e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
|
|
|
o |
|
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
(State or other jurisdiction of
incorporation or organization)
|
|
38-2007430
(IRS Employer
Identification No.) |
One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)
Registrants telephone number, including area code: (313) 227-7300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the
latest practicable date:
As of October 31, 2008, there were outstanding 246,494,673 shares of Common Stock, par value $.01,
of the registrant.
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2008 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
161,323 |
|
|
$ |
215,943 |
|
Investments |
|
|
10,813 |
|
|
|
70,474 |
|
Accounts receivable, net |
|
|
424,718 |
|
|
|
535,094 |
|
Deferred tax asset, net |
|
|
35,355 |
|
|
|
44,374 |
|
Income taxes refundable |
|
|
3,472 |
|
|
|
3,746 |
|
Prepaid expenses and other current assets |
|
|
29,376 |
|
|
|
49,285 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
665,057 |
|
|
|
918,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION |
|
|
355,978 |
|
|
|
365,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION |
|
|
55,770 |
|
|
|
61,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
267,389 |
|
|
|
244,388 |
|
Deferred tax asset, net |
|
|
33,789 |
|
|
|
35,851 |
|
Goodwill |
|
|
353,393 |
|
|
|
356,267 |
|
Other |
|
|
34,435 |
|
|
|
35,791 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
689,006 |
|
|
|
672,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,765,811 |
|
|
$ |
2,018,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
22,499 |
|
|
$ |
18,772 |
|
Accrued expenses |
|
|
102,529 |
|
|
|
148,268 |
|
Income taxes payable |
|
|
2,145 |
|
|
|
4,976 |
|
Deferred revenue |
|
|
405,622 |
|
|
|
472,864 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
532,795 |
|
|
|
644,880 |
|
|
|
|
|
|
|
|
|
|
DEFERRED REVENUE |
|
|
371,220 |
|
|
|
399,548 |
|
|
|
|
|
|
|
|
|
|
ACCRUED EXPENSES |
|
|
19,758 |
|
|
|
19,513 |
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX LIABILITY, NET |
|
|
20,992 |
|
|
|
27,585 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
944,765 |
|
|
|
1,091,526 |
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock |
|
|
2,465 |
|
|
|
2,616 |
|
Additional paid-in capital |
|
|
625,316 |
|
|
|
643,544 |
|
Retained earnings |
|
|
182,547 |
|
|
|
261,754 |
|
Accumulated other comprehensive income |
|
|
10,718 |
|
|
|
19,117 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
821,046 |
|
|
|
927,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
1,765,811 |
|
|
$ |
2,018,557 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees |
|
$ |
42,251 |
|
|
$ |
70,016 |
|
|
$ |
103,693 |
|
|
$ |
117,287 |
|
Maintenance fees |
|
|
124,717 |
|
|
|
116,296 |
|
|
|
251,244 |
|
|
|
230,037 |
|
Professional services fees |
|
|
102,877 |
|
|
|
115,659 |
|
|
|
213,496 |
|
|
|
234,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
269,845 |
|
|
|
301,971 |
|
|
|
568,433 |
|
|
|
581,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
6,253 |
|
|
|
6,609 |
|
|
|
12,343 |
|
|
|
16,975 |
|
Cost of maintenance fees |
|
|
11,332 |
|
|
|
10,206 |
|
|
|
23,326 |
|
|
|
21,658 |
|
Cost of professional services |
|
|
98,973 |
|
|
|
101,970 |
|
|
|
202,795 |
|
|
|
206,047 |
|
Technology development and support |
|
|
22,938 |
|
|
|
24,170 |
|
|
|
45,508 |
|
|
|
53,498 |
|
Sales and marketing |
|
|
58,353 |
|
|
|
65,456 |
|
|
|
119,680 |
|
|
|
130,188 |
|
Administrative and general |
|
|
42,474 |
|
|
|
42,874 |
|
|
|
83,618 |
|
|
|
88,254 |
|
Restructuring costs |
|
|
2,231 |
|
|
|
18,731 |
|
|
|
2,913 |
|
|
|
34,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
242,554 |
|
|
|
270,016 |
|
|
|
490,183 |
|
|
|
551,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
27,291 |
|
|
|
31,955 |
|
|
|
78,250 |
|
|
|
29,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME, NET |
|
|
3,046 |
|
|
|
5,427 |
|
|
|
6,267 |
|
|
|
11,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
|
30,337 |
|
|
|
37,382 |
|
|
|
84,517 |
|
|
|
41,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION (BENEFIT) |
|
|
8,755 |
|
|
|
(34 |
) |
|
|
28,203 |
|
|
|
3,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
21,582 |
|
|
$ |
37,416 |
|
|
$ |
56,314 |
|
|
$ |
37,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.09 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.08 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,314 |
|
|
$ |
37,605 |
|
Adjustments to reconcile net income to net cash provided
by operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,072 |
|
|
|
27,554 |
|
Property and equipment impairment |
|
|
662 |
|
|
|
3,079 |
|
Capitalized software impairment |
|
|
|
|
|
|
3,873 |
|
Acquisition tax benefits |
|
|
2,622 |
|
|
|
2,621 |
|
Stock option compensation |
|
|
7,900 |
|
|
|
7,183 |
|
Deferred income taxes |
|
|
2,597 |
|
|
|
(3,634 |
) |
Other |
|
|
410 |
|
|
|
815 |
|
Net change in assets and liabilities, net of effects from acquisitions
and currency fluctuations: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
54,314 |
|
|
|
39,425 |
|
Prepaid expenses and other current assets |
|
|
18,214 |
|
|
|
12,762 |
|
Other assets |
|
|
(3,992 |
) |
|
|
3,652 |
|
Accounts payable and accrued expenses |
|
|
(35,600 |
) |
|
|
(24,657 |
) |
Deferred revenue |
|
|
(61,346 |
) |
|
|
(53,760 |
) |
Income taxes |
|
|
(2,701 |
) |
|
|
(4,045 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
66,466 |
|
|
|
52,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of: |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(4,922 |
) |
|
|
(6,691 |
) |
Capitalized software |
|
|
(6,090 |
) |
|
|
(7,889 |
) |
Investment proceeds |
|
|
59,402 |
|
|
|
71,375 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
48,390 |
|
|
|
56,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock options including excess tax benefits |
|
|
11,163 |
|
|
|
64,379 |
|
Contribution to stock purchase plans |
|
|
1,674 |
|
|
|
2,230 |
|
Repurchase of common stock |
|
|
(174,186 |
) |
|
|
(227,695 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(161,349 |
) |
|
|
(161,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
(8,127 |
) |
|
|
6,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(54,620 |
) |
|
|
(45,027 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
215,943 |
|
|
|
260,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
161,323 |
|
|
$ |
215,654 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of
Compuware Corporation and its wholly owned subsidiaries (collectively, the Company). All
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S.
GAAP for complete financial statements. U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, contingencies and results of
operations. While management has based their assumptions and estimates on the facts and
circumstances existing at September 30, 2008, final amounts may differ from these estimates.
In the opinion of management of the Company, the accompanying unaudited Condensed Consolidated
Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, that
are necessary for a fair presentation of the results for the interim periods presented. These
financial statements should be read in conjunction with the Companys audited Consolidated
Financial Statements and notes thereto for the year ended March 31, 2008 included in the Companys
Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). The Condensed
Consolidated Balance Sheet at March 31, 2008 has been derived from the audited financial statements
at that date but does not include all information and footnotes required by U.S. GAAP for complete
financial statements. The results of operations for interim periods are not necessarily indicative
of actual results achieved for full fiscal years.
Revenue Recognition The Company earns revenue from licensing software products, providing
maintenance and support for those products and rendering professional services. The Companys
revenue recognition policies are in accordance with U.S. GAAP, including Statements of Position
97-2 Software Revenue Recognition and 98-9 Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 104 and Emerging Issues Task Force Issue 00-21 Revenue
Arrangements with Multiple Deliverables. Accordingly, 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 Companys software license agreements provide its customers with a
right to use its software perpetually (perpetual licenses) or during a defined term (term
licenses).
Perpetual license fee revenue is recognized using the residual method, under which the fair value,
based on vendor specific objective evidence (VSOE), of all undelivered elements of the agreement
(i.e., maintenance and professional services) is deferred. VSOE is based on rates charged for
maintenance and professional services when sold separately. The remaining portion of the fee is
recognized as license fee revenue upon delivery of the products, provided that no significant
obligations remain and collection of the related receivable is reasonably assured.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
For revenue arrangements where there is a lack of VSOE of fair value for any undelivered elements,
license fee revenue is deferred and recognized upon delivery of those elements or
when VSOE of fair value can be established. When maintenance or services are the only undelivered
elements, the license fee revenue is recognized on a ratable basis over the longer of the
maintenance term or over the period in which the services are expected to be performed. Such
transactions include term licenses as the Company does not sell maintenance for term licenses
separately and therefore cannot establish VSOE for the undelivered elements in these arrangements.
These arrangements do not qualify for separate recognition of the software license fees,
maintenance fees and as applicable, professional services fees under SOP 97-2 as amended. However,
to comply with SEC Regulation S-X, Rule 5-03(b), which requires product, services and other
categories of revenue to be displayed separately on the income statement, the Company separates the
license fee, maintenance fee and professional services fee revenue based on its determination of
fair value. The Company applies its VSOE of fair value for maintenance related to perpetual license
transactions and stand alone services arrangements as a reasonable and consistent approximation of
fair value to separate license fee, maintenance fee and professional services fee revenue for
income statement classification purposes.
