailed explanation of each risk). These
risks and uncertainties are not the only ones we face. Additional 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. 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, and on the acceptance of our
pricing structure for software licenses and maintenance.
- Our software and technology may infringe the proprietary rights of
others.
- 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.
- Maintenance revenue could decline.
- Our quarterly financial results vary and may be adversely affected by
a number of unpredictable factors.
- Our results could be adversely affected by increased competition,
pricing pressures and technological changes.
- Unanticipated changes in our operating results or effective tax rates,
or exposure to additional income tax liabilities, could affect our
profitability.
- Our results could be adversely affected if our operating margins
decline.
- A further decline in the U.S. domestic automotive manufacturing
business could adversely affect our professional services business.
- The market for professional services is highly competitive, fragmented
and characterized by low barriers to entry.
- We are exposed to exchange rate risks on foreign currencies and to
other international risks which 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.
20
COMPUWARE CORPORATION AND SUBSIDIARIES
- 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 have anti-takeover effects that may
deter hostile takeovers or delay or prevent changes in control or
management, including transactions in which the stockholders of
Compuware might otherwise receive a premium for their shares over the
current market prices.
OVERVIEW
In this section, we discuss our results of operations on a segment basis for
each of our financial reporting segments. We operate in two business segments in
the technology industry: products and professional 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 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, 2006, particularly "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
We deliver value to businesses worldwide by providing software products and
professional services that increase the efficiency and effectiveness of the
entire IT organization. Originally founded in 1973 as a professional services
company, in the late 1970's we began to offer mainframe productivity tools for
fault management and diagnosis, file and database management, and application
debugging.
In the 1990's, the IT industry 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 and manage application service using business-relevant
metrics, 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 today's global economy, enterprises must
securely share applications, information and business processes. We address this
market need through our Covisint offerings, which help manage the supply chain
through the integration of vital business information and processes between
partners, customers and suppliers.
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines, expanding our product and service offerings through key
acquisitions, developing strategic partnerships in order to provide clients with
our product solutions and managing our costs.
21
COMPUWARE CORPORATION AND SUBSIDIARIES
The following occurred during the third quarter of 2007:
- Announced that the Board of Directors adopted a plan to repurchase 34
million shares of its common stock under Rule 10b5-1 of the Securities
Exchange Act of 1934 and authorized an additional repurchase of $200
million of its common stock.
- Repurchased approximately 25.5 million shares of our common stock at
an average price of $8.42 per share.
- Achieved an 11.7% increase in distributed product revenue compared to
the third quarter of 2006. The increase was a reflection of our
continued focus on promoting our distributed products and an expanding
maintenance base for those products.
- Achieved a 1.9% increase in mainframe product revenue compared to the
third quarter of 2006.
- Achieved an increase in products contribution margin to 41.1% in the
third quarter of 2007 from 40.3% in the third quarter of 2006.
- Released 9 mainframe and 6 distributed product updates designed to
increase the productivity of the IT departments of our customers.
- Experienced a decrease in professional services contribution margin to
10.9% in the third quarter of 2007 from 11.4% in the third quarter of
2006.
Our ability to achieve our strategies and objectives is subject to a number of
factors some of which we may not be able to control. See "Forward-Looking
Statements".
