UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2007
Commission File Number: 000-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CAMPUS MARTIUS, DETROIT, MI 48226-5099
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (313) 227-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share Nasdaq Stock Market
Preferred Stock Purchase Rights Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act of 1933. Yes X No
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2006, the last business day of the registrant's
most recently completed second fiscal quarter, was $2,237,756,592, based upon
the closing sales price of the common stock on that date of $7.79 as reported on
The NASDAQ Global Select Market. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are assumed to
be affiliates. Such determination should not be deemed an admission that such
officers, directors and beneficial owners are, in fact, affiliates of the
registrant.
There were 301,152,638 shares of $.01 par value common stock outstanding as of
May 18, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2007 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Item Number Page
----------- ----
PART I
1. Business 3
1A. Risk Factors 14
1B. Unresolved Staff Comments 19
2. Properties 20
3. Legal Proceedings 20
4. Submission of Matters to a Vote of Security Holders 20
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 21
6. Selected Consolidated Financial Data 25
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
7A. Quantitative and Qualitative Disclosure about Market Risk 40
8. Consolidated Financial Statements and Supplementary Data 42
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 74
9A. Controls and Procedures 74
9B. Other Information 76
PART III
10. Directors, Executive Officers and Corporate Governance 77
11. Executive Compensation 77
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 77
13. Certain Relationships and Related Transactions, and Director
Independence 77
14. Principal Accountant Fees and Services 77
PART IV
15. Exhibits and Financial Statement Schedules 78
2
PART I
ITEM 1. BUSINESS
We deliver value to businesses worldwide by providing software products and
professional services that improve the performance of information technology
("IT") organizations. Originally founded in 1973 as a professional services
company, we began to offer mainframe productivity tools for fault diagnosis,
file and data management, and application debugging in the late 1970's.
In the 1990's, IT moved toward distributed and web-based platforms. Our
solutions portfolio grew in response, and we now market a comprehensive
portfolio of IT solutions across the full range of enterprise computing
platforms that help:
- Develop and deliver high quality, high performance enterprise business
applications in a timely and cost-effective manner.
- Measure, manage and communicate application service in business terms, and
maintain consistent, high levels of service delivery.
- Provide executive visibility, decision support and process automation
across the entire IT organization to enable all available resources to be
harnessed in alignment with business priorities.
Additionally, to be competitive in today's global economy, enterprises must
securely share applications, information and business processes. We address this
market need through our Covisint offerings, which help manage the supply chain
through the integration of vital business information and processes between
partners, customers and suppliers.
We operate in two reportable business segments in the software and technology
services industries: products and professional services (see Note 13 of the
Notes to Consolidated Financial Statements, included in Item 8 of this report).
For a discussion of developments in our business during fiscal 2007, see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
We were incorporated in Michigan in 1973. Our executive offices are located at
One Campus Martius, Detroit, Michigan 48226-5099, and our telephone number is
(313) 227-7300. Our Internet address is www.compuware.com. We make available,
free of charge on our web site, copies of reports we file with the Securities
and Exchange Commission as soon as reasonably practicable after we
electronically file such reports. The information contained on our web site
should not be considered part of this report.
The following discussion may contain 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, including, without limitation, those
discussed in Item 1A. Risk Factors and elsewhere in this report, 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. 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.
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OUR BUSINESS STRATEGY
Our business strategy is to provide a broad range of software and professional
services offerings to the largest users of information technology in the world.
Our enterprise IT solutions are focused on providing a real return on investment
for our clients by increasing the performance of the entire IT organization and
enabling IT management to deliver maximum business impact in support of the
organization's strategic objectives. We support the most widely used
technologies and platforms, including IBM z/Series (mainframe), Java, Microsoft
Windows and .NET, UNIX, Linux, Oracle and SAP.