The Company offers flexibility to customers purchasing licenses for its products and related
maintenance. Terms of these transactions range from standard perpetual license sales that include
one year of maintenance to large multi-year (generally two to five years), multi-product contracts.
The Company allows deferred payment terms on multi-year contracts, with installments collectible
over the term of the contract. Based on the Companys successful collection history for deferred
payments, license fees (net of any finance fees) are generally recognized as discussed above. In
certain transactions where it cannot be concluded that the fee is fixed or determinable due to the
nature of the deferred payment terms, the Company recognizes revenue as payments become due.
Financing fees are recognized as interest income over the term of the receivable.
Maintenance fees - The Companys maintenance agreements provide for technical support and advice,
including problem resolution services and assistance in product installation, error corrections and
any product enhancements released during the maintenance period. The first year of maintenance is
included with all license agreements. Maintenance revenue is recognized ratably over the term of
the maintenance arrangements, which primarily range from one to five years.
Professional services fees Professional services fees are generally based on hourly or daily
rates. Revenues from professional services are recognized in the period the services are performed
provided that collection of the related receivable is reasonably assured. For development services
rendered under fixed-price contracts, revenue is recognized using the percentage of completion
method and if determined that costs will exceed revenue, the expected loss is recorded at the time
the loss becomes apparent. Certain professional services contracts include a project and on-going
operations for the project. Revenue associated with these contracts is recognized over the expected
service period as the customer derives value from the services, consistent with the proportional
performance method.
7
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Deferred revenue - Deferred revenue consists primarily of maintenance fees related to the remaining
term of maintenance agreements in effect at those dates. Deferred license fees and services fees
are also included in deferred revenue for those arrangements that are being recognized on a ratable
basis. Commission costs associated with deferred revenue are also deferred.
Capitalized Software Capitalized software includes the costs of purchased and internally
developed software products and is stated at the lower of unamortized cost or net realizable value
in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.
Capitalization of internally developed software products begins when technological feasibility of
the product is established. Technology development and support includes primarily the costs of
programming personnel associated with product development and support, net of amounts capitalized.
The amortization for both internally developed and purchased software products is computed on a
product-by-product basis. The annual amortization is the greater of the amount computed using (a)
the ratio of current gross revenues compared with the total of current and anticipated future
revenues for that product or (b) the straight-line method over the remaining estimated economic
life of the product, including the period being reported on. Amortization begins when the product
is available for general release to customers. The amortization period for capitalized software is
generally five years.
Capitalized software is reviewed for impairment each balance sheet date or when events and
circumstances indicate such asset may be impaired. Asset impairment charges are recorded when
estimated future undiscounted cash flows are not sufficient to recover the carrying value of the
capitalized software. The impairment charge is the amount by which the present value of future cash
flows is less than the carrying value of these assets.
Goodwill and Other Intangibles Goodwill for each business segment and those intangible
assets with indefinite lives are tested for impairment annually and/or when events or circumstances
indicate that their fair value may have been reduced below carrying value. The Company evaluated
its goodwill and indefinite lived intangibles as of March 31, 2008 and determined there was no
impairment.
Income Taxes The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely
than not be realized. These deferred tax assets are subject to periodic assessments as to
recoverability and if it is determined that it is more likely than not that the benefits will not
be realized, valuation allowances are recorded which would increase the provision for income taxes.
In making such determination, the Company considers all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial operations.
8
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Interest and penalties related to income tax liabilities are included in income tax expense.
Recently Issued Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133 (SFAS No. 161). This Statement changes the
disclosure requirements for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. This Statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Because SFAS No. 161 applies
only to financial statement disclosures, it will not have any impact on the Companys consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
replaces Statement of Financial Accounting Standards No. 141, Business Combinations. This
Statement requires assets and liabilities acquired in a business combination, contingent
consideration and certain acquired contingencies, to be measured at their fair value as of the date
of acquisition. This Statement also requires that acquisition-related costs and restructuring costs
be recognized separately from the business combination. This Statement is effective for fiscal
years beginning after December 15, 2008 and will be effective for business combinations entered
into after January 1, 2009. Its effects on future periods will depend on the nature and
significance of any acquisitions subject to this Statement.
In February 2007, the FASB issued SFAS 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 was
adopted on April 1, 2008 and did not have a material effect on the Companys financial statements.
In February 2008, the FASB issued FASB Staff Position No. FAS 1572, Effective Date of FASB
Statement No. 157 (SFAS No. 157), which provides a one year deferral of the effective date of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized
or disclosed in the financial statements at fair value at least annually. Therefore, the Company
has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities
only. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under SFAS No. 157 as the price that would be received to sell an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the following:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities. |
9
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
|
|
Level 2 |
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. |
|
|
|
Level 3 |
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. |
The adoption of SFAS No. 157 did not have a material impact on the Companys consolidated results
of operations and financial condition.
The Company measures the following two financial liabilities at fair value on a recurring basis in
accordance with SFAS No. 157 as of September 30, 2008: (1) the director phantom stock plan
liability of $6.7 million using level 1 inputs and (2) forward foreign exchange contract
liabilities of $488,000 using level 2 inputs.
Employee Transition Agreement In the first quarter of fiscal 2009, the Company
transitioned the employment of 170 of its professional services staff to a customer for $6.5
million resulting in the Company recording a one-time $5.6 million net gain against administrative
and general expense in the Condensed Consolidated Statements of Operations. The $6.5 million was
fully collected as of September 30, 2008.
10
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
21,582 |
|
|
$ |
37,416 |
|
|
$ |
56,314 |
|
|
$ |
37,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
252,394 |
|
|
|
294,321 |
|
|
|
256,024 |
|
|
|
298,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.09 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
21,582 |
|
|
$ |
37,416 |
|
|
$ |
56,314 |
|
|
$ |
37,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
252,394 |
|
|
|
294,321 |
|
|
|
256,024 |
|
|
|
298,122 |
|
Dilutive effect of stock options |
|
|
5,221 |
|
|
|
1,116 |
|
|
|
4,428 |
|
|
|
2,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
257,615 |
|
|
|
295,437 |
|
|
|
260,452 |
|
|
|
300,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.08 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended September 30, 2008, stock options to purchase a total of
approximately 5,951,000 and 6,162,000 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, 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.
Note 3 Comprehensive Income
Other comprehensive income includes foreign currency translation gains and losses that have been
excluded from net income and reflected in equity. Total comprehensive income is summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
21,582 |
|
|
$ |
37,416 |
|
|
$ |
56,314 |
|
|
$ |
37,605 |
|
Foreign currency translation
adjustment, net of tax |
|
|
(9,323 |
) |
|
|
5,724 |
|
|
|
(8,399 |
) |
|
|
9,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
12,259 |
|
|
$ |
43,140 |
|
|
$ |
47,915 |
|
|
$ |
46,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 4 Stock Benefit Plans and Stock-Based Compensation
The Company has the following stock benefit plans: (1) the 2007 Long Term Incentive Plan allows the
Companys Compensation Committee the ability to grant stock options, stock appreciation rights,
restricted stock, restricted stock units, performance-based cash or stock awards and annual cash
incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase Plan
allows participating U.S. and Canadian employees the right to have up to 10% of their compensation
withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock Ownership
Plan (ESOP) and Trust allows the Company to make contributions to the ESOP for the benefit of
substantially all U.S. employees.
A summary of option activity under the Companys stock-based compensation plans as of September 30,
2008, and changes during the six months then ended is presented below (shares and intrinsic value
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term in Years |
|
|
Value |
|
Options outstanding as of March 31, 2008 |
|
|
34,289 |
|
|
$ |
12.69 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
9,710 |
|
|
|
7.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,335 |
) |
|
|
7.87 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(307 |
) |
|
|
8.19 |
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
(6,182 |
) |
|
|
23.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2008 |
|
|
36,175 |
|
|
$ |
9.71 |
|
|
|
5.06 |
|
|
$ |
45,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest, net of
estimated forfeitures, as of September 30, 2008 |
|
|
33,459 |
|
|
$ |
9.84 |
|
|
|
4.72 |
|
|
$ |
40,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of September 30, 2008 |
|
|
21,830 |
|
|
$ |
10.90 |
|
|
|
2.49 |
|
|
$ |
18,079 |
|
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, |
|
|
2008 |
|
2007 |
Fair value of shares vested |
|
$ |
3.88 |
|
|
$ |
5.12 |
|
Intrinsic value of options exercised |
|
|
3,903 |
|
|
|
16,192 |
|
SFAS No. 123 (revised 2004), Share-Based Payment requires the use of a valuation model to
calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes
option pricing model, which incorporates various assumptions including volatility, expected term,
risk-free interest rates and dividend yields. The volatility is based on historical volatility of
the Companys common stock over the most recent period commensurate with the estimated expected
term of the stock option granted. The Company uses historical volatility because management
believes such volatility is representative of prospective trends. The expected term of an award is
based on either historical exercise data if available or the simplified method as described in
Staff Accounting Bulletins No. 107 and No. 110. 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 Companys history and expectation
regarding dividend payouts.
