e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
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Michigan
(State or other jurisdiction of
incorporation or organization)
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38-2007430
(IRS Employer
Identification No.) |
One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)
Registrants telephone number, including area code: (313) 227-7300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the
latest practicable date:
As of July 31, 2008, there were outstanding 254,895,007 shares of Common Stock, par value $.01, of
the registrant.
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Per Share Data)
(Unaudited)
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June 30, |
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March 31, |
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2008 |
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2008 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
216,457 |
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$ |
215,943 |
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Investments |
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56,423 |
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70,474 |
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Accounts receivable, net |
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479,861 |
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535,094 |
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Deferred tax asset, net |
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45,806 |
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44,374 |
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Income taxes refundable, net |
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4,189 |
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3,746 |
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Prepaid expenses and other current assets |
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37,162 |
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49,285 |
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Total current assets |
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839,898 |
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918,916 |
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PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION |
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360,476 |
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365,691 |
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CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION |
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58,769 |
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61,653 |
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OTHER: |
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Accounts receivable |
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266,509 |
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244,388 |
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Deferred tax asset, net |
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35,520 |
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35,851 |
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Goodwill |
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356,026 |
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356,267 |
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Other |
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33,808 |
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35,791 |
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Total other assets |
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691,863 |
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672,297 |
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TOTAL ASSETS |
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$ |
1,951,006 |
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$ |
2,018,557 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
17,551 |
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$ |
18,772 |
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Accrued expenses |
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108,428 |
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148,268 |
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Income taxes payable, net |
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15,262 |
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4,976 |
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Deferred revenue |
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444,705 |
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472,864 |
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Total current liabilities |
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585,946 |
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644,880 |
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DEFERRED REVENUE |
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406,528 |
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399,548 |
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ACCRUED EXPENSES |
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18,526 |
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19,513 |
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DEFERRED TAX LIABILITY, NET |
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30,090 |
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27,585 |
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Total liabilities |
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1,041,090 |
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1,091,526 |
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SHAREHOLDERS EQUITY: |
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Common stock |
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2,560 |
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2,616 |
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Additional paid-in capital |
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634,885 |
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643,544 |
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Retained earnings |
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252,430 |
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261,754 |
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Accumulated other comprehensive income |
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20,041 |
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19,117 |
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Total shareholders equity |
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909,916 |
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927,031 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,951,006 |
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$ |
2,018,557 |
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See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
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Three Months Ended |
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June 30, |
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2008 |
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2007 |
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REVENUES: |
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Software license fees |
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$ |
61,442 |
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$ |
47,271 |
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Maintenance fees |
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126,527 |
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113,741 |
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Professional services fees |
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110,619 |
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118,377 |
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Total revenues |
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298,588 |
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279,389 |
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OPERATING EXPENSES: |
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Cost of software license fees |
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6,090 |
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10,365 |
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Cost of maintenance fees |
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11,994 |
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11,453 |
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Cost of professional services |
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103,822 |
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104,077 |
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Technology development and support |
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22,570 |
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29,329 |
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Sales and marketing |
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61,327 |
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64,731 |
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Administrative and general |
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41,144 |
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45,380 |
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Restructuring costs |
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682 |
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16,020 |
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Total operating expenses |
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247,629 |
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281,355 |
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INCOME (LOSS) FROM OPERATIONS |
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50,959 |
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(1,966 |
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OTHER INCOME, NET |
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3,221 |
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5,659 |
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INCOME BEFORE INCOME TAXES |
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54,180 |
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3,693 |
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INCOME TAX PROVISION |
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19,448 |
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3,504 |
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NET INCOME |
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$ |
34,732 |
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$ |
189 |
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Basic earnings per share |
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$ |
0.13 |
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$ |
0.00 |
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Diluted earnings per share |
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$ |
0.13 |
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$ |
0.00 |
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See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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Three Months Ended |
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June 30, |
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2008 |
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2007 |
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: |
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Net income |
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$ |
34,732 |
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$ |
189 |
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Adjustments to reconcile net income to net cash provided
by operations: |
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Depreciation and amortization |
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13,463 |
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13,817 |
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Property and equipment impairment |
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662 |
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2,998 |
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Capitalized software impairment |
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3,873 |
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Acquisition tax benefits |
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1,311 |
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1,311 |
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Stock option compensation |
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2,326 |
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1,573 |
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Deferred income taxes |
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1,751 |
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(2,519 |
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Other |
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295 |
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494 |
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Net change in assets and liabilities, net of effects from acquisitions
and currency fluctuations: |
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Accounts receivable |
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34,044 |
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56,869 |
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Prepaid expenses and other current assets |
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12,212 |
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8,648 |
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Other assets |
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1,851 |
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1,223 |
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Accounts payable and accrued expenses |
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(42,527 |
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(30,242 |
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Deferred revenue |
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(22,649 |
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(19,532 |
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Income taxes |
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10,365 |
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(896 |
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Net cash provided by operating activities |
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47,836 |
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37,806 |
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CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: |
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Purchase of: |
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Property and equipment |
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(2,384 |
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(4,346 |
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Capitalized software |
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(2,788 |
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(4,173 |
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Investment proceeds |
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13,856 |
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42,885 |
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Net cash provided by investing activities |
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8,684 |
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34,366 |
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CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
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Net proceeds from exercise of stock options including excess tax benefits |
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1,397 |
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58,364 |
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Contribution to stock purchase plans |
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934 |
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1,592 |
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Repurchase of common stock |
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(58,891 |
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(55,218 |
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Net cash provided by (used in) financing activities |
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(56,560 |
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4,738 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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554 |
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1,891 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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514 |
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78,801 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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215,943 |
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260,681 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
216,457 |
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$ |
339,482 |
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See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 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 June 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.