22
COMPUWARE CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of Percentage of
Total Revenues Total Revenues
------------------ -----------------
Three Months Ended Nine Months Ended
December 31, Period- December 31, Period-
------------------ to-Period ----------------- to-Period
2006 2005 Change 2006 2005 Change
----- ----- --------- ----- ----- ---------
REVENUE:
Software license fees 27.3% 27.2% 3.3% 23.3% 24.0% (2.2)%
Maintenance fees 36.3 35.2 6.3 37.8 36.4 4.3
Professional services fees 36.4 37.6 (0.3) 38.9 39.6 (1.5)
----- ----- ----- -----
Total revenues 100.0 100.0 3.0 100.0 100.0 0.5
----- ----- ----- -----
OPERATING EXPENSES:
Cost of software license fees 2.4 1.9 30.0 2.4 1.9 24.0
Cost of maintenance fees 3.2 3.3 (0.9) 3.3 3.4 (2.0)
Cost of professional services 32.4 33.3 0.3 34.8 34.9 0.1
Technology development and support 8.6 8.0 11.0 9.3 8.3 13.4
Sales and marketing 23.3 24.0 (0.3) 23.0 23.9 (3.3)
Administrative and general 16.5 14.1 21.2 16.0 15.9 0.7
----- ----- ----- -----
Total operating expenses 86.4 84.6 5.2 88.8 88.3 1.0
----- ----- ----- -----
Income from operations 13.6 15.4 (9.1) 11.2 11.7 (3.5)
Other income 2.8 3.0 (2.4) 3.4 2.7 28.1
----- ----- ----- -----
Income before income taxes 16.4 18.4 (8.0) 14.6 14.4 2.3
Income tax provision 4.8 6.1 (17.8) 4.5 4.7 (2.6)
----- ----- ----- -----
Net income 11.6% 12.3% (3.2)% 10.1% 9.7% 4.7%
===== ===== ===== =====
SOFTWARE PRODUCTS
REVENUE
Our 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 63.6% and 62.4% of total revenue during the
third quarter of 2007 and 2006, respectively, and 61.1% and 60.4% of total
revenue during the first nine months of 2007 and 2006, respectively.
Distributed software product revenue increased $7.1 million or 11.7% during the
third quarter of 2007 to $68.2 million from $61.1 million during the third
quarter of 2006 and increased $18.8 million or 11.4% during the first nine
months of 2007 to $184.2 million from $165.4 million during the first nine
months of 2006. The increases were primarily due to license revenue growth
related to our Vantage product line resulting from increased customer demand for
performance-related software and the enhancement of Vantage to include agentless
monitoring.
Mainframe software product revenue increased $2.4 million or 1.9% during the
third quarter of 2007 to $132.2 million from $129.8 million during the third
quarter of 2006 and decreased $9.5 million or 2.5% during the first nine months
of 2007 to $365.9 million from $375.4 million during the first nine months of
2006. The increase in the third quarter of 2007 was attributed to
23
COMPUWARE CORPORATION AND SUBSIDIARIES
maintenance revenue growth. The decline in the first nine months of 2007 was
primarily a result of lower license revenue due to decreased demand for software
on additional computing capacity in our European operations.
License revenue increased $2.7 million or 3.3% during the third quarter of 2007
to $86.0 million from $83.3 million during the third quarter of 2006 and
decreased $4.7 million or 2.2% during the first nine months of 2007 to $210.2
million from $214.9 million during the first nine months of 2006. Fluctuations
in foreign currency caused an increase in license revenue of $2.9 million and
$3.7 million, respectively, compared to the third quarter and first nine months
of 2006. Excluding the favorable effect of foreign currency fluctuations,
license revenue decreased 0.2% during the third quarter of 2007 and 3.9% during
the first nine months of 2007. The decline in the first nine months of 2007 was
due to a reduction of $14.9 million in mainframe license revenue, partially
offset by an increase in distributed license revenue.
Maintenance fees increased $6.8 million or 6.3% to $114.4 million during the
third quarter of 2007 from $107.6 million during the third quarter of 2006 and
increased $14.0 million or 4.3% during the first nine months of 2007 to $339.9
million from $325.9 million during the first nine months of 2006. Fluctuations
in foreign currency caused an increase in maintenance fees of $3.6 million and
$6.0 million, respectively, compared to the third quarter and first nine months
of 2006. Excluding the favorable effect of foreign currency fluctuations,
maintenance fees increased 2.9% during the third quarter of 2007 and 2.5% during
the first nine months of 2007. The increases were due to strong growth in our
distributed maintenance revenue related to our Vantage, QACenter and IT
Governance product lines and continued growth in our mainframe maintenance
revenue related to our Abend-Aid and File-Aid product lines.