We offer software solutions and professional services in three primary areas of
IT value delivery:
- Application delivery, encompassing business requirements management,
automated development, quality assurance, performance assurance and
delivery management - enabling IT organizations to deliver packaged,
outsourced or internally developed applications that meet business needs
and production service requirements;
- Service management, in which the delivery of key business services is
measured and managed - including the associated applications and
infrastructure; and
- IT portfolio management, which enables IT executives to prioritize, measure
and manage the entire spectrum of IT investments and activities through
portfolio-based decision-making and to communicate the value delivered to
the business.
PRODUCTS
The following table sets forth, for the periods indicated, a breakdown of total
product revenue (license and maintenance) by product line and the percentage of
total revenues for each line (dollars in thousands):
PERCENTAGE OF
YEAR ENDED MARCH 31, TOTAL REVENUES
------------------------------ ------------------
PRODUCT REVENUE 2007 2006 2005 2007 2006 2005
--------------- -------- -------- -------- ---- ---- ----
Mainframe Products
Application Delivery
File-AID $157,730 $162,843 $172,438 13.0% 13.5% 14.0%
Xpediter 98,949 98,043 108,762 8.2 8.1 8.8
Hiperstation 18,002 17,859 23,343 1.5 1.5 1.9
Service Management
Abend-AID 127,538 132,503 138,592 10.5 11.0 11.3
Strobe 82,588 91,683 83,608 6.8 7.6 6.8
-------- -------- -------- ---- ---- ----
Total Mainframe Products Revenue 484,807 502,931 526,743 40.0 41.7 42.8
-------- -------- -------- ---- ---- ----
Distributed Products
Application Delivery
Optimal and Uniface 50,529 50,663 47,403 4.2 4.2 3.8
File-Aid/CS, QACenter and CARS 48,627 44,877 42,688 4.0 3.7 3.5
DevPartner 26,569 26,324 28,078 2.2 2.2 2.3
Service Management
Vantage 107,993 86,939 70,642 8.9 7.2 5.7
IT Portfolio Management
Changepoint 22,481 18,512 14,945 1.8 1.6 1.2
-------- -------- -------- ---- ---- ----
Total Distributed Products Revenue 256,199 227,315 203,756 21.1 18.9 16.5
-------- -------- -------- ---- ---- ----
Total Product Revenue $741,006 $730,246 $730,499 61.1% 60.6% 59.3%
======== ======== ======== ==== ==== ====
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COMPUWARE SOFTWARE PRODUCTS
Our software products enhance the effectiveness of key disciplines throughout
the IT organization, from application delivery to service management and IT
portfolio management, supporting all major enterprise computing platforms.
APPLICATION DELIVERY--Our Optimal, Uniface, DevPartner, QACenter, Hiperstation,
File-AID and Xpediter products and the Compuware Application Reliability
Solution ("CARS") help IT organizations to consistently and efficiently develop
and deliver reliable, scalable applications that meet business needs and deliver
high levels of customer satisfaction.
SERVICE MANAGEMENT-- Our Abend-AID, Strobe and Vantage products are used to
manage IT service delivery - providing IT organizations with the ability to
measure, manage and communicate service in business terms and enabling delivery
of consistently high levels of service through systematic analysis of
application and infrastructure performance.
IT PORTFOLIO MANAGEMENT-- Our Changepoint solution provides IT executives with
visibility into all aspects of IT activity, supports effective investment
decision-making driven by business strategy, enables IT resources to be
effectively aligned with business priorities through management of IT supply and
demand, provides timely and accurate financial budgeting, tracking and
reporting, and enables and enforces organizational best practices through
process automation.
MAINFRAME MARKET
The market for mainframe products is well-defined and the drive to extend legacy
applications into distributed environments continues to underscore the need for
reliable, high-volume mainframe processing.
We intend to remain focused on developing, marketing and supporting high-quality
software products, both to support traditional uses of the mainframe and to
enable IT organizations to rationalize, modernize and extend their legacy
application portfolios. We believe that our longstanding customer relationships
and brand equity in this arena will help us continue to improve the benefits our
customers receive from our mainframe products. In addition, we continue to
pursue product integration opportunities to increase the value that our
customers obtain from the use of our products, to enhance the synergy among the
functional groups working on key business applications and to make IT processes
more streamlined, automated and repeatable.