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
6
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2008
(Unaudited)
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 June 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 reporting unit 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 June 30, 2008
(Unaudited)
Interest and penalties related to income tax liabilities are included in income tax expense.
The income tax provision for the first quarter of fiscal 2008 included a $2.1 million charge
relating to a tax receivable recorded in the fourth quarter of 2007. The tax receivable had
included an interest income component which was subject to income taxes, but for which the Company
had not recorded a tax provision as of March 31, 2007.
Recently Issued Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133. 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. Management is currently
evaluating the impact this Statement will have on the Companys financial statements.
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, 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
9
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2008
(Unaudited)
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. |
|
|
|
|
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 June 30, 2008: (1) the director phantom stock plan liability of
$6.3 million using level 1 inputs and (2) forward foreign exchange contract liabilities of $209,000
using level 2 inputs.
Employee Transition Agreement During 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, of which $4.0 million had been received as of June 30, 2008, and resulted in the Company
recording a one-time $5.6 million net gain against administrative and general expense in the
Condensed Consolidated Statements of Operations.
10
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 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 |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
34,732 |
|
|
$ |
189 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
259,694 |
|
|
|
301,967 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.13 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Numerator: Net income |
|
$ |
34,732 |
|
|
$ |
189 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
259,694 |
|
|
|
301,967 |
|
Dilutive effect of stock options |
|
|
1,399 |
|
|
|
3,627 |
|
|
|
|
|
|
|
|
Total shares |
|
|
261,093 |
|
|
|
305,594 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.13 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2008 and 2007, stock options to purchase a total of
approximately 19,968,000 and 13,834,000 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 that have been excluded from
net income and reflected in equity. Total comprehensive income is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
34,732 |
|
|
$ |
189 |
|
Foreign currency translation
adjustment, net of tax |
|
|
924 |
|
|
|
3,474 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
35,656 |
|
|
$ |
3,663 |
|
|
|
|
|
|
|
|
11
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 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 June 30,
2008, and changes during the quarter then ended is presented below (shares and intrinsic value in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 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 |
|
|
9,220 |
|
|
|
7.55 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(202 |
) |
|
|
6.87 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(216 |
) |
|
|
8.14 |
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
(6,114 |
) |
|
|
24.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2008 |
|
|
36,977 |
|
|
$ |
9.65 |
|
|
|
5.19 |
|
|
$ |
42,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest, net of
estimated forfeitures, as of June 30, 2008 |
|
|
34,125 |
|
|
$ |
9.80 |
|
|
|
4.83 |
|
|
$ |
37,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2008 |
|
|
23,010 |
|
|
$ |
10.79 |
|
|
|
2.77 |
|
|
$ |
17,269 |
|
The total fair value of shares vested and the total intrinsic value of options exercised were as
follows (intrinsic values in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
Fair value of shares vested |
|
$ |
2.78 |
|
|
$ |
5.13 |
|
Intrinsic value of options exercised |
|
|
576 |
|
|
|
14,461 |
|
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
12
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2008
(Unaudited)
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.