Product revenue by geographic location is presented in the table below (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
United States $108,103 $105,158 $302,849 $295,447
Europe and Africa 63,937 61,418 169,872 178,336
Other international operations 28,405 24,324 77,347 67,003
-------- -------- -------- --------
Total product revenue $200,445 $190,900 $550,068 $540,786
======== ======== ======== ========
PRODUCT CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenue $200,445 $190,900 $550,068 $540,786
Expenses 118,079 113,948 341,932 335,475
-------- -------- -------- --------
Product contribution $ 82,366 $ 76,952 $208,136 $205,311
======== ======== ======== ========
The product segment generated contribution margins of 41.1% and 40.3% during the
third quarter of 2007 and 2006, respectively, and 37.8% and 38.0% during the
first nine months of 2007 and 2006, respectively. Product expenses include cost
of software license fees, cost of
24
COMPUWARE CORPORATION AND SUBSIDIARIES
maintenance fees, technology development and support costs and sales and
marketing expenses. These 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. For the third quarter of 2007,
cost of software license fees increased $1.7 million or 30.0% to $7.5 million
from $5.8 million in the third quarter of 2006 and for the first nine months of
2007 increased $4.1 million or 24.0% to $21.1 million from $17.0 million in the
first nine months of 2006. The increases in cost of software license fees were
primarily due to an increase in amortization of capitalized software and an
increase in hardware costs resulting from increased demand in our Vantage
product line. As a percentage of software license fees, cost of software license
fees were 8.8% and 7.0% for the third quarter of 2007 and 2006, respectively,
and 10.1% and 7.9% for the first nine months of 2007 and 2006, respectively.
Cost of maintenance fees consists of the costs allocated to maintenance and
product support. Cost of maintenance fees remained consistent during the third
quarter of 2007 compared to the third quarter of 2006 and for the first nine
months of 2007 decreased $600,000 or 2.0% to $30.1 million from $30.7 million in
the first nine months of 2006. As a percentage of maintenance fees, cost of
maintenance fees were 8.9% and 9.5% for the third quarter of 2007 and 2006,
respectively, and 8.8% and 9.4% for the first nine months of 2007 and 2006,
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 here are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives. As a
percentage of product revenue, costs of technology development and support were
13.5% and 12.8% for the third quarter of 2007 and 2006, respectively, and 15.3%
and 13.7% for the first nine months of 2007 and 2006, respectively.
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 during the
third quarter and first nine months of 2007 and 2006 were as follows (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -------------------
2006 2005 2006 2005
------- ------- -------- --------
Technology development and support costs incurred $33,575 $27,895 $ 99,909 $ 87,598
Capitalized technology development and support costs (6,528) (3,534) (16,005) (13,638)
------- ------- -------- --------
Technology development and support costs reported $27,047 $24,361 $ 83,904 $ 73,960
======= ======= ======== ========
Before the capitalization of internally developed software products, total
technology development and support expenditures for the third quarter of 2007
increased $5.7 million or 20.4% to $33.6 million from $27.9 million in the third
quarter of 2006 and for the first nine months of 2007 increased $12.3 million or
14.1% to $99.9 million from $87.6 million in the first nine months of 2006. The
increases in expense were primarily due to higher compensation and benefit costs
resulting from increased employee headcount, primarily programming personnel, in
order to meet new product initiatives.
Sales and marketing costs consist primarily of personnel related costs
associated with product sales and sales support and marketing for all our
offerings. For the third quarter of 2007, sales and marketing costs decreased
$200,000 or 0.3% to $73.3 million from $73.5 million in the third
25
COMPUWARE CORPORATION AND SUBSIDIARIES
quarter of 2006 and for the first nine months of 2007 decreased $7.0 million or
3.3% to $206.8 million from $213.8 million in the first nine months of 2006. The
decrease in sales and marketing costs for the first nine months of 2007 was
primarily attributable to lower compensation, benefit, bonus and commission
costs resulting from severance expense being incurred during the first quarter
of 2006 in our European operations that was not incurred during 2007. The
decrease was also the result of lower bonus and commission costs in 2007 due to
the decline in mainframe license revenue, partially offset by an increase in
stock option expense related to the adoption of SFAS 123(R) effective April 1,
2006.