12
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
The weighted average fair value of stock options granted during the periods and the assumptions
used to estimate those values using a Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
September 30, |
|
|
2008 |
|
2007 |
Expected volatility |
|
|
54.39 |
% |
|
|
59.21 |
% |
Risk-free interest rate |
|
|
3.25 |
% |
|
|
4.79 |
% |
Expected lives at date of grant (in years) |
|
|
6.4 |
|
|
|
6.7 |
|
Weighted-average fair value of the options granted |
|
$ |
4.30 |
|
|
$ |
6.84 |
|
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, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
Stock-based compensation classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1 |
|
Cost of maintenance fees |
|
$ |
121 |
|
|
$ |
71 |
|
|
$ |
187 |
|
|
|
139 |
|
Cost of professional services |
|
|
1,598 |
|
|
|
336 |
|
|
|
1,984 |
|
|
|
672 |
|
Technology development and support |
|
|
244 |
|
|
|
168 |
|
|
|
366 |
|
|
|
342 |
|
Sales and marketing |
|
|
1,527 |
|
|
|
690 |
|
|
|
2,245 |
|
|
|
1,132 |
|
Administrative and general |
|
|
1,178 |
|
|
|
350 |
|
|
|
2,212 |
|
|
|
780 |
|
Restructuring costs |
|
|
906 |
|
|
|
3,995 |
|
|
|
906 |
|
|
|
4,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
before income taxes |
|
|
5,574 |
|
|
|
5,610 |
|
|
|
7,900 |
|
|
|
7,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(2,018 |
) |
|
|
(1,953 |
) |
|
|
(2,867 |
) |
|
|
(2,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
after income taxes |
|
$ |
3,556 |
|
|
$ |
3,657 |
|
|
$ |
5,033 |
|
|
$ |
4,694 |
|
|
|
|
|
|
As of September 30, 2008, $39.5 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 3.34 years.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 5 Goodwill and Intangible Assets
The components of the Companys intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks (1) |
|
$ |
5,946 |
|
|
|
|
|
|
$ |
5,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (2) |
|
$ |
346,491 |
|
|
$ |
(290,721 |
) |
|
$ |
55,770 |
|
Customer relationship agreements (3) |
|
|
13,925 |
|
|
|
(9,766 |
) |
|
|
4,159 |
|
Non-compete agreements (3) |
|
|
2,602 |
|
|
|
(2,493 |
) |
|
|
109 |
|
Other (4) |
|
|
6,875 |
|
|
|
(6,517 |
) |
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
$ |
369,893 |
|
|
$ |
(309,497 |
) |
|
$ |
60,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks (1) |
|
$ |
5,984 |
|
|
|
|
|
|
$ |
5,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (2) |
|
$ |
341,127 |
|
|
$ |
(279,474 |
) |
|
$ |
61,653 |
|
Customer relationship agreements (3) |
|
|
14,270 |
|
|
|
(8,482 |
) |
|
|
5,788 |
|
Non-compete agreements (3) |
|
|
2,948 |
|
|
|
(2,660 |
) |
|
|
288 |
|
Other (4) |
|
|
6,891 |
|
|
|
(6,396 |
) |
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
$ |
365,236 |
|
|
$ |
(297,012 |
) |
|
$ |
68,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain trademarks were acquired as part of the Covisint, LLC and Changepoint Corporation
acquisitions in fiscal 2004 and 2005. These trademarks are deemed to have an indefinite life
and therefore are not being amortized. |
|
(2) |
|
Amortization and impairments of capitalized software are primarily included in Cost of
Software License Fees in the Condensed Consolidated Statements of Operations. Capitalized
software is generally amortized over five years. |
|
(3) |
|
Customer relationship agreements and non-compete agreements were acquired as part of past
acquisitions. The customer relationship agreements are being amortized over periods up to five
years. The non-compete agreements are being amortized over periods up to three years. |
|
(4) |
|
Other amortized intangible assets include trademarks associated with product acquisitions and
are being amortized over periods up to ten years. |
14
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Changes in the carrying amounts of goodwill are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
Application |
|
|
|
|
|
|
Products |
|
|
Services |
|
|
Services |
|
|
Total |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008, net |
|
$ |
202,502 |
|
|
$ |
142,294 |
|
|
$ |
11,471 |
|
|
$ |
356,267 |
|
Adjustments to previously recorded
purchase price (1) |
|
|
(371 |
) |
|
|
|
|
|
|
61 |
|
|
|
(310 |
) |
Effect of foreign currency translation |
|
|
(2,012 |
) |
|
|
(552 |
) |
|
|
|
|
|
|
(2,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008, net |
|
$ |
200,119 |
|
|
$ |
141,742 |
|
|
$ |
11,532 |
|
|
$ |
353,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The adjustment to goodwill primarily relates to pre-acquisition tax contingency adjustments. |
15
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 6 Segment Information
The Company operates in three business segments in the technology industry: products, professional
services and application services. The Company provides software products, professional services
and application services to information technology (IT) organizations that help IT professionals
efficiently develop, implement and support the applications that run their businesses.
Financial information for the Companys business segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
$ |
108,801 |
|
|
$ |
110,484 |
|
|
$ |
231,290 |
|
|
$ |
213,721 |
|
Distributed systems |
|
|
58,167 |
|
|
|
75,828 |
|
|
|
123,647 |
|
|
|
133,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue |
|
|
166,968 |
|
|
|
186,312 |
|
|
|
354,937 |
|
|
|
347,324 |
|
Professional services |
|
|
94,314 |
|
|
|
106,361 |
|
|
|
196,146 |
|
|
|
215,144 |
|
Application services |
|
|
8,563 |
|
|
|
9,298 |
|
|
|
17,350 |
|
|
|
18,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
269,845 |
|
|
$ |
301,971 |
|
|
$ |
568,433 |
|
|
$ |
581,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
68,092 |
|
|
$ |
79,871 |
|
|
$ |
154,080 |
|
|
$ |
125,005 |
|
Professional services |
|
|
4,854 |
|
|
|
13,804 |
|
|
|
13,176 |
|
|
|
27,693 |
|
Application services |
|
|
(950 |
) |
|
|
(115 |
) |
|
|
(2,475 |
) |
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
71,996 |
|
|
|
93,560 |
|
|
|
164,781 |
|
|
|
152,994 |
|
Corporate expenses |
|
|
(42,474 |
) |
|
|
(42,874 |
) |
|
|
(83,618 |
) |
|
|
(88,254 |
) |
Restructuring costs |
|
|
(2,231 |
) |
|
|
(18,731 |
) |
|
|
(2,913 |
) |
|
|
(34,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
27,291 |
|
|
|
31,955 |
|
|
|
78,250 |
|
|
|
29,989 |
|
Other income, net |
|
|
3,046 |
|
|
|
5,427 |
|
|
|
6,267 |
|
|
|
11,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
30,337 |
|
|
$ |
37,382 |
|
|
$ |
84,517 |
|
|
$ |
41,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial information regarding geographic operations is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
168,192 |
|
|
$ |
194,643 |
|
|
$ |
357,394 |
|
|
$ |
379,773 |
|
Europe and Africa |
|
|
73,498 |
|
|
|
77,744 |
|
|
|
152,794 |
|
|
|
147,680 |
|
Other international operations |
|
|
28,155 |
|
|
|
29,584 |
|
|
|
58,245 |
|
|
|
53,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
269,845 |
|
|
$ |
301,971 |
|
|
$ |
568,433 |
|
|
$ |
581,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 7 Restructuring Accrual
During fiscal 2008, we undertook various restructuring initiatives to improve the effectiveness and
efficiency of a number of our critical business processes within the products segment. These
initiatives included the realignment and centralization of certain product development activities
leading to the full or partial closing of certain development labs and termination of approximately
325 employees, primarily programming personnel. We also terminated approximately 200 employees from
various other functions of the organization, primarily within sales and marketing.
In the first six months of fiscal 2009, the Company incurred restructuring charges of $2.9 million
primarily related to the professional services segment. Employee termination benefits accounted for
$2.2 million of the charge as professional services management positions were eliminated and
personnel were terminated. In addition, full or partial closing of four offices occurred resulting
in a lease abandonment charge of $500,000. The remaining facilities charge primarily related to
changes in sublease income assumptions associated with lease facilities that were abandoned in
previous restructuring initiatives.
Management continues to evaluate the Companys business processes to identify operating
efficiencies with the goal of reducing operating expenses. As part of these efforts, during the
last week of October 2008, the Company terminated or identified for termination approximately 300
employees primarily within our professional services, technology and corporate administrative
functions. These actions will result in additional restructuring charges of approximately $5
million in the third quarter of fiscal 2009.
The following table summarizes the restructuring accrual as of March 31, 2008, and changes to the
accrual during the first six months of fiscal 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed |
|
|
Paid |
|
|
|
|
|
|
Accrual |
|
|
during the |
|
|
during the |
|
|
Accrual |
|
|
|
balance at |
|
|
six months ended |
|
|
six months ended |
|
|
balance at |
|
|
|
March 31, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Employee termination benefits |
|
$ |
2,655 |
|
|
$ |
2,160 |
|
|
$ |
(2,777 |
) |
|
$ |
2,038 |
|
Facilities costs (primarily lease
abandonments) |
|
|
4,716 |
|
|
|
739 |
|
|
|
(2,240 |
) |
|
|
3,215 |
|
Other |
|
|
85 |
|
|
|
14 |
|
|
|
(82 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,456 |
|
|
$ |
2,913 |
|
|
$ |
(5,099 |
) |
|
$ |
5,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, $3.8 million of the restructuring accrual is recorded in current accrued
expenses with the remaining balance of $1.5 million recorded in long-term accrued expenses in
the Condensed Consolidated Balance Sheets.