The weighted average fair value of stock options granted during the periods and the assumptions
used to estimate those values using a Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2008 |
|
2007 |
Expected volatility |
|
|
54.21 |
% |
|
|
60.31 |
% |
Risk-free interest rate |
|
|
3.23 |
% |
|
|
4.83 |
% |
Expected lives at date of grant (in years) |
|
|
6.3 |
|
|
|
6.9 |
|
Weighted-average fair value of the options granted |
|
$ |
4.16 |
|
|
$ |
7.18 |
|
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 |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Stock-based compensation classified as: |
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
|
|
|
$ |
1 |
|
Cost of maintenance fees |
|
$ |
65 |
|
|
|
68 |
|
Cost of professional services |
|
|
386 |
|
|
|
336 |
|
Technology development and support |
|
|
123 |
|
|
|
174 |
|
Sales and marketing |
|
|
718 |
|
|
|
442 |
|
Administrative and general |
|
|
1,034 |
|
|
|
430 |
|
Restructuring costs |
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense
before income taxes |
|
|
2,326 |
|
|
|
1,573 |
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(849 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
Total stock-based compensation expense
after income taxes |
|
$ |
1,477 |
|
|
$ |
1,037 |
|
|
|
|
|
|
|
|
As of June 30, 2008, $41.9 million of total unrecognized compensation cost, net of estimated
forfeitures, related to unvested stock options is expected to be recognized over a weighted-average
period of approximately 3.52 years.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2008
(Unaudited)
Note 5 Goodwill and Intangible Assets
The components of the Companys intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks (1) |
|
$ |
5,992 |
|
|
|
|
|
|
$ |
5,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (2) |
|
$ |
343,939 |
|
|
$ |
(285,170 |
) |
|
$ |
58,769 |
|
Customer relationship agreements (3) |
|
|
14,289 |
|
|
|
(9,210 |
) |
|
|
5,079 |
|
Non-compete agreements (3) |
|
|
2,628 |
|
|
|
(2,443 |
) |
|
|
185 |
|
Other (4) |
|
|
6,892 |
|
|
|
(6,451 |
) |
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets |
|
$ |
367,748 |
|
|
$ |
(303,274 |
) |
|
$ |
64,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2008
(Unaudited)
Changes in the carrying amounts of goodwill are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
Application |
|
|
|
|
Goodwill |
|
Products |
|
|
Services |
|
|
Services |
|
|
Total |
|
Balance at March 31, 2008, net |
|
$ |
202,502 |
|
|
$ |
142,294 |
|
|
$ |
11,471 |
|
|
$ |
356,267 |
|
Adjustments to previously recorded
purchase price (1) |
|
|
(371 |
) |
|
|
|
|
|
|
21 |
|
|
|
(350 |
) |
Effect of foreign currency translation |
|
|
66 |
|
|
|
43 |
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008, net |
|
$ |
202,197 |
|
|
$ |
142,337 |
|
|
$ |
11,492 |
|
|
$ |
356,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 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 |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Products: |
|
|
|
|
|
|
|
|
Mainframe |
|
$ |
122,458 |
|
|
$ |
103,237 |
|
Distributed |
|
|
65,511 |
|
|
|
57,775 |
|
|
|
|
|
|
|
|
Total product revenue |
|
|
187,969 |
|
|
|
161,012 |
|
Professional services |
|
|
101,832 |
|
|
|
108,783 |
|
Application services |
|
|
8,787 |
|
|
|
9,594 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
298,588 |
|
|
$ |
279,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
Products |
|
$ |
85,988 |
|
|
$ |
45,134 |
|
Professional services |
|
|
8,322 |
|
|
|
13,889 |
|
Application services |
|
|
(1,525 |
) |
|
|
411 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
92,785 |
|
|
|
59,434 |
|
Administrative and general |
|
|
(41,144 |
) |
|
|
(45,380 |
) |
Restructuring costs |
|
|
(682 |
) |
|
|
(16,020 |
) |
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
50,959 |
|
|
|
(1,966 |
) |
Other income, net |
|
|
3,221 |
|
|
|
5,659 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
54,180 |
|
|
$ |
3,693 |
|
|
|
|
|
|
|
|
Financial information regarding geographic operations is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
United States |
|
$ |
189,219 |
|
|
$ |
185,136 |
|
Europe and Africa |
|
|
79,288 |
|
|
|
69,933 |
|
Other international operations |
|
|
30,081 |
|
|
|
24,320 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
298,588 |
|
|
$ |
279,389 |
|
|
|
|
|
|
|
|
16
COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 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 quarter of fiscal 2009, the Company incurred a restructuring charge of $682,000 of
which $440,000 related to employee termination benefits resulting from the elimination of certain
professional services management positions. The remaining charge primarily related to changes in
sublease income assumptions associated with previously abandoned lease facilities. Management
continues to review the Companys costs and will, based on future results of operations, determine
if additional restructuring actions are needed. The total amount of any potential future charges
for such actions will depend upon the nature, timing and extent of those actions.