MAINFRAME SOFTWARE PRODUCTS
Our mainframe products focus on improving the productivity of development,
maintenance and support teams in application analysis, testing, defect isolation
and removal, fault management, file and data management and application service
management in the IBM OS/390 and z/Series environments. We believe that these
products will remain among the industry's leading solutions for this platform.
Our mainframe products are functionally rich, focused on customer needs and easy
to install, while requiring minimal user training. We strive to ensure a common
look and feel across our products and emphasize ease of use in all aspects of
product design and functionality. Most products can be used immediately without
modification of customer development practices and standards. These products can
be quickly integrated into day-to-day testing, debugging and maintenance
activities.
Our mainframe products are grouped into two product lines: Application Delivery
and Service Management products.
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APPLICATION DELIVERY PRODUCTS
File-AID products provide a consistent, familiar and secure method for IT
professionals to access, analyze, edit, compare, move and transform data across
all strategic environments. File-AID is used to quickly resolve production data
problems and manage ongoing changes to data and databases at any stage of the
application life cycle, including building test data environments to provide the
right data in the shortest time. The File-AID product family can also be used to
address data privacy requirements in preproduction test environments.
Xpediter interactive debugging products help developers integrate enterprise
applications, build new applications and modernize and extend their legacy
applications, satisfying corporate scalability, reliability and security
requirements. Xpediter tools deliver powerful analysis and testing capabilities
across multiple environments, helping developers test more accurately and
reliably, in less time.
Hiperstation products deliver complete preproduction testing functionality for
automating test creation and execution, test results analysis and documentation.
Hiperstation also provides application auditing capabilities to address
regulatory compliance and other business requirements. The products simulate the
on-line systems environment, allowing programmers to test applications under
production conditions without requiring actual users at terminals. Their
powerful functions and features enhance unit, concurrency, integration,
migration, capacity and stress testing. When deployed in production,
Hiperstation allows scalable logging of application transactions and provides
audit reporting to aid in problem resolution and to support other uses of the
captured transaction information such as analysis of security breaches.
SERVICE MANAGEMENT PRODUCTS
Abend-AID products enable IT professionals to quickly diagnose and resolve
application and system failures. The products automatically collect program and
environmental information, analyze the information and present diagnostic and
supporting data in a way that can be easily understood by all levels of IT
staff. Automated failure notification helps speed problem resolution and reduce
downtime.
Strobe and iStrobe are products that work together to help customers locate and
eliminate sources of excessive resource demands during every phase of an
application's life cycle. Strobe products measure the activity of z/OS-based
online and batch applications, providing reports on where and how time is spent
during execution. Strobe products support an extensive array of subsystems,
databases and languages. These products can be applied via a systematic program
to reduce the consumption of mainframe resources and reduce associated costs
and/or make resources available for additional business workloads.
6
DISTRIBUTED SYSTEMS MARKET
In contrast to the mainframe market, the distributed systems market is
characterized by multiple hardware, software and network configurations.
Combined with the more recent push to provide enhanced versatility through
service-oriented architectures, IT organizations are challenged to combine
agility, cost effectiveness and control in developing and delivering reliable,
scalable and high quality enterprise applications that meet business needs,
despite an exponential increase in environment complexity. We believe our
distributed products address these challenges and that we are emerging as a
premier provider of application delivery, service management and IT portfolio
management solutions to enterprise IT organizations.
DISTRIBUTED SOFTWARE PRODUCTS
Our distributed products focus on maximizing the performance of the entire IT
organization, including applications and operations organizations, as well as IT
executive leadership. These products provide for an effective application
delivery discipline from requirements definition and management, through
application development and quality and performance assurance. They support
service delivery through comprehensive service management capabilities
encompassing business service management, end-user experience monitoring,
application analytics and application infrastructure monitoring and management.
They also support business-centric IT management through comprehensive IT
portfolio management - enabling investment prioritization driven by business
strategy, portfolio-driven management decision making, effective visibility and
control over IT supply and demand, and value transparency back to
line-of-business management.