The accruals for employee termination benefits at September 30, 2008 primarily represent the
amounts to be paid to employees that have been terminated as a result of initiatives described
above.
The accruals for facilities costs at September 30, 2008 represent the remaining fair value of lease
obligations for exited and demised locations, as determined at the cease-use dates of those
facilities, net of estimated sublease income that could be reasonably obtained in the future, and
will be paid out over the remaining lease terms, the last of which ends in fiscal 2012. Projected
sublease income is based on managements estimates, which are subject to change.
17
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)
Note 8 Debt
The Company has no long term debt.
The Company has an unsecured revolving credit agreement (the credit facility) with Comerica Bank
and other lenders. The credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The credit facility also permits the Company to
increase the revolving line of credit by up to an additional $150 million subject to receiving
further commitments from lenders and certain other conditions.
The credit facility contains various covenant requirements, including limitations on liens;
indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans
and advances from the Company; transactions with affiliates and limits additional borrowing outside
of the facility to $250 million. The credit facility is also subject to maximum total debt to
EBITDA and minimum fixed charge coverage financial covenants. The Company is in compliance with the
covenants under the credit facility.
Any borrowings under the credit facility bear interest at the prime rate or the Eurodollar rate
plus the applicable margin (based on the level of maximum total debt to EBITDA ratio), at the
Companys option. The Company pays a quarterly facility fee on the credit facility based on the
applicable margin grid. The Company has never used the credit facility.
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, 2008, and the related condensed consolidated
statements of operations for the three-month and six-month periods ended September 30, 2008 and
2007, and of cash flows for the six-month periods ended September 30, 2008 and 2007. These interim
financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and
subsidiaries as of March 31, 2008, 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 28, 2008 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, 2008, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
November 5, 2008
19
COMPUWARE CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements within the meaning of the
federal securities laws. When we use words such as may, might, will, should, believe,
expect, anticipate, estimate, continue, predict, forecast, projected, intend or
similar expressions, or make statements regarding our future plans, objectives or expectations, we
are making forward-looking statements. Numerous important factors, risks and uncertainties affect
our operating results and could cause actual results to differ materially from the results implied
by these or any other forward-looking statements made by us, or on our behalf.
The material risks and uncertainties that we believe affect us are summarized below and have not
materially changed since the end of fiscal 2008 (see Item 1A Risk Factors in our 2008 Form 10-K).
These risks and uncertainties are not the only ones we face. Additional risks and uncertainties
discussed elsewhere in the reports we file with the Securities and Exchange Commission, as well as
other risks and uncertainties that we are not aware of or focused on or that we currently deem
immaterial, may also impair business operations. This report is qualified in its entirety by these
risk factors and those listed below. If any of the following risks actually occur, our financial
condition and results of operations could be materially and adversely affected. If this were to
happen, the value of our common stock could decline significantly, and shareholders could lose all
or part of their investment.
There can be no assurance that future results will meet expectations. While we believe that our
forward-looking statements are reasonable, you should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. Except as required by applicable
law, we do not undertake any obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after the date of this
report.
|
|
|
The majority of our software products revenue is dependent on our customers continued
use of International Business Machines Corp. (IBM) and IBM-compatible products. |
|
|
|
|
Our software product revenue is dependent on the acceptance of our pricing structure for
software licenses and maintenance. |
|
|
|
|
Our strategy to package products and services as a single offering may not be accepted
by our customers, negatively impacting our revenue. |
|
|
|
|
The continuing uncertainty in the United States and global economies may reduce demand
for our software products, professional services and application services, which may
negatively affect our revenues and operating results. |
|
|
|
|
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 expense reduction program, our
results of operations and financial condition may be adversely affected. |
|
|
|
|
Our software and technology may infringe the proprietary rights of others, which may
require us to enter into royalty arrangements or result in costly litigation. |
|
|
|
|
Our results could be adversely affected if our operating margin or operating margin
percentage decline. |
20
COMPUWARE CORPORATION AND SUBSIDIARIES
|
|
|
Our results could be adversely affected by increased competition, pricing pressures and
technological changes. |
|
|
|
|
The market for professional services is highly competitive, fragmented and characterized
by low barriers to entry. |
|
|
|
|
The market for application services is in its early stages with emerging competitors.
As the market matures, competition may increase and could have a negative impact on our
results of operations. |
|
|
|
|
We must develop or acquire product enhancements and new products to succeed. |
|
|
|
|
Acquisitions may be difficult to integrate, disrupt our business or divert the attention
of our management and may result in financial results that are different than expected. |
|
|
|
|
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 or consolidation in the U.S. domestic automotive manufacturing
business could adversely affect our professional services and application services
businesses. |
|
|
|
|
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 affect on our business. |
|
|
|
|
Our quarterly financial results vary and may be adversely affected by a number of
unpredictable factors. |
|
|
|
|
Declines in our license commitments, increases in customer cancellations or currency
fluctuations could lead to declines in our maintenance revenue. |
|
|
|
|
Unanticipated changes in our operating results or effective tax rates, or exposure to
additional income tax liabilities, could affect our profitability. |
|
|
|
|
Our stock repurchase plan may be suspended or terminated at any time, which may result
in a decrease in our stock price. |
|
|
|
|
If the fair value of our long-lived assets deteriorated below their carrying value,
recognition of an impairment loss would be required, which would adversely affect our
financial results. |
|
|
|
|
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. |
21
COMPUWARE CORPORATION AND SUBSIDIARIES
OVERVIEW
In this section, we discuss our results of operations on a segment basis for each of our three
business segments in the technology industry: products, professional services and application
services. We evaluate segment performance based primarily on segment contribution before corporate
expenses. References to years are to fiscal years ended March 31. This discussion and analysis
should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and
notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year
ended March 31, 2008, particularly Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.
We deliver value to businesses worldwide by providing software products, professional services and
application services that improve the performance of IT organizations. Originally founded in 1973
as a professional services company, in the late 1970s we began to offer mainframe productivity
tools for fault diagnosis, file and data management, and application debugging.
In the 1990s, IT moved toward distributed and web-based platforms. Our solutions portfolio grew in
response, and we now market a comprehensive portfolio of IT solutions across the full range of
enterprise computing platforms that help:
|
|
|
Develop and deliver high quality, high performance enterprise business applications in a
timely and cost-effective manner. |
|
|
|
|
Measure, manage and communicate application service in business terms, and maintain
consistent, high levels of service delivery. |
|
|
|
|
Provide executive visibility, decision support and process automation across the entire
IT organization to enable all available resources to be harnessed in alignment with
business priorities. |
Additionally, to be competitive in todays global economy, enterprises must securely share
applications, information and business processes. We address this market need through our
application services, which are marketed under the brand name Covisint. Our application services
offerings provide a software-as-a-service platform that enables industries and business communities
to securely integrate vital information and processes across users, business partners, customers,
vendors and suppliers.
We earn revenue from licensing software products, providing maintenance and support for those
products and rendering professional services. Our revenue recognition policies are in accordance
with U.S. GAAP, including Statements of Position 97-2 Software Revenue Recognition and 98-9
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104 and Emerging Issues
Task Force Issue 00-21 Revenue Arrangements with Multiple Deliverables. Accordingly, revenue is
recognized 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.
See Note 1 of the Condensed Consolidated Financial Statements for additional details regarding our
revenue recognition policy, including our policy and methodology regarding certain bundled revenue
arrangements where there is a lack of VSOE of fair value for any undelivered elements.
22
COMPUWARE CORPORATION AND SUBSIDIARIES
Quarterly Update
The following occurred during the second quarter of 2009:
|
|
|
Realized a decrease in product contribution margin to 40.8% in the second quarter of
2009 from 42.9% in the second quarter of 2008 primarily due to the decline in distributed
product revenue. |
|
|
|
|
Realized a 23.3% decrease in distributed product revenue compared to the second quarter
of 2008 primarily within our Vantage and Changepoint product lines. |
|
|
|
|
Realized a 1.5% decrease in mainframe product revenue compared to the second quarter of
2008. |
|
|
|
|
Repurchased approximately 10.7 million shares of our common stock at an average price of
$11.09 per share. |
|
|
|
|
Temporarily suspended the repurchase of our common stock and terminated our Rule 10b5-1
repurchase plan due to the instability in the credit market that occurred near the end of
the quarter. |
|
|
|
|
Released 3 mainframe and 7 distributed product updates designed to increase the
productivity of the IT departments of our customers. |
Our ability to achieve our strategies and objectives is subject to a number of risks and
uncertainties, some of which we may not be able to control. See Forward-Looking Statements.