As a percentage of product revenue, sales and marketing costs were 36.6% and
38.5% for the third quarter of 2007 and 2006, respectively, and 37.6% and 39.5%
for the first nine months of 2007 and 2006, respectively.
PROFESSIONAL SERVICES
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 services and management, product solutions, project management,
enterprise resource planning and customer relationship management services.
Revenue from professional services decreased $300,000 or 0.3% during the third
quarter of 2007 to $114.7 million compared to $115.0 million in the third
quarter of 2006, and decreased $5.2 million or 1.5% during the first nine months
of 2007 to $349.9 million from $355.1 million during the first nine months of
2006. The decrease in revenue for the first nine months of 2007 primarily
occurred in the United States due to cost cutting initiatives and pricing
pressures on staff supplementation services for certain customers within the
automotive sector. This reduction was partially offset by growth in application
services revenue.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
United States $ 95,367 $ 98,025 $295,899 $304,046
Europe and Africa 17,038 15,254 48,076 46,506
Other international operations 2,298 1,726 5,930 4,541
-------- -------- -------- --------
Total professional services revenue $114,703 $115,005 $349,905 $355,093
======== ======== ======== ========
26
COMPUWARE CORPORATION AND SUBSIDIARIES
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for the professional services segment is as follows (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenue $114,703 $115,005 $349,905 $355,093
Expenses 102,189 101,894 313,449 313,083
-------- -------- -------- --------
Professional services contribution $ 12,514 $ 13,111 $ 36,456 $ 42,010
======== ======== ======== ========
The professional services segment generated a contribution margin of 10.9% and
11.4% during the third quarter of 2007 and 2006, and 10.4% and 11.8% during the
first nine months of 2007 and 2006, respectively. The decreases in contribution
margin were primarily due to an increase in subcontract costs within our
European operations related to projects that require specialized skill sets.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services remained consistent during the third
quarter of 2007 compared to the third quarter of 2006 and the first nine months
of 2007 compared to the first nine months of 2006.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses primarily consist 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, utilities, etc., associated with worldwide sales,
professional services and software development offices. Administrative and
general expenses increased $9.1 million or 21.2% during the third quarter of
2007 to $52.1 million from $43.0 million during the third quarter of 2006, and
increased $900,000 or 0.7% during the first nine months of 2007 to $143.5
million from $142.6 million in the first nine months of 2006. The increase in
administrative and general expenses for the third quarter of 2007 primarily
related to a $5.0 million donation to a local charity, increases in recruiting
fees related to developer and sales force hires and stock option expense related
to the adoption of SFAS 123(R) effective April 1, 2006.
The first nine months of 2007 were further affected by the following changes in
costs that occurred in the first and second quarters of 2007 as compared to
2006: (1) an impairment charge of $3.9 million recorded in the first quarter of
2006 related to a purchased software application that management no longer
intended to use; (2) an impairment charge of $4.0 million related to our former
headquarters building in Farmington Hills, Michigan recorded during the second
quarter of 2006; and (3) litigation settlement charges of $4.2 million recorded
during the second quarter of 2006. In addition, legal expenses declined by $1.6
million as IBM litigation costs were still being incurred during the first half
of 2006. These decreases in costs during the first and second quarters of 2007
were offset by foreign currency losses related to inter-company balances with
our wholly owned subsidiaries, increases in charitable contribution expense,
recruiting fees and charges related to stock option expense during the first six
months of 2007.