Our distributed software products are grouped into three product lines:
Application Delivery, Service Management and IT Portfolio Management products.
APPLICATION DELIVERY PRODUCTS
Optimal Trace is our business requirements management product. Optimal Trace
enables the effective capture of business intent into a set of structured
application requirements which can then be used to drive the rest of the
application delivery process.
OptimalJ is our Java automated development product. OptimalJ accelerates
application delivery by simplifying Java development, allowing developers of
varying experience levels to rapidly produce reliable J2EE business
applications. OptimalJ generates complete, working applications directly from a
visual model using sophisticated patterns to implement accepted best practices
for coding to J2EE specifications.
Uniface is our 4GL automated development and deployment product. With Uniface,
developers can develop, integrate, maintain and deploy complex distributed
applications. Uniface applications are hardware, operating system, database and
user interface independent. This reduces the cost for customers when switching
or upgrading to new platforms.
Uniface View is our business integration portal product. As a packaged,
web-based application integration platform, Uniface View enables customers to
quickly bring together diverse packaged and custom applications in a
customizable desktop portal.
Uniface Flow is our business process automation and business process modeling
product. Uniface Flow enables business analysts to model business processes and
connect business tasks to application components. In addition Uniface Flow
provides a business process server enabling customers to deploy their automated
business processes.
File-AID/Client Server is a comprehensive test data management product that
allows quality assurance teams to more efficiently reuse test cases with
different test data enabling repeatable and consistent testing.
7
QACenter delivers a full spectrum of automated testing products and solutions
designed to validate applications running across various distributed
environments, isolate and correct problems and ensure that applications will
meet performance requirements before they are deployed in production.
The QACenter product family provides the following capabilities:
Quality Assurance - supporting full life-cycle testing of large-scale
distributed applications. QACenter provides the framework for managing the
entire testing process, allowing users to track test requirements and
associated test cases and scripts, to analyze and manage risk and improve
efficiency with test management and analysis that aligns quality assurance
with business goals to maximize application quality. It also provides
functional test automation that allows organizations to validate
business-critical applications including web-based, client/server and
packaged applications. It provides a defect management solution that serves
as a central repository and communication hub for all development-related
activities and test-related activities and data.
Performance Assurance - providing automated load testing and preproduction
performance prediction and monitoring capabilities to identify bottlenecks
and to optimize performance for internally developed, outsourced and
packaged applications running in distributed environments.
CARS is a comprehensive quality management solution that provides a risk-based
testing framework used to ensure testing efforts align with business priorities.
It consists of the CARS workbench (our software solution) combined with
certified quality assurance expertise (professional services) and Qualitypoint
(our risk-based proprietary methodology). This systematic testing approach
provides adherence to a consistent quality assurance process, delivers the
quality metrics required to make sound go / no go decisions and ensures the most
critical of business requirements are met.
The DevPartner Studio family of products provide analysis, automation and
metrics to help application delivery teams build reliable, high-performance
applications and components for Microsoft.NET. These products provide code,
memory and performance analysis, code coverage, security analysis and error
simulation. This yields a rich set of quality, performance and security metrics
to enable critical business capabilities to be efficiently built into
applications during the construction phase, rather than during the testing phase
of application delivery.
DevPartner Java Edition pinpoints runtime errors, memory problems and
performance bottlenecks and identifies code coverage/stability across all tiers
of a Java application environment. DevPartner Java Edition helps developers and
testers more efficiently solve the complexity, quality and performance problems
associated with Java development.
SERVICE MANAGEMENT PRODUCTS
Our Vantage family of service management products enable IT organizations to
deliver outstanding service by measuring and managing service from the
perspective of the business. The Vantage solution gathers business-relevant
service metrics by monitoring end user response time and availability. These end
user service metrics are integrated with deep application and infrastructure
analytics, enabling IT organizations to proactively identify, resolve and
prevent performance problems. The same end user service metrics are crucial to
establishing an overall quality-of-service management environment incorporating
a broad spectrum of service metrics from both Compuware and third-party
management products through the Vantage business service management capability.