23
COMPUWARE CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational data from the
Condensed Consolidated Statements of Operations as a percentage of total revenues and the
percentage change in such items compared to the prior period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
|
|
Total Revenues |
|
|
|
|
|
Total Revenues |
|
|
|
|
Three Months Ended |
|
Period- |
|
Six Months Ended |
|
Period- |
|
|
September 30, * |
|
to-Period |
|
September 30, * |
|
to-Period |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees |
|
|
15.7 |
% |
|
|
23.2 |
% |
|
|
(39.7 |
)% |
|
|
18.2 |
% |
|
|
20.2 |
% |
|
|
(11.6 |
)% |
Maintenance fees |
|
|
46.2 |
|
|
|
38.5 |
|
|
|
7.2 |
|
|
|
44.2 |
|
|
|
39.6 |
|
|
|
9.2 |
|
Professional services segment revenue |
|
|
34.9 |
|
|
|
35.2 |
|
|
|
(11.3 |
) |
|
|
34.5 |
|
|
|
37.0 |
|
|
|
(8.8 |
) |
Application services segment revenue |
|
|
3.2 |
|
|
|
3.1 |
|
|
|
(7.9 |
) |
|
|
3.1 |
|
|
|
3.2 |
|
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
(10.6 |
) |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
2.3 |
|
|
|
2.2 |
|
|
|
(5.4 |
) |
|
|
2.2 |
|
|
|
2.9 |
|
|
|
(27.3 |
) |
Cost of maintenance fees |
|
|
4.2 |
|
|
|
3.4 |
|
|
|
11.0 |
|
|
|
4.1 |
|
|
|
3.7 |
|
|
|
7.7 |
|
Professional services segment expenses |
|
|
33.2 |
|
|
|
30.7 |
|
|
|
(3.3 |
) |
|
|
32.2 |
|
|
|
32.2 |
|
|
|
(2.4 |
) |
Application services segment expenses |
|
|
3.5 |
|
|
|
3.0 |
|
|
|
1.1 |
|
|
|
3.5 |
|
|
|
3.2 |
|
|
|
6.6 |
|
Technology development and support |
|
|
8.5 |
|
|
|
8.0 |
|
|
|
(5.1 |
) |
|
|
8.0 |
|
|
|
9.2 |
|
|
|
(14.9 |
) |
Sales and marketing |
|
|
21.6 |
|
|
|
21.7 |
|
|
|
(10.9 |
) |
|
|
21.0 |
|
|
|
22.4 |
|
|
|
(8.1 |
) |
Administrative and general |
|
|
15.8 |
|
|
|
14.2 |
|
|
|
(0.9 |
) |
|
|
14.7 |
|
|
|
15.2 |
|
|
|
(5.3 |
) |
Restructuring cost |
|
|
0.8 |
|
|
|
6.2 |
|
|
|
(88.1 |
) |
|
|
0.5 |
|
|
|
6.0 |
|
|
|
(91.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
89.9 |
|
|
|
89.4 |
|
|
|
(10.2 |
) |
|
|
86.2 |
|
|
|
94.8 |
|
|
|
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
10.1 |
|
|
|
10.6 |
|
|
|
(14.6 |
) |
|
|
13.8 |
|
|
|
5.2 |
|
|
|
160.9 |
|
Other income, net |
|
|
1.1 |
|
|
|
1.8 |
|
|
|
(43.9 |
) |
|
|
1.1 |
|
|
|
1.9 |
|
|
|
(43.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
11.2 |
|
|
|
12.4 |
|
|
|
(18.8 |
) |
|
|
14.9 |
|
|
|
7.1 |
|
|
|
105.8 |
|
Income tax provision |
|
|
3.2 |
|
|
|
0.0 |
|
|
|
n/a |
|
|
|
5.0 |
|
|
|
0.6 |
|
|
|
712.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
8.0 |
% |
|
|
12.4 |
% |
|
|
(42.3 |
)% |
|
|
9.9 |
% |
|
|
6.5 |
% |
|
|
49.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported
as professional services in the Condensed Consolidated Statement of Operations included within this report. |
24
COMPUWARE CORPORATION AND SUBSIDIARIES
PRODUCTS SEGMENT
Financial information for the products segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
166,968 |
|
|
$ |
186,312 |
|
|
$ |
354,937 |
|
|
$ |
347,324 |
|
Expenses |
|
|
98,876 |
|
|
|
106,441 |
|
|
|
200,857 |
|
|
|
222,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product contribution |
|
$ |
68,092 |
|
|
$ |
79,871 |
|
|
$ |
154,080 |
|
|
$ |
125,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The products segment generated contribution margins of 40.8% and 42.9% during the second quarter of
2009 and 2008, respectively, and 43.4% and 36.0% for the first six months of 2009 and 2008,
respectively. The decrease in margin for the second quarter of 2009 was primarily due to the
decline in distributed product revenue. The increase in margin for the first six months of 2009 was
due to both an increase in mainframe product revenue and a decrease in both technology development
and support costs and sales and marketing expenses as described below.
Macroeconomic developments toward the end of the second quarter of 2009 affected demand for our
software products across all product lines. Although we believe a significant amount of sales were
delayed into the third and fourth quarters of fiscal 2009, there can be no assurance when, if ever,
such delayed sales will close.
Products Segment Revenue
Revenue for the products segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Software License Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
$ |
21,431 |
|
|
$ |
28,322 |
|
|
|
(24.3 |
)% |
|
$ |
55,369 |
|
|
$ |
50,457 |
|
|
|
9.7 |
% |
Distributed |
|
|
20,820 |
|
|
|
41,694 |
|
|
|
(50.1 |
) |
|
|
48,324 |
|
|
|
66,830 |
|
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Software License Fees |
|
|
42,251 |
|
|
|
70,016 |
|
|
|
(39.7 |
) |
|
|
103,693 |
|
|
|
117,287 |
|
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
|
87,370 |
|
|
|
82,162 |
|
|
|
6.3 |
|
|
|
175,921 |
|
|
|
163,264 |
|
|
|
7.8 |
|
Distributed |
|
|
37,347 |
|
|
|
34,134 |
|
|
|
9.4 |
|
|
|
75,323 |
|
|
|
66,773 |
|
|
|
12.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Maintenance Fees |
|
|
124,717 |
|
|
|
116,296 |
|
|
|
7.2 |
|
|
|
251,244 |
|
|
|
230,037 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainframe |
|
|
108,801 |
|
|
|
110,484 |
|
|
|
(1.5 |
) |
|
|
231,290 |
|
|
|
213,721 |
|
|
|
8.2 |
|
Distributed |
|
|
58,167 |
|
|
|
75,828 |
|
|
|
(23.3 |
) |
|
|
123,647 |
|
|
|
133,603 |
|
|
|
(7.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Revenue |
|
$ |
166,968 |
|
|
$ |
186,312 |
|
|
|
(10.4 |
)% |
|
$ |
354,937 |
|
|
$ |
347,324 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 61.9% and 61.7% of total revenue during the second quarter of 2009 and 2008, respectively, and 62.4% and 59.8% of
total revenue during the first six months of 2009 and 2008, respectively.
25
COMPUWARE CORPORATION AND SUBSIDIARIES
Software license fees
Software license fees (license fees) decreased $27.7 million or 39.7%, which included a positive
impact from foreign currency fluctuations of $1.0 million, during the second quarter of 2009 to
$42.3 million from $70.0 million during the second quarter of 2008 and decreased $13.6 million or
11.6%, which included a positive impact from foreign currency fluctuations of $3.7 million, during
the first six months of 2009 to $103.7 million from $117.3 million during the first six months of
2008.
Distributed license fees for the second quarter and first six months of 2009 declined by $20.8
million and $18.5 million, respectively, and mainframe license fees for the second quarter of 2009
declined by $6.9 million and increased $4.9 million for the first six months of 2009.
The declines in software license fees for the second quarter and first six months of 2009 as
compared to 2008 were primarily due to the late second quarter economic slowdown that impacted
license transactions across all product lines. The first six months of 2009 declines were partially
offset by increases in mainframe license fees resulting from existing customer capacity increases
in the United States that occurred during the first quarter of 2009 and an increasing acceptance of
our more flexible licensing options.
During the second quarter and first six months of 2009, for software license transactions
(transactions) that are required to be recognized ratably, we deferred $14.6 million and $31.3
million, respectively, of license revenue relating to transactions that closed during the
respective periods, and recognized $20.1 million and $44.0 million of previously deferred license
revenue relating to transactions that closed and had been deferred prior to the beginning of the
respective periods.
Maintenance fees
Maintenance fees increased $8.4 million or 7.2%, which included a positive impact from foreign
currency fluctuations of $3.4 million, during the second quarter of 2009 to $124.7 million from
$116.3 million during the second quarter of 2008, and increased $21.2 million or 9.2%, which
included a positive impact from foreign currency fluctuations of $9.9 million, during the first six
months of 2009 to $251.2 million from $230.0 million during the first six months of 2008. The
increase relates primarily to the continued growth of our mainframe and distributed product base
and maintaining a high rate of maintenance renewals.
26
COMPUWARE CORPORATION AND SUBSIDIARIES
Products segment revenue by geographic location is presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
85,460 |
|
|
$ |
98,236 |
|
|
$ |
184,771 |
|
|
$ |
183,646 |
|
Europe and Africa |
|
|
56,544 |
|
|
|
60,906 |
|
|
|
118,206 |
|
|
|
114,073 |
|
Other international operations |
|
|
24,964 |
|
|
|
27,170 |
|
|
|
51,960 |
|
|
|
49,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue |
|
$ |
166,968 |
|
|
$ |
186,312 |
|
|
$ |
354,937 |
|
|
$ |
347,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products Segment Expenses
Products segment 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. Cost of software license fees decreased $300,000 or 5.4% during the
second quarter of 2009 to $6.3 million from $6.6 million in the second quarter of 2008 and for the
first six months of 2009 decreased $4.7 million or 27.3% to $12.3 million from $17.0 million in the
first six months of 2008. The decreases in cost of software license fees were due to a decline in
hardware costs consistent with the decline in our Vantage product line license sales. The decline
in the first six months of 2009 was further affected by a $3.9 million capitalized software
impairment charge recorded during the first quarter of 2008 associated with the 2008 restructuring
initiative. As a percentage of software license fees, cost of software license fees were 14.8% and
9.4% in the second quarter of 2009 and 2008, respectively, and 11.9% and 14.5% (including 3.3% from
the impairment charge) in the first six months of 2009 and 2008, respectively. The increase for the
second quarter of 2009 was primarily due to the decline in software license fees. The decline for
the first six months of 2009 was primarily due to the capitalized software impairment charge as
discussed above.