The following table summarizes the restructuring accrual as of March 31, 2008, and changes to the
accrual during the first three months of fiscal 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed |
|
|
Paid |
|
|
|
|
|
|
Accrual |
|
|
during the three |
|
|
during the three |
|
|
Accrual |
|
|
|
balance at |
|
|
months ended |
|
|
months ended |
|
|
balance at |
|
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Employee termination benefits |
|
$ |
2,655 |
|
|
$ |
440 |
|
|
$ |
(1,893 |
) |
|
$ |
1,202 |
|
Facilities costs (primarily lease
abandonments) |
|
|
4,716 |
|
|
|
231 |
|
|
|
(1,206 |
) |
|
|
3,741 |
|
Other |
|
|
85 |
|
|
|
11 |
|
|
|
(76 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,456 |
|
|
$ |
682 |
|
|
$ |
(3,175 |
) |
|
$ |
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, $3.7 million of the restructuring accrual is recorded in current accrued
expenses with the remaining balance of $1.3 million recorded in long-term accrued expenses in
the Condensed Consolidated Balance Sheets.
The accruals for employee termination benefits at June 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 June 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 June 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; and 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 greater of 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 not borrowed under 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 June 30, 2008, and the related condensed consolidated statements
of operations and cash flows for the three-month periods ended June 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
August 6, 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 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 bookings, 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
We focus on growing revenue and profit margins by enhancing and promoting our current product lines
and solutions, expanding our product and service offerings through key acquisitions, developing
strategic partnerships and managing our costs.
The following occurred during the first quarter of 2009:
|
|
|
Achieved an increase in product contribution margin to 45.7% in the first quarter of
2009 from 28.0% in the first quarter of 2008 due to both an increase in product revenue and
a decrease in both technology development and support costs and sales and marketing
expenses. |
|
|
|
|
Achieved a 13.4% increase in distributed product revenue compared to the first quarter
of 2008 primarily due to growth within our Vantage and Changepoint product lines. |
|
|
|
|
Achieved an 18.6% increase in mainframe product revenue compared to the first quarter of
2008 primarily within our U.S. operations. |
|
|
|
|
Recorded a one-time $5.6 million net gain against administrative and general expense
associated with transitioning the employment of 170 of our professional services staff to a
customer. |
|
|
|
|
Repurchased approximately 6.0 million shares of our common stock at an average price of
$9.84 per share. |
|
|
|
|
Released 8 mainframe and 4 distributed product updates designed to increase the
productivity of the IT departments of our customers. |
On May 15, 2008, we officially launched our Compuware 2.0 initiative, which is a rebirth of the
Company based on the following definable, actionable and measurable objectives:
|
|
|
Instituting a strategic vision for the Company that positions us as best-in-class for
the businesses in which we choose to compete. |
|
|
|
|
Going to market with solutions that possess straightforward and compelling value
propositions. |
|
|
|
|
Establishing a corporate brand identity our customers can identify with and trust while
extending our current brand equity outside our existing client base. |
|
|
|
|
Aligning the organization in a manner that best allows us to focus on our target markets
and deliver value to our customers. |
|
|
|
|
Deploying a global recruiting, training and career development function to attract and
retain the highest quality professionals. |
|
|
|
|
Creating a culture in which employees are energized and empowered, and that rewards
people for their achievements in a consistent and equitable manner. |
|
|
|
|
Implementing effective go-to-market programs and delivering high-value, consistent sales
tools to the field that will help our sales team communicate our value to customers in a
consistent and transparent manner. |
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 |
|
|
|
|
|
|
Total Revenues |
|
|
|
|
|
|
Three Months Ended |
|
|
Period- |
|
|
|
June 30, * |
|
|
to-Period |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees |
|
|
20.6 |
% |
|
|
16.9 |
% |
|
|
30.0 |
% |
Maintenance fees |
|
|
42.4 |
|
|
|
40.7 |
|
|
|
11.2 |
|
Professional services segment revenue |
|
|
34.1 |
|
|
|
39.0 |
|
|
|
(6.4 |
) |
Application services segment revenue |
|
|
2.9 |
|
|
|
3.4 |
|
|
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees |
|
|
2.0 |
|
|
|
3.7 |
|
|
|
(41.2 |
) |
Cost of maintenance fees |
