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 SEPTEMBER 30, 2007
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 October 31, 2007, there were outstanding 286,202,586 shares of Common
Stock, par value $.01, of the registrant.
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2007 and March 31, 2007 3
Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2007 and 2006 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 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits 36
SIGNATURES 37
2
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2007 2007
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 215,654 $ 260,681
Investments 95,404 107,062
Accounts receivable, net 398,703 420,774
Deferred tax asset, net 36,835 33,392
Income taxes refundable, net 31,272 58,266
Prepaid expenses and other current assets 29,183 41,019
---------- ----------
Total current assets 807,051 921,194
---------- ----------
INVESTMENTS 10,958 71,391
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 375,555 385,227
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 65,543 72,276
---------- ----------
OTHER:
Accounts receivable 174,657 172,255
Deferred tax asset, net 33,185 15,987
Goodwill 354,133 353,682
Other 35,048 37,400
---------- ----------
Total other assets 597,023 579,324
---------- ----------
TOTAL ASSETS $1,856,130 $2,029,412
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,632 $ 27,713
Accrued expenses 116,669 141,970
Deferred revenue 371,867 359,688
---------- ----------
Total current liabilities 507,168 529,371
DEFERRED REVENUE 277,963 321,881
ACCRUED EXPENSES 20,110 11,346
DEFERRED TAX LIABILITY, NET 17,437 34,666
---------- ----------
Total liabilities 822,678 897,264
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 2,861 3,030
Additional paid-in capital 693,160 673,660
Retained earnings 316,934 444,159
Accumulated other comprehensive income 20,497 11,299
---------- ----------
Total shareholders' equity 1,033,452 1,132,148
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,856,130 $2,029,412
========== ==========
See notes to unaudited condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2007 2006 2007 2006
--------- -------- -------- --------
REVENUES:
Software license fees $ 70,016 $ 56,709 117,287 $124,174
Maintenance fees 116,296 115,132 230,037 225,449
Professional services fees 115,659 116,666 234,036 235,202
--------- -------- -------- --------
Total revenues 301,971 288,507 581,360 584,825
--------- -------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 6,609 7,010 16,975 13,595
Cost of maintenance fees 10,206 9,795 21,658 19,919
Cost of professional services 101,970 103,645 206,047 211,260
Technology development and support 24,170 29,744 53,498 56,860
Sales and marketing 65,456 67,711 130,188 133,479
Administrative and general 42,874 45,156 88,254 91,384
Restructuring costs 18,731 34,751
--------- -------- -------- --------
Total operating expenses 270,016 263,061 551,371 526,497
--------- -------- -------- --------
INCOME FROM OPERATIONS 31,955 25,446 29,989 58,328
OTHER INCOME, NET 5,427 10,613 11,086 21,494
--------- -------- -------- --------
INCOME BEFORE INCOME TAXES 37,382 36,059 41,075 79,822
INCOME TAX PROVISION (BENEFIT) (34) 11,250 3,470 25,692
--------- -------- -------- --------
NET INCOME $ 37,416 $ 24,809 $ 37,605 $ 54,130
========= ======== ======== ========
Basic earnings per share $ 0.13 $ 0.07 $ 0.13 $ 0.15
========= ======== ======== ========
Diluted earnings per share $ 0.13 $ 0.07 $ 0.13 $ 0.15
========= ======== ======== ========
See notes to unaudited condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
2007 2006
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 37,605 $ 54,130
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 27,554 26,900
Property and equipment impairment associated with restructuring 3,079
Capitalized software impairment associated with restructuring 3,873
Acquisition tax benefits 2,621 2,585
Stock option compensation 7,183 4,862
Deferred income taxes (3,634) 6,405
Other 815 (329)
Net change in assets and liabilities, net of effects from acquisitions
and currency fluctuations:
Accounts receivable 39,425 64,142
Prepaid expenses and other current assets 12,762 (4,315)
Other assets 3,652 (99)
Accounts payable and accrued expenses (24,657) (33,107)
Deferred revenue (53,760) (44,772)
Income taxes (4,045) (3,982)
--------- ---------
Net cash provided by operating activities 52,473 72,420
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of:
Businesses, net of cash acquired (20,484)
Property and equipment (6,691) (10,485)
Capitalized software (7,889) (9,475)
Proceeds from sale of property 3,298
Investments:
Proceeds 71,375 272,305
Purchases (266,248)
--------- ---------
Net cash provided by (used in) investing activities 56,795 (31,089)
--------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits 64,379 1,218
Contribution to stock purchase plans 2,230 2,577
Repurchase of common stock (227,695) (190,104)
--------- ---------
Net cash used in financing activities (161,086) (186,309)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,791 3,011
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (45,027) (141,967)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 260,681 612,062
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 215,654 $ 470,095
========= =========
See notes to unaudited condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(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 September 30, 2007, 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, 2007 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, 2007 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.
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 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 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 (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, 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 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. 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
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
which the services are expected to be performed. For income statement
presentation purposes, we allocate revenue between professional services fees,
maintenance fees and license fees based on our best estimate of the fair value
of the undelivered elements using the residual method.
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, license fees (net of any finance fees) are
recognized as discussed above. The finance fee 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. The first year of maintenance is included with
all license agreements. Maintenance revenue is recognized ratably over the term
of the maintenance arrangements, which primarily range from one to five years.
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. 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. Capitalized software is reviewed for
impairment on each balance sheet date. 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.
Goodwill and Other Intangibles - Goodwill for each operating segment and
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 and indefinite
lived intangibles as of March 31, 2007 and determined there was no impairment.
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
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.
Recently Issued Accounting Pronouncements
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 evaluating the
impact this Statement will have on the Company's financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115," which permits entities to
measure eligible financial assets, financial liabilities and firm commitments at
fair value, on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating if it will elect the fair value option for any of the
Company's eligible financial instruments.
NOTE 2 - 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 Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
BASIC EARNINGS PER SHARE:
Numerator: Net income $ 37,416 $ 24,809 $ 37,605 $ 54,130
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 294,321 363,834 298,122 370,261
-------- -------- -------- --------
Basic earnings per share $ 0.13 $ 0.07 $ 0.13 $ 0.15
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Numerator: Net income $ 37,416 $ 24,809 $ 37,605 $ 54,130
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 294,321 363,834 298,122 370,261
Dilutive effect of stock options 1,116 713 2,239 704
-------- -------- -------- --------
Total shares 295,437 364,547 300,361 370,965
-------- -------- -------- --------
Diluted earnings per share $ 0.13 $ 0.07 $ 0.13 $ 0.15
======== ======== ======== ========
During the three and six months ended September 30, 2007, stock options to
purchase a total of approximately 26,829,000 and 13,259,000 shares,
respectively, were excluded from the diluted earnings per share calculation
because they were anti-dilutive. During the three and six months ended September
30, 2006, stock options to purchase a total of approximately 51,221,000 and
51,332,000 shares, respectively, were excluded from the diluted earnings per
share calculation because they were anti-dilutive.