Cost of maintenance fees consists of the direct costs allocated to maintenance and product
support such as helpdesk and technical support. Customers who subscribe to maintenance are also
eligible to receive the benefit of new releases as well as technical support. Cost of maintenance
fees increased $1.1 million or 11.0% during the second quarter of 2009 to $11.3 million from $10.2
million in the second quarter of 2008 and for the first six months of 2009 increased $1.6 million
or 7.7% to $23.3 million from $21.7 million in the first six months of 2008. The increase was
primarily due to higher compensation and benefit costs associated with the increased customer
support required for the growth in our international operations. As a percentage of maintenance
fees, cost of maintenance fees were 9.1% and 8.8% in the second quarter of 2009 and 2008,
respectively, and 9.3% and 9.4% in the first six months of 2009 and 2008, 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 13.7% and 13.0% in the second quarter of 2009 and 2008, respectively, and 12.8% and
15.4% in the first six months of 2009 and 2008, respectively.
27
COMPUWARE CORPORATION AND SUBSIDIARIES
Capitalization of internally developed software products begins when technological feasibility of
the product is established. Total technology development and support costs incurred internally and
capitalized in the second quarter and first six months of 2009 and 2008 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Technology development and support costs incurred |
|
$ |
25,650 |
|
|
$ |
27,767 |
|
|
$ |
50,709 |
|
|
$ |
60,815 |
|
Capitalized technology development and support costs |
|
|
(2,712 |
) |
|
|
(3,597 |
) |
|
|
(5,201 |
) |
|
|
(7,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology development and support costs reported |
|
$ |
22,938 |
|
|
$ |
24,170 |
|
|
$ |
45,508 |
|
|
$ |
53,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before the capitalization of internally developed software products, total technology development
and support costs decreased $2.1 million or 7.6% during the second quarter of 2009 to $25.7 million
from $27.8 million in the second quarter of 2008 and for the first six months of 2009 decreased
$10.1 million or 16.6% to $50.7 million from $60.8 million in the first six months of 2008. The
decrease in expense was primarily due to lower compensation and benefit costs resulting from
employee headcount reductions as part of the restructuring program initiated during the first six
months of 2008 (see Note 7 to the Condensed Consolidated Financial Statements).
Sales and marketing costs consist primarily of personnel related costs associated with
product sales, sales support and marketing for all our product offerings. Sales and marketing costs
decreased $7.1 million or 10.9% during the second quarter of 2009 to $58.4 million from $65.5
million in the second quarter of 2008 and for the first six months of fiscal 2009 decreased $10.5
million or 8.1% to $119.7 million from $130.2 million in the first six months of fiscal 2008. The
decrease in sales and marketing costs was primarily attributable to a decrease in compensation and
benefit costs resulting from employee headcount reductions as part of the restructuring program
initiated during the first six months of 2008 (see Note 7 to the Condensed Consolidated Financial
Statements) and a decrease in commission costs due to the decline in software license sales in
2009.
As a percentage of product revenue, sales and marketing costs were 34.9% and 35.1% in the second
quarter of 2009 and 2008, respectively, and 33.7% and 37.5% in the first six months of 2009 and
2008, respectively. The declines in our percentage of product revenue primarily resulted from the
expense reductions discussed above.
28
COMPUWARE CORPORATION AND SUBSIDIARIES
PROFESSIONAL SERVICES SEGMENT
Financial information for the professional services segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, * |
|
|
September 30, * |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
94,314 |
|
|
$ |
106,361 |
|
|
$ |
196,146 |
|
|
$ |
215,144 |
|
Expenses |
|
|
89,460 |
|
|
|
92,557 |
|
|
|
182,970 |
|
|
|
187,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services segment contribution |
|
$ |
4,854 |
|
|
$ |
13,804 |
|
|
$ |
13,176 |
|
|
$ |
27,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported as
professional services in the Condensed Consolidated Statement of Operations included within this report. |
During the second quarter of 2009, the professional services segment generated a contribution
margin of 5.1%, compared to 13.0% during the second quarter of 2008 and 6.7% and 12.9% during the
first six months of 2009 and 2008, respectively. The decline in contribution margin was primarily
due to higher costs associated with the investment in personnel for our Solutions Delivery Group
(SDG) during the first six months of 2009 and a decrease in staff utilization rates. SDG focuses
on providing professional services associated with our product solutions. Our long-term strategy
going forward will be to reduce our reliance on low margin professional services contracts and
increase the professional services projects within SDG with the intent of improving our
contribution margin.
Professional Services Segment Revenue
We offer a broad range of IT services to help businesses make the most of their IT assets. Some of
these services include outsourcing and co-sourcing, application management, product solutions,
project management, enterprise resource planning and customer relationship management services.
Professional services segment revenue decreased $12.1 million or 11.3% during the second quarter of
2009 to $94.3 million compared to $106.4 million in the second quarter of 2008 and decreased $19.0
million or 8.8% for the first six months of 2009 to $196.1 million from $215.1 million in the first
six months of 2008.
During the first quarter of 2009, we transitioned the employment of 170 of our professional
services staff to a customer (see Administrative and General Expenses within this section for
more details). This resulted in a decline in our professional services segment revenue during the
second quarter and first six months of 2009 of $5.5 million and $9.4 million, respectively. The
total revenue loss for 2009 as compared to 2008 associated with this transition is expected to be
approximately $17 million.
The remaining decreases in the second quarter and first six months of 2009 revenue were primarily
due to a local government contract expiring on October 31, 2007 that was not renewed and our
election not to renew low margin contracts in certain locations.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
Professional services segment revenue by geographic location is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
75,593 |
|
|
$ |
88,349 |
|
|
$ |
158,212 |
|
|
$ |
179,621 |
|
Europe and Africa |
|
|
16,139 |
|
|
|
15,982 |
|
|
|
32,900 |
|
|
|
32,104 |
|
Other international operations |
|
|
2,582 |
|
|
|
2,030 |
|
|
|
5,034 |
|
|
|
3,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional services segment revenue |
|
$ |
94,314 |
|
|
$ |
106,361 |
|
|
$ |
196,146 |
|
|
$ |
215,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services Segment Expenses
Professional services segment expenses consist primarily of personnel-related costs of providing
services, including billable staff, subcontractors and sales personnel. Professional services
segment expense decreased $3.1 million or 3.3% during the second quarter of 2009 to $89.5 million
from $92.6 million in the second quarter of 2008 and decreased $4.5 million or 2.4% during the
first six months of 2009 to $183.0 million from $187.5 million during the first six months of 2008.
The decreases in expenses were primarily attributable to lower compensation and benefit costs due
to the transition of 170 professional services staff to a customer (see Professional Services
Segment Revenue for more details) and additional reductions in employee headcount as management
continues to align headcount with customer demand for our services, partially offset by increases
in costs associated with our investment in SDG personnel.
30
COMPUWARE CORPORATION AND SUBSIDIARIES
APPLICATION SERVICES SEGMENT
Our application services, which are marketed under the brand name Covisint, provide a
software-as-a-service platform that enables industries and business communities to securely
integrate vital information and processes across users, business partners, customers, vendors and
suppliers.
Financial information for the application services segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, * |
|
|
September 30, * |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
8,563 |
|
|
$ |
9,298 |
|
|
$ |
17,350 |
|
|
$ |
18,892 |
|
Expenses |
|
|
9,513 |
|
|
|
9,413 |
|
|
|
19,825 |
|
|
|
18,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application services segment contribution (loss) |
|
$ |
(950 |
) |
|
$ |
(115 |
) |
|
$ |
(2,475 |
) |
|
$ |
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application services segment are combined and reported as
professional services in the Condensed Consolidated Statement of Operations included within this report. |
During the second quarter of 2009, the application services segment generated a negative
contribution margin of 11.1%, compared to a negative contribution margin of 1.2% during the second
quarter of 2008 and a negative contribution margin of 14.3% compared to a contribution margin of
1.6% during the first six months of 2009 and 2008, respectively. The decline in contribution margin
relates to higher costs associated with the addition of personnel in order to continue our
expansion of application services into the healthcare industry and declining revenue due to a
decrease in customer spending, primarily in the automotive sector, as described below.
Application Services Segment Revenue
Application services segment revenue decreased $700,000 or 7.9% during the second quarter of 2009
to $8.6 million from $9.3 million in the second quarter of 2008 and decreased $1.5 million or 8.2%
for the first six months of 2009 to $17.4 million from $18.9 million in the first six months of
2008. The decreases in revenue were primarily a result of decreased customer spending within the
automotive sector.