|
|
4.0 |
|
|
|
4.1 |
|
|
|
4.7 |
|
Professional services segment expenses |
|
|
31.3 |
|
|
|
34.0 |
|
|
|
(1.5 |
) |
Application services segment expenses |
|
|
3.5 |
|
|
|
3.3 |
|
|
|
12.3 |
|
Technology development and support |
|
|
7.6 |
|
|
|
10.5 |
|
|
|
(23.0 |
) |
Sales and marketing |
|
|
20.5 |
|
|
|
23.2 |
|
|
|
(5.3 |
) |
Administrative and general |
|
|
13.8 |
|
|
|
16.2 |
|
|
|
(9.3 |
) |
Restructuring costs |
|
|
0.2 |
|
|
|
5.7 |
|
|
|
(95.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
82.9 |
|
|
|
100.7 |
|
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
17.1 |
|
|
|
(0.7 |
) |
|
|
2692.0 |
|
Other income, net |
|
|
1.0 |
|
|
|
2.0 |
|
|
|
(43.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
18.1 |
|
|
|
1.3 |
|
|
|
1367.1 |
|
Income tax provision |
|
|
6.5 |
|
|
|
1.3 |
|
|
|
455.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
11.6 |
% |
|
|
0.0 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application
services segment are combined and reported as professional services on the
Condensed Consolidated Statement of Operations included in this report. |
PRODUCTS SEGMENT
Financial information for the products segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
187,969 |
|
|
$ |
161,012 |
|
Expenses |
|
|
101,981 |
|
|
|
115,878 |
|
|
|
|
|
|
|
|
Products segment contribution |
|
$ |
85,988 |
|
|
$ |
45,134 |
|
|
|
|
|
|
|
|
The products segment generated contribution margins of 45.7% and 28.0% during the first quarter of
2009 and 2008, respectively. The increase in margin for the first quarter of 2009 was
due to both an increase in product revenue and a decrease in both technology development and
support costs and sales and marketing expenses as described below.
24
COMPUWARE CORPORATION AND SUBSIDIARIES
Products Segment Revenue
Our software products are designed to enhance the effectiveness of key disciplines throughout the
IT organization from application development and delivery to service management and IT portfolio
management supporting all major enterprise computing platforms. Product revenue, which consists of
software license fees and maintenance fees, comprised 63.0% and 57.6% of total revenue during the
first quarter of 2009 and 2008, respectively.
Distributed product revenue increased $7.7 million or 13.4% during the first quarter of 2009 to
$65.5 million from $57.8 million during the first quarter of 2008. The increase was due to a $2.4
million increase in software license fees and a $5.3 million
increase in maintenance fees.
Mainframe product revenue increased $19.3 million or 18.6% during the first quarter of 2009 to
$122.5 million from $103.2 million during the first quarter of 2008. The increase was due to an
$11.8 million increase in software license fees and a
$7.5 million increase in maintenance fees.
Software license fees increased $14.2 million or 30.0%, which included a positive impact from
foreign currency fluctuations of $2.8 million, during the first quarter of 2009 to $61.5 million
from $47.3 million during the first quarter of 2008. The
increase was primarily due to an increase in mainframe products resulting from existing customer
capacity increases within our United States operations and to a lesser extent an increasing
acceptance of our more flexible licensing options. During the first quarter of 2009, for
transactions that are required to be recognized ratably, we deferred $16.7 million of revenue
relating to transactions that closed during the quarter, and recognized $23.9 million of revenue
relating to transactions that closed and had been deferred prior to April 1, 2008.
Maintenance fees increased $12.8 million or 11.2%, which included a positive impact from foreign
currency fluctuations of $5.9 million, during the first quarter of 2009 to $126.5 million from
$113.7 million during the first quarter 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.
Products segment revenue by geographic location is presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
99,328 |
|
|
$ |
85,416 |
|
Europe and Africa |
|
|
61,654 |
|
|
|
53,164 |
|
Other international operations |
|
|
26,987 |
|
|
|
22,432 |
|
|
|
|
|
|
|
|
Total products segment revenue |
|
$ |
187,969 |
|
|
$ |
161,012 |
|
|
|
|
|
|
|
|
25
COMPUWARE CORPORATION AND SUBSIDIARIES
Products Segment Expenses
Products segment expenses include cost of software license fees, cost of maintenance fees,
technology development and support costs 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 $4.3 million or 41.2% during the
first quarter of 2009 to $6.1 million from $10.4 million in the first quarter of 2008. The decrease
in cost of software license fees was due to a $3.9 million capitalized software
impairment charge recorded during the first quarter of 2008 associated with the 2008 restructuring
initiative and a decrease in hardware costs. As a percentage of software license fees, cost of software license fees was 9.9% in the
first quarter of 2009 compared to 21.9% in the first quarter of 2008.