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gain on marketable securities and
foreign currency translation gains that have been excluded from net income and
reflected in equity. Total comprehensive income is summarized as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
------- ------- ------- -------
Net income $37,416 $24,809 $37,605 $54,130
Unrealized gain on marketable
securities, net of tax 13 71
Foreign currency translation
adjustment, net of tax 5,724 (819) 9,198 3,212
------- ------- ------- -------
Total comprehensive income $43,140 $24,003 $46,803 $57,413
======= ======= ======= =======
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 4 - STOCK BENEFIT PLANS AND STOCK-BASED COMPENSATION
The Company's Board of Directors adopted the 2007 Long Term Incentive Plan (the
"LTIP") in June 2007 and it was approved by the Company's Shareholders in August
2007. The Company has reserved an aggregate of 28,000,000 common shares to be
awarded under the LTIP. The Compensation committee may grant stock options,
stock appreciation rights, restricted stock, restricted stock units,
performance-based cash or stock awards and annual cash incentive awards under
the LTIP. All of the other Company's stock option plans have been terminated as
to future grants.
The Company also has an employee stock purchase plan under which rights to
purchase the Company's common stock are granted at 95% of the last day's actual
closing market price on the market date immediately preceding a relevant
transaction. During the first six months of 2008 the Company sold
approximately 239,733 shares.
The Company's stock-based compensation plan activity was as follows (shares and
intrinsic value in thousands):
Six Months Ended September 30, 2007
----------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term Value
--------- -------- ----------- ---------
Options outstanding as of April 1, 2007 43,710 $12.23
Granted 410 10.93
Exercised (6,732) 8.83
Forfeited (544) 7.19
Cancelled/expired (1,195) 14.65
------ ------
Options outstanding as of September 30, 2007 35,649 $12.79 3.56 $9,249
====== ======
Options vested and expected to vest, net of
estimated forfeitures,
as of September 30, 2007 34,250 $13.06 3.23 $8,272
Options exercisable as of September 30, 2007 30,137 $13.84 2.73 $4,785
The total fair value of shares vested and the total intrinsic value of options
exercised were as follows (intrinsic values in thousands):
Six Months Ended
September 30,
----------------
2007 2006
------- -----
Fair value of shares vested $ 5.12 $5.55
Intrinsic value of options exercised 16,192 710
Statement of Financial Accounting Standards 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 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.
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
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 simplified method as described in Staff Accounting
Bulletin 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.
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:
Six Months Ended
September 30,
----------------
2007 2006
------ ------
Expected volatility 59.21% 68.88%
Risk-free interest rate 4.79% 4.83%
Expected lives at date of grant (in years) 6.7 6.9
Weighted-average fair value of the options granted $ 6.84 $ 5.04
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.
Stock-based compensation expense was allocated as follows (in thousands):
Three Months Ended Six Months Ended
September 30, 2007 September 30, 2007
------------------ ------------------
Stock-based compensation classified as:
Cost of software license fees $ -- $ 1
Cost of maintenance fees 71 139
Cost of professional services 336 672
Technology development and support 168 342
Sales and marketing 690 1,132
Administrative and general 350 780
Restructuring costs (see Note 7) 3,995 4,117
------- -------
Total stock-based compensation expense
before income taxes 5,610 7,183
Income tax benefit (1,953) (2,489)
------- -------
Total stock-based compensation expense
after income taxes $ 3,657 $ 4,694
======= =======
As of September 30, 2007, $13.2 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 2.86 years.
11
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
September 30, 2007
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 6,019 $ 6,019
======== =======
Amortized intangible assets:
Capitalized software (2) $337,211 $(271,668) $65,543
Customer relationship agreements (3) 14,142 (7,105) 7,037
Non-compete agreements (3) 2,854 (2,543) 311
Other (4) 6,896 (6,152) 744
-------- --------- -------
Total amortized intangible assets $361,103 $(287,468) $73,635
======== ========= =======
March 31, 2007
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,865 $ 5,865
======== =======
Amortized intangible assets:
Capitalized software (2) $328,957 $(256,681) $72,276
Customer relationship agreements (3) 13,827 (5,571) 8,256
Non-compete agreements (3) 2,794 (2,222) 572
Other (4) 6,883 (5,900) 983
-------- --------- -------
Total amortized intangible assets $352,461 $(270,374) $82,087
======== ========= =======
(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
(see Note 7 to the Condensed Consolidated Financial Statements).
(3) Customer relationship agreements and non-compete agreements were acquired
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.
12
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
Changes in the carrying amounts of goodwill are summarized as follows (in
thousands):
Goodwill Products Services Total
-------- -------- --------
Balance at March 31, 2007, net $211,947 $141,735 $353,682
Adjustments to previously recorded purchase price (1) (973) (973)
Effect of foreign currency translation 304 392 696
-------- -------- --------
Balance at June 30, 2007, net $211,278 $142,127 $353,405
Adjustments to previously recorded purchase price (1) 72 72
Effect of foreign currency translation 291 365 656
-------- -------- --------
Balance at September 30, 2007, net $211,641 $142,492 $354,133
======== ======== ========
(1) The adjustment to goodwill primarily relates to tax adjustments related to
prior acquisitions.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 6 - 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 Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Revenues:
Products:
Mainframe $110,484 $113,941 $213,721 $233,686
Distributed systems 75,828 57,900 133,603 115,937
-------- -------- -------- --------
Total product revenue 186,312 171,841 347,324 349,623
Professional services 115,659 116,666 234,036 235,202
-------- -------- -------- --------
Total revenues $301,971 $288,507 $581,360 $584,825
======== ======== ======== ========
Operating expenses:
Products $106,441 $114,260 $222,319 $223,853
Professional services 101,970 103,645 206,047 211,260
Corporate expenses 42,874 45,156 88,254 91,384
Restructuring costs 18,731 34,751
-------- -------- -------- --------
Total operating expenses $270,016 $263,061 $551,371 $526,497
======== ======== ======== ========
Income from operations
before other income:
Products $ 79,871 $ 57,581 $125,005 $125,770
Professional services 13,689 13,021 27,989 23,942
Corporate expenses (42,874) (45,156) (88,254) (91,384)
Restructuring costs (18,731) (34,751)
-------- -------- -------- --------
Income from operations before
other income 31,955 25,446 29,989 58,328
Other income, net 5,427 10,613 11,086 21,494
-------- -------- -------- --------
Income before income taxes $ 37,382 $ 36,059 $ 41,075 $ 79,822
======== ======== ======== ========
Financial information regarding geographic operations is presented in the table
below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Revenues:
United States $194,643 $192,641 $379,773 $395,281
Europe and Africa 77,744 69,507 147,680 136,972
Other international operations 29,584 26,359 53,907 52,572
-------- -------- -------- --------
Total revenues $301,971 $288,507 $581,360 $584,825
======== ======== ======== ========
14
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 7 - RESTRUCTURING ACCRUAL
During the first six months of fiscal 2008 the Company has undertaken various
restructuring activities to improve the effectiveness and efficiency of a number
of the Company's critical business processes. These activities resulted in a
restructuring charge of $34.8 million for the six months ended September 30,
2007. As a result of these initiatives the Company has terminated approximately
415 employees and identified for termination approximately 65 employees. In
addition, the Company has exited certain locations or reduced the square footage
required to operate existing facilities.