Application services segment revenue by geographic location is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
7,139 |
|
|
$ |
8,058 |
|
|
$ |
14,411 |
|
|
$ |
16,506 |
|
Europe and Africa |
|
|
815 |
|
|
|
856 |
|
|
|
1,688 |
|
|
|
1,503 |
|
Other international operations |
|
|
609 |
|
|
|
384 |
|
|
|
1,251 |
|
|
|
883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total application services segment revenue |
|
$ |
8,563 |
|
|
$ |
9,298 |
|
|
$ |
17,350 |
|
|
$ |
18,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
COMPUWARE CORPORATION AND SUBSIDIARIES
Application Services Segment Expenses
Application services segment expenses consist primarily of personnel-related costs of providing
services, including billable staff, subcontractors and sales personnel. Application services
segment expenses increased $100,000 or 1.1% during the second quarter of 2009 to $9.5 million from
$9.4 million in the second quarter of 2008 and increased $1.2 million or 6.6% during the first six
months of 2009 to $19.8 million from $18.6 million during the first six months of 2008. The
increases in expense were primarily due to higher compensation and benefit costs due to increases
in employee headcount in order to support the continued expansion of Covisint into the healthcare
industry.
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 $400,000 or 0.9% during the second quarter of 2009 to $42.5 million from
$42.9 million during the second quarter of 2008 and decreased $4.7 million or 5.3% during the first
six months of 2009 to $83.6 million from $88.3 million in the first six months of 2008.
The decreases in expenses for the second quarter and first six months of 2009 compared to 2008 were
due to an increase in foreign currency gains of $4.7 million and $5.4 million, respectively,
partially offset by a $2.5 million increase in certain employment related taxes and a $2.1 million
increase in our director deferred compensation costs resulting from the increase in our common
stock price during the first half of 2009 compared to 2008.
The decrease in expenses for the first six months of 2009 was further impacted by a one-time $5.6
million net gain recorded during the first quarter of 2009 as we transitioned the employment of 170
of our professional services staff to a customer (see Note 1 of the Condensed Consolidated
Financial Statements and Professional Services Segment Revenue within this section for more
details).
Other income, net (other income) consists primarily of interest income realized from
investments, interest earned on deferred customer receivables, and income generated from our
investment in a partially owned company. Other income decreased $2.4 million or 43.9% during the
second quarter of 2009 to $3.0 million from $5.4 million in the second quarter of 2008 and
decreased $4.8 million or 43.5% during the first six months of 2009 to $6.3 million from $11.1
million during the first six months of 2008. 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 and to a lesser extent lower interest rates throughout the second
quarter and first six months of 2009 compared to 2008.
Income taxes are accounted for using the asset and liability approach. Deferred income
taxes are provided for the differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements. The income tax provision was $8.8 million in the
second quarter of 2009 compared to an income tax benefit of $34,000 in the second quarter of 2008
representing an effective tax rate of 28.9% and 0%, respectively. The income tax provision was $28.2 million for the first six months of 2009 compared to $3.5 million for the first six months of
2008, representing an effective tax rate of 33.4% and 8.5%, respectively.
32
COMPUWARE CORPORATION AND SUBSIDIARIES
The increase in the effective tax rate from 2008 to 2009 was due to the following:
|
(1) |
|
An income tax benefit of $2.5 million was recorded during the second quarter of
2009. This benefit primarily related to the adjustment of our income tax valuation
allowance associated with the 2005 and 2006 U.S. Research and Development credits which
were effectively settled with the Internal Revenue Service. |
|
|
(2) |
|
An income tax benefit of $12 million was recorded in the second quarter of
2008. This benefit related primarily to the recognition of a deferred tax asset for
Brownfield Redevelopment credits that are available to offset Michigan Business Tax
(MBT) liabilities through the Companys fiscal year 2022. |
RESTRUCTURING COSTS AND ACCRUAL
We incurred charges of $2.2 million and $2.9 million during the second quarter and first six months
of 2009, respectively (see Note 7 to the Condensed Consolidated Financial Statements).
We continue to evaluate our business processes to identify operating efficiencies with the goal of
reducing operating expenses by an additional $55 million to $80 million in annualized costs during
fiscal 2009.
As part of these efforts, during the last week of October 2008, the Company terminated or
identified for termination approximately 300 employees primarily within our professional services,
technology and corporate administrative functions. These actions will result in additional
restructuring charges of approximately $5 million in the third quarter of fiscal 2009.
Any further actions will likely result in additional restructuring charges. The amount of such
charges will depend upon the nature, timing and extent of the restructuring actions taken.
MANAGEMENTS DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Assumptions and estimates were based on the facts and circumstances known at September 30,
2008. 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, 2008 are considered by management to be the most important to an
understanding of the financial statements, because their application places the most significant
demands on managements judgment and estimates about the effect of matters that are inherently
uncertain. These policies are also discussed in Note 1 of the 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 2008.
33
COMPUWARE CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, cash and cash equivalents and investments totaled approximately $172.1
million, compared to $286.4 million at March 31, 2008.
Net cash provided by operating activities:
Net cash provided by operating activities during the first six months of 2009 was $66.5 million, an
increase of $14.0 million from the first six months of 2008. The increase was due to lower employee
payroll and benefit related disbursements of approximately $48 million primarily resulting from the
cost savings achieved through our 2008 restructuring initiatives and due to the payment of a $5
million litigation settlement in the first quarter of 2008. The increase was partially offset by an
increase in bonus disbursements of $12 million that occurred in the first six months of 2009
related to the improved operating results for 2008, an increase in income tax payments of $20
million and a decrease in investment interest income received during the first six months of 2009
due to our continuing use of funds to repurchase our common shares, which caused a decline in our
investment portfolio, and to a lower yield on our investment portfolio.
The Condensed Consolidated Statements of Cash Flows included in this report compute net cash from
operating activities using the indirect cash flow method. Therefore non-cash adjustments and net
changes in assets and liabilities (net of the effects of acquisitions and currency fluctuations)
are adjusted from net income to derive net cash from operating activities. Changes in accounts
receivable and deferred revenue have typically had the largest impact on the reconciliation of net
income to compute cash flows from operating activities as we allow for deferred payment terms on
multi-year products contracts. The net change for accounts receivable increased cash flow from
operating activities by $14.9 million in the first six months of 2009 as compared to the same
period in 2008 and the net change in deferred revenue reduced cash flow from operating activities
by $7.6 million for the same periods.
The other significant changes in our reconciliation of net income to derive net cash from operating
activities during the first six months of 2009 as compared to the first six months of 2008 were as
follows:
|
(1) |
|
The decrease to cash flows from operating activities resulting from the net change in
accounts payable and accrued expenses of $10.9 million was primarily due to a larger
restructuring initiative in 2008 compared to 2009 that caused associated accruals to be
greater as of September 30, 2007 compared to September 30, 2008. |
|
|
(2) |
|
Decrease in impairment charges for property and equipment and capitalized software of
$6.3 million that were recorded in the first six months of 2008 as a result of the 2008
restructuring initiatives. |
As of September 30, 2008, $5.3 million was accrued related to restructuring actions (see Note 7 of
the Notes to Condensed Consolidated Financial Statements included in this report). We continue to
evaluate our business processes to identify operating efficiencies with the goal of reducing
operating expenses by an additional $55 million to $80 million in annualized costs during fiscal
2009.
As part of these efforts, during the last week of October 2008, the Company terminated or
identified for termination approximately 300 employees primarily within our professional services,
technology and corporate administrative functions. These actions will result in additional
restructuring charges of approximately $5 million in the third quarter of fiscal 2009.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
Any further actions will likely result in additional restructuring charges. The amount of such
charges will depend upon the nature, timing and extent of the restructuring actions taken.
We believe our existing cash resources and cash flow from operations will be sufficient to meet
operating cash needs for the foreseeable future.
Net cash provided by investing activities:
Net cash provided by investing activities during the first six months of 2009 was $48.4 million, a
decrease of $8.4 million from the first six months of 2008. The decrease was primarily due to a
$12.0 million decline in the amount of investments liquidated in the first six months of 2009
compared to the first six months of 2008. The cash generated from the sale of our investments in
both periods was primarily used to fund the stock repurchase initiative.
During the first six months of 2009 and 2008, capital expenditures for property and equipment and
capitalized research and software development totaled $11.0 million and $14.6 million,
respectively.
There were no business acquisitions in the first six months of 2008 or 2009. However, we continue
to evaluate business acquisition opportunities that fit our strategic plans.
Net cash used in financing activities:
Net cash used in financing activities during the first six months of 2009 was $161.3 million, an
increase of $263,000 from the first six months of 2008.
The decrease of $53.5 million in cash used to repurchase common stock was offset by the $53.8
million decline in net proceeds received from the exercise of employee stock options and employee
contributions to the employee stock purchase plan.
Since May 2003, the Board of Directors has authorized the repurchase of a total of $1.7 billion of
our common stock under a Discretionary Plan. Purchases of common stock under the Discretionary Plan
may occur on the open market, or through negotiated or block transactions based upon market and
business conditions, subject to applicable legal limitations. On September 5, 2008 pursuant to
authorization granted by the Board of Directors, we entered into an agreement under Rule 10b5-1 of
the Securities and Exchange Act of 1934 (Rule 10b5-1 Plan) to repurchase up to 14 million shares
of our common stock. Due to the increased instability in the credit market that occurred near the
end of the quarter, we terminated the Rule 10b5-1 Plan on September 29, 2008. In addition,
repurchases under the Discretionary Plan have been temporarily suspended until market and credit
conditions improve. The long-term goal of our common stock repurchase program to reduce our
outstanding common share count to approximately 200 million shares has not changed. We plan to fund
the common stock repurchase program through our operating cash flow and, if needed, funds from our
existing facility.
During the first six months of 2009, we repurchased approximately 16.6 million shares of our common
stock at an average price of $10.64 per share for a total cost of $177.2 million ($3 million of the
$177.2 million was settled in October 2008). As of September 30, 2008, approximately $566 million
remains authorized for future purchases under the Discretionary Plan.