The decline was primarily due to the decrease in costs 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 $500,000 or 4.7% during the first quarter of 2009 to $12.0 million from $11.5
million in the first quarter 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 9.5%
and 10.1% in the first quarter 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
12.0% and 18.2% in the first quarter of 2009 and 2008, respectively.
Capitalization of internally developed software products begins when technological feasibility of
the product is established. Total technology development and support costs incurred internally and
capitalized in the first quarter of 2009 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Technology development and support costs incurred |
|
$ |
25,059 |
|
|
$ |
33,048 |
|
Capitalized technology development and support costs |
|
|
(2,489 |
) |
|
|
(3,719 |
) |
|
|
|
|
|
|
|
|
Technology development and support costs reported |
|
$ |
22,570 |
|
|
$ |
29,329 |
|
|
|
|
|
|
|
|
Before the capitalization of internally developed software products, total technology development
and support costs decreased $7.9 million or 24.2% during the first quarter of 2009 to $25.1 million
from $33.0 million in the first quarter 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 quarter of 2008 (see Note 7 to the Condensed
Consolidated Financial Statements).
26
COMPUWARE CORPORATION AND SUBSIDIARIES
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 $3.4 million or 5.3% during the first quarter of 2009 to $61.3 million from $64.7 million
in the first quarter of 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 quarter of 2008 (see Note 7 to the
Condensed Consolidated Financial Statements), partially offset by an increase in bonus and
commission costs associated with the stronger financial results in the first quarter of 2009 compared to
the first quarter of 2008.
As a percentage of product revenue, sales and marketing costs were 32.6% and 40.2% in the first
quarter of 2009 and 2008, respectively.
PROFESSIONAL SERVICES SEGMENT
Financial information for the professional services segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, * |
|
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
101,832 |
|
|
$ |
108,783 |
|
Expenses |
|
|
93,510 |
|
|
|
94,894 |
|
|
|
|
|
|
|
|
Professional services segment contribution |
|
$ |
8,322 |
|
|
$ |
13,889 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application
services segments are combined and reported as professional services on the
Condensed Consolidated Statement of Operations included in this report. |
During the first quarter of 2009, the professional services segment generated a contribution margin
of 8.2%, compared to 12.8% during the first quarter of 2008. 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 quarter of 2009. SDG focuses on providing professional
services associated with our product solutions. Our strategy going forward will be to reduce our
reliance on low margin professional service contracts in certain locations and increase the
professional services projects within the 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 $7.0 million or 6.4% during the first quarter of
2009 to $101.8 million compared to $108.8 million in the first quarter of 2008.
27
COMPUWARE CORPORATION AND SUBSIDIARIES
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) resulting in a $2.8 million decline in professional services revenue in the first
quarter of 2009 compared to the first quarter of 2008. The total revenue loss for 2009 as compared
to 2008 associated with this transition is expected to be approximately $17 million.
The remaining decrease in revenue was primarily due to a local government contract that expired on
October 31, 2007 and was not renewed.
Professional services segment revenue by geographic location is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
82,617 |
|
|
$ |
91,272 |
|
Europe and Africa |
|
|
16,762 |
|
|
|
16,122 |
|
Other international operations |
|
|
2,453 |
|
|
|
1,389 |
|
|
|
|
|
|
|
|
Total professional services segment revenue |
|
$ |
101,832 |
|
|
$ |
108,783 |
|
|
|
|
|
|
|
|
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 $1.4 million or 1.5% during the first quarter of 2009 to $93.5 million
from $94.9 million in the first quarter of 2008. The decrease in expenses was 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.
28
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 |
|
|
|
June 30, * |
|
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
8,787 |
|
|
$ |
9,594 |
|
Expenses |
|
|
10,312 |
|
|
|
9,183 |
|
|
|
|
|
|
|
|
Application services segment contribution (loss) |
|
$ |
(1,525 |
) |
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The professional services segment and the application
services segments are combined and reported as professional services on the
Condensed Consolidated Statement of Operations included in this report. |
During the first quarter of 2009, the application services segment generated a negative
contribution margin of 17.4%, compared to a contribution margin of 4.3% during the first quarter of
2008. The decline in contribution margin was a result of both a decrease in revenue and an increase
in personnel costs as described below.