In the first quarter of fiscal 2008, the Company initiated a restructuring plan
that realigned and centralized certain product development activities and
terminated employees from various other functions of the organization.
Development activities were transitioned from the Merrimack, New Hampshire
facility and the Amsterdam, The Netherlands facility to the Detroit headquarters
facility and Application Vantage product development was transitioned from the
San Diego, California facility to the Gdansk, Poland facility. The restructuring
plan included the termination of approximately 230 employees, primarily
programming personnel, and full or partial closing of the aforementioned
facilities. In addition, the Company also terminated approximately 70 employees
from various other functions of the organization, primarily within our products
segment. All costs related to these first quarter actions have been expensed.
During the second quarter of fiscal 2008, the Company communicated a plan to
further centralize a number of its product development activities. The
centralization plan included the transition of development activities from
Cambridge, Massachusetts, Sydney, Australia and Dublin, Ireland to the Detroit
headquarters. This action will eliminate the positions of approximately 100
employees, and is anticipated to be substantially completed during the third
quarter of fiscal 2008. In addition, the Company continued with workforce
reductions in other areas of the company, terminating approximately 80
employees, primarily in sales and marketing. As part of the sales force
reorganization, senior management positions were eliminated and the distributed
and mainframe sales teams were aligned under one management structure. In
addition, the Application Delivery Management and Changepoint sales teams were
combined. The activities for the second quarter of fiscal 2008 resulted in a
restructuring charge of $18.7 million. Approximately $1.7 million remains to be
expensed related to these actions, primarily lease abandonment costs.
As part of the restructuring activities during the second quarter, the Company
entered into a separation agreement with Henry (Hank) Jallos, its former
President and Chief Operating Officer of Products, whose employment with the
Company ended on July 10, 2007. Mr. Jallos will receive his salary in effect on
his retirement date ($600,000 per year) through June 30, 2009. In accordance
with Section 409A of the Internal Revenue Code, Mr. Jallos will receive the
first six months of salary no earlier than January 10, 2008 after which Mr.
Jallos will receive his remaining salary paid in semi-monthly installments
through June 30, 2009. Mr. Jallos will also receive bonuses earned under the
Company's executive incentive plan for fiscal 2006 in the amount of $345,000,
which is payable in April 2008, and for fiscal 2007 in the amount of $240,000,
which is payable in April 2009. Unvested stock options held by Mr. Jallos will
continue to vest and all options may be exercised by Mr. Jallos pursuant to the
terms and conditions set forth in the applicable stock option agreements as if
his employment with the Company continued. Mr. Jallos must refrain from making
disparaging statements regarding the Company and its directors and employees,
and will remain obligated through June 30, 2009 to continue to comply with the
provisions of our standard employee agreement, which requires that he keep the
Company's confidential information confidential and that he comply with the
Company's employee code of conduct. Under the standard employee agreement, he
will also
15
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
be prohibited until June 30, 2010 from competing with the Company, soliciting
the Company's clients and soliciting or recruiting the Company's employees. The
Company recorded a charge of approximately $5.4 million in the second quarter of
fiscal 2008 related to this matter, including a non cash charge of $4.0 million
related to the continued vesting of outstanding stock options.
The following table summarizes the restructuring accrual as of March 31, 2007,
and changes to the accrual during the first six months of fiscal 2008 (in
thousands):
Non-cash
Expensed Paid charges
Accrual during the during the during the Accrual
balance at period ended period ended period ended balance at
March 31, September 30, September 30, September 30, September 30,
2007 2007 2007 2007 2007
---------- ------------- ------------- ------------- -------------
Employee termination benefits $26,907 $(16,228) $(4,117) $ 6,562
Facilities costs (primarily lease
abandonments and property
and equipment impairment) $2,419 6,998 (691) (3,079) 5,647
Other 846 (740) 106
------ ------- -------- ------- -------
Total $2,419 $34,751 $(17,659) $(7,196) $12,315
====== ======= ======== ======= =======
As of September 30, 2007, $9.4 million of the restructuring accrual is recorded
in current "accrued expenses" with the remaining balance of $2.9 million
recorded in long-term "accrued expenses" in the Condensed Consolidated Balance
Sheet.
The accruals for employee termination benefits at September 30, 2007 primarily
represent the amounts to be paid to employees that have been terminated or
identified for termination as a result of initiatives described above. Most of
these amounts are expected to be paid within fiscal 2008.
The accruals for facilities costs at September 30, 2007 represent the remaining
fair value of lease obligations for exited 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 2012. Projected sublease income is
based on management's estimates, which are subject to change.
In the first quarter of 2008, the Company also recorded a capitalized software
impairment charge of $3.9 million associated with our DevPartner and OptimalJ
products that was recorded to "Cost of software license fees" in our Condensed
Consolidated Statements of Operations.
16
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
NOTE 8 - DEBT
The Company has no long term debt.
On November 1, 2007, the Company entered into a new, unsecured revolving credit
agreement (the "new credit facility") with Comerica Bank and other lenders. The
new 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 has an
accordion feature to increase the revolving line of credit by up to $150 million
subject to receiving additional commitments from lenders and certain other
conditions.
The new credit facility contains various negative covenants, including
limitations on: liens, investments, loans and advances, indebtedness, mergers,
consolidations and acquisitions, asset sales, dividends and transactions with
affiliates. The new credit facility is also subject to maximum total debt to
EBITDA and minimum fixed charge coverage financial covenants.
Any borrowings under the new credit facility bear interest at the Company's
option, at the prime rate, the Eurodollar rate plus the applicable margin (based
on the level of maximum total debt to EBITDA ratio), or the Federal Funds rate
plus one hundred basis points plus the applicable margin. The Company will also
pay a quarterly facility fee on the new credit facility based on the applicable
margin grid.