Other income, net ("other income") consists primarily of interest income
realized from investments, interest earnings on deferred customer receivables
and income/losses generated
27
COMPUWARE CORPORATION AND SUBSIDIARIES
from our investments in partially owned companies. Other income decreased
$200,000 or 2.4% during the third quarter of 2007 to $9.0 million compared to
$9.2 million in the third quarter of 2006 and increased $6.7 million or 28.1%
during the first nine months of 2007 to $30.5 million from $23.8 million during
the first nine months of 2006. The increase in other income for the first nine
months of 2007 was primarily attributable to an increase in investment interest
income due to higher interest rates earned on investments. If the average
investment balances continue to decline as a result of the use of cash and
investments for stock repurchases, interest income will decline.
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 $15.3 million in the third quarter of 2007 and $41.0 million
for the first nine months of 2007, which represents an effective tax rate of
29.5% and 31.1%, respectively. This compares to an income tax provision of $18.6
million in the third quarter of 2006 and $42.1 million for the first nine months
of 2006, which represents an effective tax rate of 33% and 32.7%, respectively.
The decrease in the effective tax rate is primarily due to reinstatement of the
U.S. Research and Development Tax Credit.
RESTRUCTURING ACCRUAL
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability by better aligning cost structures with
current market conditions. See Note 9 to the Condensed Consolidated Financial
Statements for changes in the restructuring accrual for the first nine months of
2007.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Assumptions and estimates
were based on the facts and circumstances known at December 31, 2006. 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, 2006 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
management's judgment and estimates about the effect of matters that are
inherently uncertain. These policies are also discussed in Note 1 of the Notes
to Consolidated Financial Statements included in Item 8 of that report. There
have been no material changes to that information since the end of fiscal 2006.
28
COMPUWARE CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, cash and cash equivalents and investments totaled
approximately $589.9 million. During the first nine months of 2007 and 2006,
cash flow from operations was $93.3 million and $114.3 million, respectively.
The decrease in operating cash flow was primarily due to a decline in cash
received from customers. During the first nine months of 2007 and 2006, capital
expenditures including property and equipment and capitalized research and
software development totaled $31.3 million and $25.4 million, respectively. The
increase in capital expenditures was primarily due to an increase in leasehold
improvements related to leased facilities and an increase in capitalized
software as we continue to invest in enhancing our product lines.
We hold a $100 million revolving credit facility that matures on July 26, 2007.
See Note 10 to the Condensed Consolidated Financial Statements for a description
of the terms of the facility, including recent amendments to the terms of the
facility. No borrowings have occurred under this facility since inception.
During fiscal 2007, the Company sold its former headquarters and distribution
center buildings for approximately $15.4 million. These buildings were held for
sale at March 31, 2006.
In April 2006, August 2006 and December 2006, the Board of Directors authorized
the repurchase of up to $125 million, $300 million and $200 million,
respectively, of our common stock. Our purchases of stock may occur on the open
market, through negotiated or block transactions based upon market and business
conditions. During the first nine months of 2007, we repurchased approximately
49.1 million shares of our common stock under these programs at an average price
of $7.78 per share and a total cost of $381.7 million. Approximately $243.3
million remains authorized for future purchases, which will be made only during
open window trading periods.
In addition, the Board of Directors adopted a plan under Rule 10b5-1 of the
Securities Exchange Act of 1934 in December 2006 to repurchase 34 million shares
of our common stock subject to price, volume and timing restraints set forth in
the plan through June 30, 2007. The 10b5-1 plan allows us to repurchase common
stock at times when we otherwise might be prevented from doing so under insider
trading laws or because of self-imposed trading blackout periods. A broker
selected by us has the authority under the terms and limitations specified in
the plan to repurchase shares on our behalf in accordance with the terms of the
plan. We repurchased approximately 2.7 million shares of our common stock under
this plan at an average price of $8.56 per share and a total cost of $23.5
million ($6.4 million of the $23.5 million was settled in January 2007).
Approximately 31.3 million shares remain for future purchases.
In April 2006, we acquired SteelTrace Limited, a privately held provider of
requirements management products that align application delivery to business
needs through a structured, visual approach to the management of enterprise
application requirements, for approximately $20.7 million in cash. The
acquisition has been accounted for using the purchase method in accordance with
SFAS No. 141, "Business Combinations" and, accordingly, the assets and
liabilities acquired have been recorded at preliminary fair value as of the
acquisition date.