Application Services Segment Revenue
Application services segment revenue decreased $800,000 or 8.4% during the first quarter of 2009 to
$8.8 million from $9.6 million in the first quarter of 2008. The decrease in revenue was 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 |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
7,274 |
|
|
$ |
8,448 |
|
Europe and Africa |
|
|
872 |
|
|
|
647 |
|
Other international operations |
|
|
641 |
|
|
|
499 |
|
|
|
|
|
|
|
|
Total application services segment revenue |
|
$ |
8,787 |
|
|
$ |
9,594 |
|
|
|
|
|
|
|
|
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 $1.1 million or 12.3% during the first quarter of 2009 to $10.3 million
from $9.2 million in the first quarter of 2008. The increase in expense was primarily due to higher
compensation and benefit costs due to increases in employee headcount in order to support the
expansion of Covisint into the healthcare industry.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist primarily of costs associated with the
corporate executive, finance, human resources, administrative, legal, communications and investor
relations departments. In addition, administrative and general expenses include all
facility-related costs, such as rent, building depreciation, maintenance and utilities, associated
with worldwide sales, professional services and software development offices. Administrative and
general expenses decreased $4.3 million or 9.3% during the first quarter of 2009 to $41.1 million
from $45.4 million during the first quarter of 2008. The decrease in cost was primarily
attributable to 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). This was partially offset by an increase in bonus expense due to
the stronger financial results in the first quarter of 2009 compared to the first quarter of 2008.
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 $2.5 million or 43.1% during the
first quarter of 2009 to $3.2 million from $5.7 million in the first quarter 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 lower interest rates throughout the
first quarter of 2009 compared to the first quarter of 2008. We expect interest income to continue
declining as a result of the use of cash and investments for future stock repurchases.
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 $19.4 million in the
first quarter of 2009 and $3.5 million in the first quarter of 2008 representing an effective tax
rate of 36% and 95%, respectively.
The decrease in the effective tax rate was primarily due to an additional $2.1 million charge
incurred during the first quarter of 2008 relating to a tax receivable recorded in the fourth
quarter of 2007. The tax receivable had included an interest income component which was subject to
income taxes, but for which the Company had not recorded a tax provision as of March 31, 2007.
RESTRUCTURING COSTS AND ACCRUAL
In the first quarter of 2009, we incurred a restructuring charge of $682,000 (as discussed in Note
7 to the Condensed Consolidated Financial Statements). We will continue to evaluate our business
processes to identify opportunities to streamline operations and reduce costs, which may result in
additional restructuring charges.
30
COMPUWARE CORPORATION AND SUBSIDIARIES
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 June 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, cash and cash equivalents and investments totaled approximately $272.9
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 quarter of 2009 was $47.8 million, an
increase of $10 million from the first quarter of 2008. The increase was due to lower employee
payroll and benefit related disbursements of approximately $22 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 and commission disbursements of $15 million due to our improved operating results
and a decrease in investment interest income received during the first quarter of 2009 due to our
continuing use of funds to repurchase our common shares 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 significant changes in our reconciliation of net income to derive net cash from operating
activities from June 30, 2008 as compared to June 30, 2007 were as follows:
|
(1) |
|
decrease in the net change of accounts receivable of $22.8 million was primarily due to
an increase in multi-year products deals that had deferred payment terms; |
|
(2) |
|
decrease in the net change of accounts payable and accrued expenses of $12.3 million
was primarily due to the establishment of restructuring accruals in the first quarter of
2008 as a result of the 2008 restructuring initiatives.
|
31
COMPUWARE CORPORATION AND SUBSIDIARIES
|
(3) |
|
increase in the net change of income taxes of $11.3 million was primarily due to income
taxes payable associated with the increase in net income in the first quarter of 2009
compared to 2008; and |
|
|
(4) |
|
decrease in impairment charges for property and equipment and capitalized software of
$6.2 million which were recorded in the first quarter of 2008 as a result of the 2008
restructuring initiatives. |
As of June 30, 2008, $5.0 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
review the impact of these actions and will, based on future results of operations, determine if
additional actions are needed. The total amount of any potential future charges for such actions
will depend upon the nature, timing and extent of those actions.
We believe our existing cash resources and cash flow from operations will be sufficient to meet
operating cash needs for the foreseeable future.
Net cash provided by investing activities:
Net cash provided by investing activities during the first quarter of 2009 was $8.7 million, a
decrease of $25.7 million from the first quarter of 2008. The decrease was primarily due to a $29
million decline in the amount of investments liquidated in the first quarter of 2009 compared to
the first quarter of 2008. The sale of our investments is primarily being used to fund the stock
repurchase initiative.