Previously, the Company held a $100 million revolving credit facility which
matured on October 26, 2007. No borrowings had ever occurred under the prior
facility.
NOTE 9 - INCOME TAXES
On July 12, 2007, the State of Michigan enacted the Michigan Business Tax (MBT)
as a replacement for the Single Business Tax (SBT), which expires at December
31, 2007. The MBT is effective on January 1, 2008 and is comprised of two
components: an income tax and a modified gross receipts tax. The two components
of the MBT are considered income taxes subject to the accounting provisions of
FASB Statement No. 109, "Accounting for Income Taxes".
As a result of the MBT enactment, the Company recorded an income tax benefit of
approximately $12 million in the quarter ended September 30, 2007. This benefit
relates primarily to the recognition of a deferred tax asset for Brownfield
Redevelopment credits which are available to offset MBT liabilities through the
Company's fiscal year 2022. The Brownfield Redevelopment credits were previously
available to reduce the Company SBT liabilities. These credits were not
historically recorded as a deferred tax asset since the Company did not account
for the SBT as an income tax. As with all deferred tax assets, the Company
assessed the ability to utilize these credits prior to their expiration and
recorded a valuation allowance for the amount that was not more likely than not
to be realized.
The income tax provision for the first quarter ended June 30, 2007 includes an
additional $2.1 million charge relating to the tax receivable previously
recorded in the fourth quarter ended March 31, 2007. The previously recorded
receivable had included an interest income component which was subject to income
taxes, but for which the Company had not recorded a tax provision. The Company
has considered both the qualitative and quantitative effects of this error on
the financial statements for the fiscal year ended March 31, 2007, as well as
the qualitative and quantitative effects of including the error correction in
the quarter ended June 30,
17
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
2007, the six months ended September 30, 2007 and fiscal year ended March 31,
2008, and has concluded that the effects on the financial statements are not
material.
During the first quarter ended June 30, 2007, the Company adopted Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN
48"). This Interpretation prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. Upon adoption of FIN
48, we recorded a $1.4 million increase in the liability for unrecognized tax
benefits, which was accounted for as a cumulative-effect adjustment to retained
earnings. At April 1, 2007, the Company had $16.7 million of gross unrecognized
tax benefits of which $12.7 million, net of federal benefit, would favorably
affect the Company's effective tax rate if recognized. At September 30, 2007,
the Company had $18.2 million of gross unrecognized tax benefits, of which $4.6
million are netted against deferred tax assets relating to the same
jurisdiction, and $1.9 million and $11.7 million are recorded as current and
non-current accrued expenses, respectively. Of the total unrecognized tax
benefits, $13.7 million, net of federal benefit, would favorably affect the
Company's effective tax rate if recognized. There have been no material changes
to the liability for uncertain tax positions during the quarter ended September
30, 2007.
In accordance with our accounting policy, interest and penalties related to
income tax liabilities are included in income tax expense. The Company had a
$3.6 million reserve recorded for the payment of interest and penalties at April
1, 2007. This amount is included as a component of the gross unrecognized tax
benefits discussed above. The Company has a $3.4 million reserve recorded for
the payment of interest and penalties at September 30, 2007.
At September 30, 2007, the Company has open tax years, from tax periods 1996 and
forward, with various taxing jurisdictions, including the U.S., Brazil and the
United Kingdom. While it is expected that the amount of unrecognized tax
benefits will change in the next twelve months, the Company does not anticipate
the change to have a significant impact on the results of operations or the
financial position of the Company.
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 September 30,
2007, and the related condensed consolidated statements of operations for the
three-month and six-month periods ended September 30, 2007 and 2006, and of cash
flows for the six-month periods ended September 30, 2007 and 2006. 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 9 to the condensed consolidated financial statements,
effective April 1, 2007, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
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, 2007, 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 24, 2007, 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, 2007, 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
November 6, 2007
19
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws. 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 and, other than the risk factor relating to our stock repurchase plans,
have not materially changed since the end of fiscal 2007 (see Item 1A Risk
Factors in our 2007 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 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, and on the acceptance of our
pricing structure for software licenses and maintenance.
- Our software product revenue is dependent on the acceptance of our
pricing structure for software license and maintenance.
- We may fail to achieve our forecasted financial results due to
inaccurate sales forecasts or other factors.
- If we fail to achieve the results we expect from our restructuring
programs, our results of operations and financial condition may be
adversely affected.
- Our software and technology may infringe the proprietary rights of
others.
- Our results could be adversely affected if our operating margins
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 continuation of our stock repurchase plans is subject to various
risks and uncertainties that may cause us to suspend or terminate our
market repurchase activity.
20
COMPUWARE CORPORATION AND SUBSIDIARIES
For example, repurchases of the Company's common stock could be
delayed indefinitely by conditions in the stock or debt markets,
adverse business conditions, the Company's need to conserve capital
resources for use in its operations, the Company's inability or
unwillingness to borrow funds, and other factors beyond our control.
- 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.
- 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.
- A further decline in the U.S. domestic automotive manufacturing
business could adversely affect our professional services business.
- 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.
- Our quarterly financial results vary and may be adversely affected by
a number of unpredictable factors.
- 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.
- 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, 2007, 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 improve the performance of IT organizations.
Originally founded in 1973 as a professional services company, in the late
1970's we began to offer mainframe productivity tools for fault diagnosis, file
and data management, and application debugging.
In the 1990's, 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:
21
COMPUWARE CORPORATION AND SUBSIDIARIES
- 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 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.
The following occurred during the second quarter of 2008:
- Restructuring actions resulted in a charge of $18.7 million. Cost
saving actions initiated during the first six months of 2008 are
expected to reduce costs by approximately $75.0 million on an
annualized basis.
- Repurchased approximately 19.1 million shares of our common stock at
an average price of $9.02 per share. Obtained authorization from the
Board of Directors to repurchase an additional $200 million of common
stock.
- Terminated the Stock Repurchase Agreement under Rule 10b5-1 of the
Securities Exchange Act of 1934.
- Experienced a 31.0% increase in distributed product revenue compared
to the second quarter of 2007 due to increases in both license and
maintenance revenue.
- Realized a 3.0% decrease in mainframe product revenue compared to the
second quarter of 2007 primarily due to a decline in maintenance
revenue.
- Experienced an increase in products contribution margin to 42.9% in
the second quarter of 2008 from 33.5% in the second quarter of 2007
due to an increase in license revenue and a decrease in technology
development and support and sales and marketing costs.
- Recognized an income tax benefit of approximately $12 million as a
result of the Michigan Business Tax enactment.