Vantage Service Manager - Provides a sophisticated business service management
and service level reporting platform to provide a coherent view of business
service -- incorporating end user experience metrics, application infrastructure
metrics, and other service metrics across both distributed and mainframe
environments and incorporating Vantage capabilities as well as insight available
from Abend-AID, Strobe and third party monitoring and service desk solutions.
8
ClientVantage--Provides a complete measure of end-user experience for all users,
all the time, by tracking response times, resource usage, application faults and
availability. ClientVantage supports agentless performance monitoring of
extremely high-transaction volume web-based and enterprise applications as well
as active agent based monitoring which provides consistent service level metrics
for key business transactions across defined user populations and service
locations.
NetworkVantage--Shows how users and applications consume critical shared network
resources; provides the information necessary to troubleshoot problems related
to unplanned use, unauthorized use, or poor configuration of the network;
supports network bandwidth sizing decisions; and provides historical trending
data for use in network growth management.
ServerVantage--Via agent-based or agentless technology, monitors the
availability and performance of applications, databases and servers, allowing
administrators to centrally manage events across all application components--web
servers, firewalls, application servers, file systems, databases, middleware and
operating systems.
Vantage Analyzer--Directs users straight to the source of application
performance problems in both J2EE and .NET environments, using visibility and
detailed transaction analysis, without draining production resources.
ApplicationVantage--Pinpoints the source of poor performance and infrastructure
problems to the client, server or network in production and pre-production
environments, eliminating time-consuming guesswork. Predictive analysis features
enable IT organizations to ensure that new and modified applications roll out
successfully and provide crucial information for establishing and meeting
service requirements.
IT PORTFOLIO MANAGEMENT PRODUCTS
Changepoint provides business management capabilities for Chief Information
Officers ("CIOs") and IT organizations as well as for the IT professional
services organizations that serve them. Accordingly, there are two versions of
the Changepoint solution - Changepoint and Changepoint PSA (Professional
Services Automation).
Changepoint provides CIOs and IT managers with critical insight into IT project
and non-project activity, strategic and operational demand and resource
allocation and availability, enabling portfolio-driven decision-making aligned
with business strategy. Changepoint automates core IT business processes to
reduce costs and increase efficiency and quality. It provides a sound financial
framework which enables IT leadership to communicate value delivered to the
business for every dollar of IT spend.
Portfolio management capabilities enable integrated management of all IT
investments and resources. Changepoint supports project, application and
investment planning portfolios, so that organizations can prioritize and manage
the investments that best support business goals, even as business conditions
and market requirements change.
Changepoint PSA provides total visibility into the performance of an IT
professional services organization from detailed analyses of the performance of
engagements, projects and customers to higher level views of workgroups, the
sales pipeline, engagements, project portfolios and financial projections. A
configurable management portal enables the consolidation of business-critical
information from Changepoint PSA, as well as other critical business systems.
9
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
We believe that effective support of our customers and products during both the
trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide customer support and product
upgrades to assure a continuing high level of customer satisfaction. In fiscal
year 2007, 2006 and 2005, we experienced a high customer maintenance renewal
rate.
All customers who subscribe to our maintenance and support services are entitled
to receive technical support and advice, including problem resolution services
and product support installation, error corrections and any product enhancements
released by us during the maintenance period. Maintenance and support services
are provided online, through our FrontLine technical support web site, by
telephone access to technical personnel located in our development labs and by
support personnel in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee based on the license price of the product. They also have the
option of committing to maintenance for longer terms, generally up to five
years, on a contractual basis. For fiscal years 2007, 2006 and 2005, maintenance
fees represented approximately 37.7%, 36.0% and 34.5%, respectively, of our
total revenues.
TECHNOLOGY DEVELOPMENT AND SUPPORT
We have been successful in developing acquired products and technologies into
marketable software for our distribution channels. We believe that our future
growth lies in part in continuing to identify promising technologies from all
potential sources, including independent software developers, customers, small
startup companies and internal research and development.