35
COMPUWARE CORPORATION AND SUBSIDIARIES
We reserve the right to change the timing and volume of our repurchases at any time without notice.
The maximum amount of repurchase activity under the Discretionary Plan, excluding block purchases
and negotiated transactions, continues to be limited on a daily basis to 25% of the average daily
trading volume of our common stock during the previous four week period. In addition, no purchases
are made during our self-imposed trading black-out periods in which the Company and our insiders
are prohibited from trading in our common shares. Our standard quarterly black-out period commences
10 business days prior to the end of each quarter and terminates one full market day following the
public release of our earnings.
The Company has a credit facility with Comerica Bank and other lenders to provide leverage for the
Company if needed. The credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The credit facility also permits us to increase the
facility by an additional $150 million, subject to receiving further commitments from lenders and
certain other conditions. The credit facility also limits borrowing outside of the facility to $250
million. No borrowings have occurred under this credit facility.
Recently Issued Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for recently issued accounting
pronouncements that could affect the Company.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended March 31, 2008. Except as described elsewhere in this report on Form 10-Q, there have
been no material changes to those obligations or arrangements outside of the ordinary course of
business since the end of fiscal 2008.
36
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, 2008, therefore the market
risks remain substantially unchanged since we filed the Annual Report on Form 10-K for the fiscal
year ending March 31, 2008.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information
required to be disclosed in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that a control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any,
with a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective, at the reasonable
assurance level, to cause information required to be disclosed in the reports that we file or
submit under the Exchange Act to be recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required financial disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the first six months of
2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
37
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Other than the risk that continuing uncertainty in the United States and global economies may
reduce demand for our software products, professional services and application services that was
added in our form 10-Q for the quarter ended June 30, 2008, 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, 2008.
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,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate dollar value or |
|
|
|
|
|
|
|
|
|
|
Total number of |
|
maximum number of shares that |
|
|
|
|
|
|
|
|
|
|
shares |
|
may yet be purchased under the |
|
|
|
|
|
|
|
|
|
|
purchased as |
|
plans or programs |
|
|
Total number of |
|
Average |
|
part of publicly |
|
Discretionary |
|
Rule 10b5-1 |
|
|
shares |
|
price paid |
|
announced |
|
Plan (a) |
|
Plan (b) |
Period |
|
purchased |
|
per share |
|
plans |
|
($) |
|
(shares) |
For the month ended July 31, 2008 |
|
|
1,500,000 |
|
|
$ |
11.02 |
|
|
|
1,500,000 |
|
|
$ |
654,011,001 |
|
|
|
|
|
|
For the month ended August 31, 2008 |
|
|
4,570,700 |
|
|
|
11.42 |
|
|
|
4,570,700 |
|
|
|
601,819,067 |
|
|
|
|
|
|
For the month ended September 30, 2008 |
|
|
4,595,000 |
|
|
|
10.79 |
|
|
|
4,595,000 |
|
|
|
565,707,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,665,700 |
|
|
$ |
11.09 |
|
|
|
10,665,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Since May 2003, the Board of Directors has authorized the repurchase of a total of $1.7
billion of our common stock under a Discretionary Plan. 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 Plan will expire when we have repurchased all shares authorized for
repurchase thereunder. Due to the increased instability in the credit market, repurchases
under the Discretionary Plan were temporarily suspended in September 2008. Our long-term
goal of reducing our outstanding common share count to approximately 200 million shares by
repurchasing shares under the Discretionary Plan funded primarily through our operating
cash flow and, if needed, funds from our existing credit facility, has not changed. We
intend to resume the common stock buyback program under the Discretionary Plan once we
believe there are indications the credit market is stabilizing. The maximum amount of
repurchase activity under the Discretionary Plan continues to be limited on a daily basis
to 25% of the average daily trading volume of our common stock during the previous four
week period. In addition, no purchases are made during our self-imposed trading black-out
periods in which the Company and our insiders are prohibited from trading in our common
shares. The black-out periods covering the second quarter of 2009 were July 1, 2008 through
July 24, 2008 and September 17, 2008 through September 30, 2008 (see Liquidity and Capital
Resources section of |
38
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
|
|
|
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations for
more details on our stock repurchase program). |
|
(b) |
|
On September 5, 2008, pursuant to authorization granted by our Board of Directors, we
adopted a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 (Rule 10b5-1
Plan) to repurchase shares of common stock. 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 14 million shares on our behalf in accordance with the terms of the plan.
Due to the increased instability in the credit market, we terminated the Rule 10b5-1 Plan
on September 29, 2008. We purchased 1.3 million shares under the Rule 10b5-1 Plan before it
was terminated. |
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on August 26, 2008 at the Companys 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 2009 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 |
|
|
218,990,542 |
|
|
|
13,298,105 |
|
Gurminder S. Bedi |
|
|
227,278,657 |
|
|
|
5,009,990 |
|
William O. Grabe |
|
|
224,396,434 |
|
|
|
7,892,213 |
|
William R. Halling |
|
|
226,352,218 |
|
|
|
5,936,429 |
|
Peter Karmanos, Jr. |
|
|
223,342,256 |
|
|
|
8,946,391 |
|
Faye Alexander Nelson |
|
|
225,869,828 |
|
|
|
6,418,819 |
|
Glenda D. Price |
|
|
227,017,752 |
|
|
|
5,270,895 |
|
W. James Prowse |
|
|
225,968,363 |
|
|
|
6,320,284 |
|
G. Scott Romney |
|
|
218,883,243 |
|
|
|
13,405,404 |
|
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, 2009. Total votes for 223,246,432, against 7,104,385 and
abstained 1,937,830.
The total number of the Companys common shares issued and outstanding and entitled to be voted at
the Annual Meeting was 255,956,887 shares. The total number of shares voted at the Annual Meeting
was 232,288,647 or 90.8% of the shares outstanding and eligible to vote.
39
Item 5. Other Information
On November 6, 2008, our Board of Directors approved a grant of restricted stock units under the
2007 Long Term Incentive Plan (the Plan) to certain executive officers of the Company pursuant to
the terms of the form of Restricted Stock Unit Award Agreement adopted on that date. The following
named executive officers from the Companys 2008 annual meeting proxy statement received the
following grants:
|
|
|
|
|
Officer Name and Position |
|
Restricted Stock Units |
Peter J. Karmanos, Jr., Chairman of the Board and
Chief Executive Officer
|
|
|
104,986 |
|
Laura L. Fournier, Executive Vice President and
Chief Financial Officer
|
|
|
39,370 |
|
Robert C. Paul, President and Chief Operating
Officer
|
|
|
48,118 |
|
As long as the executive officer continues to be employed by the Company, the restricted stock
units will become vested and non-forfeitable as follows (i) 50% of the restricted stock unit award
on the third anniversary of the grant date; (ii) 25% of the restricted stock unit award on the
fourth anniversary of the grant date; and (iii) the remaining 25% of the restricted stock unit
award on the fifth anniversary of the grant date. The entire restricted stock unit award becomes
immediately vested and non-forfeitable (a) in the event that the executives employment ceases due
to his or her death or disability or (b) upon the occurrence of a change in control (as defined in
the Plan). If the executives employment ceases for any reason other than death or disability, the
executives right to shares of common stock subject to the restricted stock units that are not yet
vested will be automatically terminated and forfeited unless the committee (as defined in the Plan)
modifies the Restricted Stock Unit Award Agreement to provide otherwise.
No later than 30 days after the date on which restricted stock units vest, the Company will issue
the executive one share of common stock for each vested restricted stock unit. The restricted
stock units will not be settled in cash. Each restricted stock unit awarded will have a dividend
equivalent (as defined in the Plan) associated with it with respect to cash dividends on common
stock that have a record date after the grant date and prior to the date on which restricted stock
units are settled for shares of common stock. Any dividend equivalents will be paid by crediting
the executive with additional whole restricted stock units as of the date of payment of such cash
dividend on common stock in accordance with the formula set forth in the Restricted Stock Unit
Award Agreement.
The executive will have no voting or other rights as a shareholder of the Company with respect to
the restricted stock units until certificates are issued or a book entry representing the shares of
common stock has been made and such shares have been deposited with the appropriate registered book
entry custodian.
The foregoing summary of terms of the Restricted Stock Unit Award Agreement is subject to, and
qualified in its entirety by, the form of Restricted Stock Unit Award Agreement, attached to this
periodic report on Form 10-Q as Exhibit 10.110.
40
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description of Document |
|
|
|
10.110 |
|
|
Restricted Stock Unit Award
Agreement (1) |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
Independent Registered Public Accounting Firms Awareness Letter (1) |
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
|
|
|
|
|
|
|
|
|
|
32 |
|
|
Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b)
of the Securities Exchange Act. (1) |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
COMPUWARE CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
Date: November 6, 2008
|
|
|
|
By:
|
|
/s/ Peter Karmanos, Jr.
|
|
|
|
|
|
|
Peter Karmanos, Jr. |
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(duly authorized officer) |
|
|
|
|
|
|
|
|
|
|
|
Date: November 6, 2008
|
|
|
|
By:
|
|
/s/ Laura L. Fournier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laura L. Fournier |
|
|
|
|
|
|
Executive Vice President, |
|
|
|
|
|
|
Chief Financial Officer and |
|
|
|
|
|
|
Treasurer |
|
|
|
|
|
|
(principal financial officer) |
|
|
42