- Released 11 mainframe and 4 distributed product updates designed to
increase the productivity of the IT departments of our customers.
In addition, on November 1, 2007 we entered into a new revolving credit facility
with Comerica Bank and other lenders. The new credit facility provides for a
revolving line of credit in the amount of $150 million and expires on November
1, 2012.
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 Six Months Ended
September 30, Period- September 30, Period-
------------------ to-Period ------------------ to-Period
2007 2006 Change 2007 2006 Change
----- ----- --------- ----- ----- ---------
REVENUE:
Software license fees 23.2% 19.7% 23.5% 20.2% 21.2% (5.5)%
Maintenance fees 38.5 39.9 1.0 39.6 38.6 2.0
Professional services fees 38.3 40.4 (0.9) 40.2 40.2 (0.5)
----- ----- ----- -----
Total revenues 100.0 100.0 4.7 100.0 100.0 (0.6)
----- ----- ----- -----
OPERATING EXPENSES:
Cost of software license fees 2.2 2.4 (5.7) 2.9 2.3 24.9
Cost of maintenance fees 3.4 3.4 4.2 3.7 3.4 8.7
Cost of professional services 33.7 35.9 (1.6) 35.4 36.1 (2.5)
Technology development and support 8.0 10.3 (18.7) 9.2 9.7 (5.9)
Sales and marketing 21.7 23.5 (3.3) 22.4 22.8 (2.5)
Administrative and general 14.2 15.7 (5.1) 15.2 15.7 (3.4)
Restructuring cost 6.2 0.0 n/a 6.0 0.0 n/a
----- ----- ----- -----
Total operating expenses 89.4 91.2 2.6 94.8 90.0 4.7
----- ----- ----- -----
Income from operations 10.6 8.8 25.6 5.2 10.0 (48.6)
Other income 1.8 3.7 (48.9) 1.9 3.7 (48.4)
----- ----- ----- -----
Income before income taxes 12.4 12.5 3.7 7.1 13.7 (48.5)
Income tax provision 0.0 3.9 (100.3) 0.6 4.4 (86.5)
----- ----- ----- -----
Net income 12.4% 8.6% 50.8% 6.5% 9.3% (30.5)%
===== ===== ===== =====
SOFTWARE PRODUCTS
Financial information for the products segment is as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Revenue $186,312 $171,841 $347,324 $349,623
Expenses 106,441 114,260 222,319 223,853
-------- -------- -------- --------
Product contribution $ 79,871 $ 57,581 $125,005 $125,770
======== ======== ======== ========
The products segment generated contribution margins of 42.9% and 33.5% during
the second quarter of 2008 and 2007, respectively, and 36.0% for the first six
months of both 2008 and 2007. Product expenses include cost of software license
fees, cost of maintenance fees, technology development and support, and sales
and marketing costs. The increase in margins for the second quarter of 2008 was
primarily due to an increase in license fees and a decrease in technology
development and support and sales and marketing costs.
23
COMPUWARE CORPORATION AND SUBSIDIARIES
SOFTWARE PRODUCTS REVENUE
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 61.7% and 59.6% of total revenue
during the second quarter of 2008 and 2007, respectively, and 59.8% of total
revenue during the first six months of both 2008 and 2007.
Distributed software product revenue increased $17.9 million or 30.9% during the
second quarter of 2008 to $75.8 million from $57.9 million during the second
quarter of 2007 and increased $17.7 million or 15.2% during the first six months
of 2008 to $133.6 million from $115.9 million during the first six months of
2007. The increases were due to license and maintenance fee growth as discussed
below.
Mainframe software product revenue decreased $3.5 million or 3.0% during the
second quarter of 2008 to $110.5 million from $113.9 million during the second
quarter of 2007 and decreased $20.0 million or 8.5% during the first six months
of 2008 to $213.7 million from $233.7 million during the first six months of
2007. The decline during the second quarter was due to lower maintenance
revenue. The decline in the first six months of 2008 was primarily due to
decreased license and maintenance fees as discussed below.
License revenue increased $13.3 million or 23.5% during the second quarter of
2008 to $70.0 million from $56.7 million during the second quarter of 2007 and
decreased $6.9 million or 5.5% during the first six months of 2008 to $117.3
million from $124.2 million in the first six months of 2007. The increase during
the second quarter was primarily related to a $13.0 million increase in
distributed license fees related to our Vantage and Changepoint product lines.
The decline during the first six months was primarily a result of decreased
demand for capacity mainframe licenses in our United States operations,
partially offset by increases in distributed license revenue. Fluctuations in
foreign currencies positively impacted license fees by $2.2 million and $3.6
million during the second quarter of 2008 and first six months of 2008,
respectively.
Maintenance fees increased $1.2 million or 1.0% to $116.3 million during the
second quarter of 2008 from $115.1 million during the second quarter of 2007 and
increased $4.6 million to $230.0 million in the first six months of 2008 from
$225.4 million in the first six months of 2007. Fluctuations in foreign
currencies positively impacted maintenance fees by $3.5 million and $6.5 million
during the second quarter of 2008 and first six months of fiscal 2008,
respectively. Increases in distributed maintenance fees, across most product
families, were partially offset by declines in mainframe maintenance fees.