In January 2007, we acquired Proxima Technology Group, Inc. ("Proxima") for
approximately $37.0 million in cash. Proxima is a privately held provider of the
Centauri product that will complement our Vantage product line by giving
customers the ability to manage service delivery from a business perspective.
The acquisition will be accounted for as a purchase and, accordingly, assets and
liabilities acquired will be recorded at fair value as of the acquisition date.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
We believe cash flow from operations will be sufficient to meet operating cash
needs for the foreseeable future. We are evaluating various borrowing options,
which may be used to continue funding stock repurchases.
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109", which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that we recognize in
our financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. This Interpretation is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. Management is
currently considering the impact this Interpretation will have on the financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and therefore, does not expand the use
of fair value in any new circumstances. This Statement is effective for fiscal
years beginning after November 15, 2007. Management is currently considering the
impact this Statement will have on the financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), codified as SAB Topic 1.N, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements." SAB 108 describes the approach that should
be used to quantify the materiality of a misstatement and provides guidance for
correcting prior year errors. We early adopted SAB 108 in the second quarter of
2007 and accordingly, follow SAB 108 requirements when quantifying financial
statement misstatements. The adoption of SAB 108 did not result in corrections
of our financial statements.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in "Item 7 - Management's 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, 2006. 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 2006.
30
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, 2006, therefore the market risks remain substantially
unchanged since we filed the Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
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 SEC's 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 the material
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 Commission's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in our internal control over financial reporting occurred during the
quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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 December 31, 2006:
Approximate dollar value or
Total number maximum number of shares
of shares that may yet be purchased
purchased as under the plans or programs
part of ---------------------------
Total number Average publicly Discretionary Rule 10b5-1
of shares price paid announced Plan (a) Plan (b)
Period purchased per share plans ($) (shares)
------ ------------ ---------- ------------ ------------- -----------
For the month ended October 31, 2006 1,450,000 $7.97 1,450,000 $223,334,000
For the month ended November 30, 2006 14,868,383 8.39 14,868,383 98,524,220
For the month ended December 31, 2006 9,229,879 8.53 9,229,879 243,347,000 31,251,000
For the three months ended Dec. 31, 2006 25,548,262 $8.42 25,548,262 $243,347,000 31,251,000
(a) In August 2006 and December 2006, we announced that the Board of Directors
authorized the repurchase of $300 million and $200 million, respectively,
of the Company's common stock. Our purchases of 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 share repurchase plans will expire when we have
repurchased all shares authorized for repurchase thereunder.
(b) In December 2006, the Board of Directors adopted a plan under Rule 10b5-1
of the Securities Exchange Act of 1934 to repurchase 34 million shares of
our common stock. A broker selected by us has the authority under the terms
and limitations specified in the plan to repurchase shares on our behalf in
accordance with the terms of the plan. We expect these purchases to
continue through June 30, 2007, although the Company may terminate the plan
at any time.
32
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
2.7 Stock Purchase Agreement by and among Compuware Corporation, Proxima
Technology Group, Inc., and each of the shareholders of Proxima
Technology Group, Inc. dated as of January 2, 2007. (1)
15 Independent Registered Public Accounting Firm's Awareness Letter (2)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act. (2)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act. (2)
32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of
the Securities Exchange Act. (2)
(1) Incorporated by reference to the registrant's report on Form 8-K dated
January 2, 2007.
(2) Filed herewith.
33
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: February 7, 2007 By: /s/ Peter Karmanos, Jr.
------------------------------------
Peter Karmanos, Jr.
Chief Executive Officer
(duly authorized officer)
Date: February 7, 2007 By: /s/ Laura L. Fournier
------------------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
Treasurer
34
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
15 Independent Registered Public Accounting Firm's Awareness Letter
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act.
32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of
the Securities Exchange Act.
35