During the first quarter of 2009 and 2008, capital expenditures for property and equipment and
capitalized research and software development totaled $5.2 million and $8.5 million, respectively.
We also continue to evaluate business acquisition opportunities that fit our strategic plans.
Net cash provided by (used in) financing activities:
Net cash used in financing activities during the first quarter of 2009 was $56.6 million compared
to net cash provided by financing activities of $4.7 million during the first quarter of 2008.
The decrease of $61.3 million from the first quarter of 2008 was primarily due to a decrease of $57
million in net proceeds from the exercise of employee stock options and a $3.7 million increase in
our repurchases of our common stock during the first quarter of 2009 compared to the first quarter
of 2008.
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. During the first quarter of 2009, we
repurchased approximately 6.0 million shares of our common stock at an average price of $9.84 per
share for a total of $58.9 million. As of June 30, 2008, approximately $670.5 million remains
authorized for future purchases. We intend to continue repurchasing shares under the Discretionary Plan, funded primarily through our operating cash flow
and, if needed, funds from our existing credit facility. Our long-term goal is to reduce our
outstanding common share count to approximately 200 million shares. We do not anticipate any
significant changes in our approach to the repurchase program. However, we reserve the right to
change the timing and volume of our repurchases at any time without notice. The maximum
32
COMPUWARE CORPORATION AND SUBSIDIARIES
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 fifteen days
prior to the end of each quarter and terminates the day following the public release of our
earnings.
The Company has a credit facility with Comerica Bank and other lenders to provide additional
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 additional 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.
33
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 quarter ended June
30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
34
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Other than the risk factor added below, there have been no material changes to the Risk Factors as
previously disclosed in our Form 10-K for the fiscal year ended March 31, 2008.
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.
Our revenues and profitability depend on the overall demand for our software products, professional
services and application services. Regional and global economic change and uncertainty have
resulted in companies reassessing their spending for technology projects. We believe that a further
deterioration in the current business climate within the United States and/or other geographic
regions in which we operate could have a negative impact on our revenue and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth, the repurchases of common stock for the quarter ended June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of shares |
|
|
|
|
|
|
|
|
|
|
Total number of |
|
that may yet be |
|
|
|
|
|
|
Average |
|
shares purchased |
|
purchased under |
|
|
Total number of |
|
price paid |
|
as part of publicly |
|
the plan or |
Period |
|
shares purchased |
|
per share |
|
announced plans |
|
program (a) |
For the month ended April 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
729,433,000 |
|
|
For the month ended May 31, 2008 |
|
|
3,858,000 |
|
|
$ |
9.90 |
|
|
|
3,858,000 |
|
|
|
691,241,000 |
|
|
For the month ended June 30, 2008 |
|
|
2,125,000 |
|
|
|
9.74 |
|
|
|
2,125,000 |
|
|
|
670,542,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,983,000 |
|
|
$ |
9.84 |
|
|
|
5,983,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 share repurchase plan will expire when we have repurchased all shares
authorized for repurchase thereunder. We do not anticipate any significant changes in our
approach to the repurchase program. The maximum amount of repurchase activity under the
discretionary program continues to be limited on a daily basis to 25% of the average daily
trading volume of our common stock during the |
35
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
|
|
|
|
|
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 first quarter of 2009 were March 17, 2008 through May 16, 2008 and June 17, 2008 through July 24, 2008 (see Liquidity and Capital Resources
section of Managements Discussion and Analysis of Financial Condition and Results of
Operations for more details on our stock repurchase program). |
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10.106
|
|
Form of Stock Option Agreement (3-Year Version) (incorporated by reference from
the Companys Form 8-K filed on April 25, 2008) |
|
|
|
10.107
|
|
Form of Stock Option Agreement (5-Year Version) (incorporated by reference from
the Companys Form 8-K filed on April 25, 2008) |
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10.109
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Form of Compuware Executive Incentive Plan Corporate as of April 30, 2008
(1) |
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15
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Independent Registered Public Accounting Firms Awareness Letter
(1) |
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act. (1) |
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32
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Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b)
of the Securities Exchange Act. (1) |
36
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.
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COMPUWARE CORPORATION
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Date: August 7, 2008 |
By: |
/s/ Peter Karmanos, Jr. |
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Peter Karmanos, Jr. |
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Chief Executive Officer
(duly authorized officer) |
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Date: August 7, 2008 |
By: |
/s/ Laura L. Fournier |
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Laura L. Fournier |
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Executive Vice President,
Chief Financial Officer and
Treasurer
(principal financial officer) |
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37