Product revenue by geographic location is presented in the table below (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
United States $ 98,236 $ 94,315 $183,646 $194,748
Europe and Africa 60,906 53,270 114,073 105,935
Other international operations 27,170 24,256 49,605 48,940
-------- -------- -------- --------
Total product revenue $186,312 $171,841 $347,324 $349,623
======== ======== ======== ========
24
COMPUWARE CORPORATION AND SUBSIDIARIES
PRODUCT EXPENSES
Product expenses include cost of software license fees, cost of 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 second
quarter of 2008, cost of software license fees decreased $0.4 million or 5.7% to
$6.6 million from $7.0 million in the second quarter of 2007 and for the first
six months of 2008 increased $3.4 million or 24.9% to $17.0 million from $13.6
million in the first six months of 2007. The increase in cost of software
license fees for the first six months was primarily due to a $3.9 million
capitalized software impairment charge associated with the restructuring program
initiated during the first quarter of 2008 (see Note 7 to the Condensed
Consolidated Financial Statements). As a percentage of software license fees,
costs of software license fees were 9.4% and 12.4% in the second quarter of 2008
and 2007, respectively, and 14.5% (including 3.3% from the impairment charge)
and 10.9% in the first six months of 2008 and 2007, 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 support. New releases include significant research and
development costs and are available to be licensed to new customers as well as
maintenance customers. For the second quarter of 2008, cost of maintenance fees
increased $0.4 million or 4.2% to $10.2 million from $9.8 million in the second
quarter of 2007 and for the first six months of 2008 increased $1.8 million or
8.7% to $21.7 million from $19.9 million in the first six months of 2007. The
increases in expense were primarily due to higher compensation and benefit
costs, which started to occur during the middle of fiscal 2007 in order to meet
product development and maintenance initiatives. As a percentage of maintenance
fees, cost of maintenance fees were 8.8% and 8.5% in the second quarter of 2008
and 2007, respectively and 9.4% and 8.8% in the first half of 2008 and 2007,
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
13.0% and 17.3% in the second quarter of 2008 and 2007, respectively and 15.4%
and 16.3% in the first six months of 2008 and 2007, 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 in the second
quarter and first six months of 2008 and 2007 were as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
------- -------- ------- -------
Technology development and support costs incurred $27,767 $33,739 $60,815 $66,337
Capitalized technology development and support costs (3,597) (3,995) (7,317) (9,477)
------- -------- ------- -------
Technology development and support costs reported $24,170 $29,744 $53,498 $56,860
======= ======== ======= =======
25
COMPUWARE CORPORATION AND SUBSIDIARIES
Before the capitalization of internally developed software products, total
technology development and support expenditures for the second quarter of 2008
decreased $6.0 million or 17.7%, to $27.8 million from $33.8 million in the
second quarter of 2007 and for the first six months of 2008 decreased $5.5
million, or 8.3% to $60.8 million from $66.3 million in the first six months of
fiscal 2007. The decreases were a result of the restructuring program initiated
during the first quarter of fiscal 2008 (see Note 7 to the Condensed
Consolidated Financial Statements).
Sales and marketing costs consist primarily of personnel related costs
associated with product sales and sales support and marketing for all our
product offerings. For the second quarter of 2008, sales and marketing costs
decreased $2.2 million or 3.3% to $65.5 million from $67.7 million in the second
quarter of 2007 and for the first six months of fiscal 2008 decreased $3.3
million or 2.5% to $130.2 million from $133.5 million in the first six months of
fiscal 2007. The decrease in sales and marketing costs for the second quarter
was primarily attributable to lower salary costs due to decreased headcount as a
result of the sales reorganization (see Note 7 to the Condensed Consolidated
Financial Statements) and lower marketing costs offset by higher commission
expense due to the increase in license revenue. The six month decrease was
primarily the result of reduced salary and marketing program costs.
As a percentage of product revenue, sales and marketing costs were 35.1% and
39.4% in the second quarter of 2008 and 2007, respectively and 37.5% and 38.2%
in the first six months of 2008 and 2007, respectively.
PROFESSIONAL SERVICES
Financial information for the professional services segment is as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Revenue $115,659 $116,666 $234,036 $235,202
Expenses 101,970 103,645 206,047 211,260
-------- -------- -------- --------
Professional services contribution $ 13,689 $ 13,021 $ 27,989 $ 23,942
======== ======== ======== ========
During the second quarter of 2008, the professional services segment generated a
contribution margin of 11.8%, compared to 11.2% during the second quarter of
2007 and 12.0% and 10.2% during the first six months of 2008 and 2007,
respectively. The increase in contribution margin was primarily due to the
improved performance of the application services operations.
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 $1.0 million or 0.9% during the
second quarter of 2008 to $115.7 million compared to $116.7 million in the
second quarter of 2007 and decreased $1.2 million or 0.5% for the first six
months
26
COMPUWARE CORPORATION AND SUBSIDIARIES
of 2008 to $234.0 million from $235.2 million in the first six months of 2007.
The decreases in revenue were primarily due to a general slow down in customer
spending on certain IT programs and on staff supplementation services, partially
offset by a $2.9 million and $6.2 million increase in application services
revenue during the second quarter and first six months of 2008, respectively.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
United States $ 96,407 $ 98,326 $196,127 $200,533
Europe and Africa 16,838 16,237 33,607 31,037
Other international operations 2,414 2,103 4,302 3,632
-------- -------- -------- --------
Total professional services revenue $115,659 $116,666 $234,036 $235,202
======== ======== ======== ========
PROFESSIONAL SERVICES EXPENSES
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services decreased $1.6 million or 1.6% during
the second quarter of 2008 to $102.0 million compared to $103.6 million in the
second quarter of 2007 and decreased $5.3 million or 2.5% during the first six
months of 2008 to $206.0 million from $211.3 million during the first six months
of 2007. The decrease in costs was primarily attributable to lower compensation
and benefit costs due to a reduction in employee headcount as management
continues to align headcount with customer demand for our services.
27
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 $2.3 million or 5.1% during the second quarter of
2008 to $42.9 million from $45.2 million during the second quarter of 2007 and
decreased $3.1 million or 3.4% during the first six months of 2008 to $88.3
million from $91.4 million in the first six months of 2007. The decrease in
costs for the second quarter was primarily attributable to a decrease in costs
associated with the Director Phantom Stock Plan due to the reduction in our
stock price at June 30, 2007 as compared to September 30, 2007, lower
compensation costs resulting from a reduction in employee headcount and a
reduction in third party recruiting fees, offset by an increase in foreign
currency losses. The decrease in costs for the six month period was primarily
attributable to a decrease in compensation costs, a decrease in costs associated
with the Director Phantom Stock Plan that resulted from the decrease in our
stock price at March 31, 2007 as compared to September 30, 2007 and lower third
party recruiting fees.
Other income, net ("other income") consists primarily of interest income
realized from investments, interest earned on deferred customer receivables and
income/losses generated from our investments in partially owned companies. Other
income decreased $5.2 million or 49.1% during the second quarter of 2008 to $5.4
million compared to $10.6 million in the second quarter of 2007 and decreased
$10.4 million or 48.4% during the first six months of 2008 to $11.1 million from
$21.5 million during the first six months of 2007. The decrease in other income
was primarily attributable to a decline in investment interest income resulting
from a lower average cash equivalent and investment balance during the
respective periods of 2008 compared to 2007.
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 benefit was $34,000 in the second quarter of 2008 compared to a provision of
$11.3 million in the second quarter of 2007, representing an effective tax rate
of 0% and 31.2%, respectively. The income tax provision was $3.5 million for the
first six months of 2008 compared to $25.7 million for the first six months of
2007, representing an effective rate of 8.5% and 32.2%, respectively.
The decrease in the effective tax rate from 2007 to 2008 is primarily due to a
benefit of approximately $12 million recorded in the quarter ended September 30,
2007. This benefit relates primarily to the recognition of a deferred tax asset
for Brownfield Redevelopment credits which are available to offset Michigan
Business Tax (MBT) liabilities through the Company's fiscal year 2022 (see Note
9 to the Condensed Consolidated Financial Statements).
For the first six months of 2008, the MBT benefit was partially offset by an
additional $2.1 million charge relating to the tax receivable previously
recorded in the fourth quarter ended March 31, 2007. The previously recorded
receivable had included an interest income component which was subject to income
taxes, but for which the Company had not recorded a tax provision. The Company
has considered both the qualitative and quantitative effects of this error on
the financial statements for the fiscal year ended March 31, 2007, as well as
the qualitative and quantitative effects of including the error correction in
the quarter ended June 30, 2007 and the six months ended September 30, 2007 and
year ended March 31, 2008, and has concluded that the effects on the financial
statements are not material.
28
COMPUWARE CORPORATION AND SUBSIDIARIES
RESTRUCTURING COSTS AND ACCRUAL
In the second quarter of 2008, we continued with our initiative to improve
operating efficiencies and reduce costs (as discussed in Note 7 to the Condensed
Consolidated Financial Statements). We incurred charges of $18.7 million and
$34.8 million during the second quarter and first six months of 2008,
respectively. Actions initiated during the first six months of 2008 are expected
to result in approximately $75.0 million of annualized cost reductions,
primarily in technology development and support and sales and marketing. An
additional charge of $1.7 million is expected in the third quarter of 2008
relating to the restructuring actions undertaken in the first six month of 2008.
We continue to evaluate our business processes to identify ways to reduce costs
with the goal of reducing operating expenses by an additional $20.0 million to
$25.0 million in annualized costs during fiscal 2008. Further expense reductions
are likely to result in additional restructuring charges. Such restructuring
charges are expected to be under $10 million for the third quarter of 2008.
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 September 30, 2007. 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, 2007 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 2007.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, cash and cash equivalents and investments totaled
approximately $322.0 million.
Net cash provided by operating activities:
Net cash from operating activities decreased $19.9 million during the first six
months of 2008 as compared to the first six months of 2007. The decrease was
primarily a result of the $17.7 million of severance and other payments
associated with the restructuring program initiated in 2008. Our cash provided
by operating activities is also impacted by changes in working capital accounts.
Changes in accounts receivable and deferred revenue have typically had the
largest impact on our cash flows as we allow for deferred payment terms on
multi-year products contracts. This net change was $33.7 million lower in the
first six months of 2008 compared to comparable period in 2007 primarily due to
a decline in collections multi-year products deals. Changes in accounts payable
and accrued expenses are usually higher during the first six months of a fiscal
year as commissions and bonuses accrued for at March 31, 2007 are paid during
the first quarter. This change was lower during the first six months of 2008
compared to the comparable period in 2007 due to a $8.7 million increase in the
accrual for restructuring costs. The change in prepaid expenses and other
current assets was a result of collecting $10.0 million of fiscal 2007 IBM
settlement proceeds during the first six months of 2008. There were no fiscal
2006 IBM settlement proceeds paid during the first six months of 2007.
As of September 30, 2007, $12.3 million is accrued related to restructuring
actions. We continue to review our business processes for additional cost
reductions that could cause us to incur further restructuring costs during 2008
(see Note 7 to the Condensed Consolidated Financial Statements).
We believe cash flow from operations will be sufficient to meet operating cash
needs for the foreseeable future.
Net cash provided by (used in) investing activities:
Net cash provided by investing activities during the first six months of 2008
was $56.8 million compared to net cash used for investing activities of $31.1
million during the first six months of 2007, an increase of $87.9 million. The
increase was primarily due to the $71.4 million net reduction in our
investments. The sale of our investments was primarily used to fund the stock
repurchase initiative. The remaining increase in net cash was primarily due to
the fact that we had no acquisitions during the first six months of 2008. In the
first six months of 2007, we acquired SteelTrace Limited for $20.7 million in
cash. We continue to evaluate business acquisition opportunities that fit our
strategic plans.
For the six months ended September 30, 2007 and 2006, capital expenditures for
property and equipment and capitalized research and software development totaled
$14.6 million and $20.0 million, respectively.
We also continue to evaluate business acquisition opportunities that fit our
strategic plans.
30
COMPUWARE CORPORATION AND SUBSIDIARIES
Net cash used in financing activities:
Net cash used by financing activities during the first six months of 2008 was
$161.1 million compared to net cash used for financing activities of $186.3
million during the first six months of 2007, a decrease of $25.2 million. The
decrease was primarily due to a $63.2 million increase in net proceeds from
exercise of stock options, due to the increase in the stock price during the
first six months of 2008, partially offset by a $37.6 million increase in cash
used to repurchase our common stock.
The Company has repurchased common stock under two plans, the "Discretionary
Plan" and the "10b5-1 Plan". Under the Discretionary Plan, the Board of
Directors has authorized, since May 2003, the repurchase of a total of up to
$950.0 million of our common stock, including an additional $200 million
authorized in August 2007. Our purchases of stock under the Discretionary Plan
may occur on the open market, through negotiated or block transactions based
upon market and business conditions subject to applicable legal limitations.
During the first six months of 2008, we repurchased 12.6 million shares of our
common stock under the Discretionary Plan at an average price of $8.78 per share
for a total of $110.8 million. As of September 30, 2007, approximately $192.7
million remains authorized for future purchases under the Discretionary Plan.
Under the 10b5-1 Plan, the Board of Directors had authorized the repurchase of
up to a total of 50.0 million shares of our common stock, subject to price,
volume and timing constraints set forth in the plan pursuant to Rule 10b5-1(c)
of the Securities Exchange Act of 1934 through September 30, 2007. A broker
selected by us had the authority to repurchase shares on our behalf under the
terms and limitations specified in the plan without our discretion, allowing
repurchase activity to continue at times when we might otherwise be prevented
from repurchasing shares under insider trading laws or because of self-imposed
trading blackout periods. During the first six months of 2008, we repurchased
11.3 million shares for an aggregate $109.8 million and settled an additional
$7.2 million of trades that occurred during the fourth quarter of 2007 under the
10b5-1 Plan. In August 2007 the 10b5-1 Plan was terminated.
The Company intends to continue repurchasing shares under its Discretionary
Plan, funded primarily through the Company's operating cash flow. Over the long
term the goal is to reduce the Company's weighted average share count to
approximately 200 million shares. Management intends to request approval from
the Board of Directors for additional repurchase authorization from time to time
toward this goal.
On November 1, 2007, the Company entered into a new revolving credit agreement
(the "new credit facility") with Comerica Bank and other lenders to provide
additional leverage to the Company. The new credit facility provides for a
revolving line of credit in the amount of $150 million and expires on November
1, 2012. The new credit facility also has an accordion feature to increase the
facility by $150 million, subject to receiving additional commitments from
lenders and certain other conditions. The new facility also limits additional
borrowing outside of the facility to $250 million. See Note 8 to the Condensed
Consolidated Financial Statements for a description of the material terms of the
new credit facility.
The new credit facility replaces a $100 million revolving credit facility which
matured on October 26, 2007. No borrowings have occurred under this or the
previous facility since inception.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
Recently Issued Accounting Pronouncements
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 evaluating the
impact this Statement will have on our financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115," which permits entities to
measure eligible financial assets, financial liabilities and firm commitments at
fair value, on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating if it will elect the fair value option for any of our
eligible financial instruments.
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, 2007.
At September 30, 2007, we had gross unrecognized tax benefits of $18.2 million.
We anticipate settlement of $2.0 million with the taxing authorities in the
upcoming twelve months. We are not able to reasonably estimate in which future
periods the remaining amounts will ultimately be settled.
Except as described above or 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 2007.
32
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, 2007, therefore the market risks remain substantially
unchanged since we filed the Annual Report on Form 10-K for the fiscal year
ending March 31, 2007.
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 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 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
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
33
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Other than the risk factor added below, 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, 2007.
OUR STOCK REPURCHASE PLANS MAY BE SUSPENDED OR TERMINATED AT ANY TIME, WHICH MAY
RESULT IN A DECREASE IN OUR STOCK PRICE.
We have repurchased shares of our common stock in the market during the past
several years pursuant to a non-discretionary plan which complied with SEC Rule
10b5-1 and a second arrangement pursuant to which management is permitted to
determine the amount and timing of repurchases in its discretion subject to an
overall limit. Our ability and willingness to repurchase shares is subject to,
among other things, the availability of cash resources and credit at rates and
upon terms we believe are prudent. In August 2007, due to current unfavorable
conditions in the credit market, we decided it was prudent not to take on any
debt at this time to fund additional stock buyback activity and discontinued our
Rule 10b5-1 repurchase plan. Stock market conditions, the market value of our
common stock and other factors may also make it imprudent for us from time to
time to engage in repurchase activity. There can be no assurance that we will
continue to repurchase shares at historic levels or at all. If our repurchase
program is curtailed, our stock price may fall.
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 September 30, 2007:
Approximate dollar value or
maximum number of shares
Total number that may yet be purchased
of shares under the plans or programs
Total Average purchased as ---------------------------
number price part of Discretionary Rule 10b5-1
of shares paid per publicly Plan (a) Plan (b)
Period purchased share announced plans ($) (shares)
------ ---------- -------- --------------- ------------- -----------
For the month ended July 31, 2007 4,749,000 $9.98 4,749,000 $ 88,717,000 23,935,000
For the month ended August 31, 2007 11,520,000 8.95 11,520,000 214,769,000 20,685,000
For the month ended September 30, 2007 2,852,000 7.73 2,852,000 192,725,000 --
---------- ----------
Total 19,121,000 $9.02 19,121,000
========== ==========
(a) In August, 2007, we announced that the Board of Directors authorized the
repurchase of up to an additional $200 million of 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 discretionary share
repurchase plan will expire when we have repurchased all shares authorized
for repurchase thereunder.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
(b) Under the Rule 10b5-1 Plan, a broker selected by us had the authority under
the terms and limitations specified in the plan to repurchase a total of up
to 50.0 million shares on our behalf in accordance with the terms of the
plan, through September 30, 2007. The Rule 10b5-1 Plan was terminated,
effective August 20, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on August 28, 2007 at the Company's
headquarters. The first matter voted upon at the meeting was the election of
directors. Each of the nominees was elected to hold office for one year until
the 2008 Annual Meeting of Shareholders or until their successors are elected
and qualified. The results of the voting at the meeting are as follows:
Nominee for Director Total Votes For Total Votes Withheld
--------------------- --------------- --------------------
Dennis W. Archer 252,277,925 19,629,690
Gurminder S. Bedi 266,883,165 5,024,449
William O. Grabe 258,829,208 13,078,406
William R. Halling 265,798,989 6,108,626
Peter Karmanos, Jr. 263,615,294 8,292,320
Faye Alexander Nelson 261,917,984 9,989,631
Glenda D. Price 266,780,308 5,127,307
W. James Prowse 263,344,148 8,563,466
G. Scott Romney 261,343,509 10,564,105
The second matter voted upon was the ratification of the appointment of Deloitte
& Touche LLP, our independent registered public accounting firm, to audit our
consolidated financial statements for the fiscal year ending March 31, 2008.
Total votes for - 263,434,051, against - 6,720,895 and abstained - 1,752,669.
The third matter voted upon was the approval of the 2007 Long Term Incentive
Plan. Total votes for - 205,993,156, against - 32,125,191, abstained - 1,968,162
and broker non-votes - 31,821,105.
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 304,569,866 shares. The total
number of shares voted at the Annual Meeting was 271,907,614 or 89.3% of the
shares outstanding and eligible to vote.
ITEM 5. OTHER INFORMATION
On November 1, 2007, the Company entered into a new Revolving Credit Agreement
(the "credit facility") with Comerica Bank and other lenders. The new credit
facility provides for a revolving line of credit in the amount of $150 million
and expires on November 1, 2012. See Note 8 to the Condensed Consolidated
Financial Statements for a description of the material terms of the credit
facility.
35
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
4.9 Amendment No. 1, dated July 26, 2007, to Amended and Restated Credit
Agreement dated July 26, 2006 (filed as an exhibit to the Company's
Form 10-Q for the quarter ended June 30, 2007 and incorporated herein
by reference).
4.10 Compuware Corporation Revolving Credit Agreement dated as of November
1, 2007.
10.103 Settlement Agreement with Hank Jallos dated July 18, 2007 (filed as an
exhibit to the Company's Form 10-Q for the quarter ended June 30, 2007
and incorporated herein by reference).
10.104 Amendment No. 1, dated August 7, 2007, to the Settlement agreement
with Hank Jallos dated July 18, 2007 (filed as an exhibit to the
Company's Form 10-Q for the quarter ended June 30, 2007 and
incorporated herein by reference).
10.105 2007 Long Term Incentive Plan (filed on July 24, 2007 as Appendix A to
the Company's definitive proxy statement for its 2007 annual
shareholders meeting and incorporated herein by reference).
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.
36
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
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: November 6, 2007 By: /s/ Peter Karmanos, Jr.
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Peter Karmanos, Jr.
Chief Executive Officer
(duly authorized officer)
Date: November 6, 2007 By: /s/ Laura L. Fournier
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Laura L. Fournier
Senior Vice President
Chief Financial Officer
Treasurer
(principal financial officer)
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