Product development is performed primarily at our headquarters in Detroit,
Michigan; and at our development labs in Amsterdam, The Netherlands; Gdansk,
Poland; Toronto, Canada; Dublin, Ireland; Sydney, Australia; Cambridge,
Massachusetts; San Diego, California; and Merrimack, New Hampshire.
Total technology development and support costs were $135.5 million, $117.2
million and $130.6 million during fiscal 2007, 2006 and 2005, respectively, of
which $21.4 million, $20.3 million and $19.3 million, respectively, were
capitalized.
PROFESSIONAL SERVICES
We offer a broad range of IT services for distributed systems and mainframe
environments. Our offerings include technical staffing, application services and
development, quality assurance, project management and application maintenance.
We also offer professional services solutions that utilize Compuware's products
for enhanced efficiency, quality and performance.
We believe that the demand for professional services will continue to be driven
by the need to control costs, the significant level of resources necessary to
support complex and rapidly changing hardware, software and communication
technologies and the need for a larger technical staff for ongoing maintenance.
Our business approach to professional services delivery emphasizes hiring
experienced staff, ongoing training, high staff utilization and immediate,
productive deployment of new personnel at client locations.
Our objective in the professional services division is to create long-term
relationships with customers in which our professional staff join with the
customer's IT organization to plan, design, program, implement and maintain
technology-based solutions that achieve customer business goals. Typically, the
professional services staff is integrated with the customer's development team
on a specific application or project. Professional services staff work primarily
at customer sites or at our professional services offices located throughout
North America and Europe. We also have professional services
10
operations in other international locations. In addition, Compuware offers a
NearShore Development Center that serves customers looking for flexible,
cost-effective and high-quality application services delivered remotely from our
facility in Montreal.
Professional services also includes Covisint, our business-to-business ("b2b")
applications and interoperability services division.
Covisint provides a secure, collaborative services platform that digitizes and
integrates information assets that cross disparate systems and user communities.
By combining centralized identity and access management technologies, advanced
portal functionality and global b2b messaging, users can find, access and share
information across disparate systems more effectively.
For industries and communities of any size, anywhere, Covisint's collaborative
services platform delivers the reliability and security of enterprise
applications with the flexibility of a software-as-a-service model. Delivered as
a service, Covisint extends the capabilities of legacy systems and applications
across organizations and communities.
- Covisint provides a portal framework for web-based communications
across an organization's extended enterprise and business communities.
- Covisint provides a robust messaging engine that is capable of
consuming and distributing both electronic and paper-based messages.
- Covisint enables organizations and communities to implement a unified
and leveraged approach to managing digital identities and information
security across a wide variety of technologies and organizations. This
leveraged approach results in reduced complexity with increased
consistency and policy enforcement when sharing information across
multiple participants.
CUSTOMERS
Our products and professional services are used by the IT departments of a wide
variety of commercial and government organizations.
We did not have a single customer that accounted for greater than 10% of total
revenue during fiscal 2007, 2006 or 2005, or greater than 10% of accounts
receivable at March 31, 2007 and 2006.
SALES AND MARKETING
We market software products primarily through a direct sales force in the United
States, Canada, Europe, Japan, Asia-Pacific, Brazil, Mexico and South Africa as
well as through independent distributors giving us a presence in 60 countries.
We market our professional services primarily through account managers located
in offices throughout North America, Europe and Asia-Pacific. This marketing
structure enables us to keep abreast of, and respond quickly to, the changing
needs of our clients and to call on the actual users of our products and
services on a regular basis.
COMPETITION
The markets for our software products are highly competitive and characterized
by continual change and improvement in technology. We consider more than 40
firms to be directly competitive with one or more of our products. These
competitors include BMC Software, Inc., Borland Software Corp., CA, Inc.,
International Business Machines Corporation ("IBM") and Hewlett-Packard Company.
Some of these competitors have substantially greater financial, marketing,
recruiting and training resources than we
11
do. The principal competitive factors affecting the market for our software
products include: responsiveness to customer needs, functionality, performance,
reliability, ease of use, quality of customer support, vendor reputation,
distribution channels and price.
The distributed systems market in which we operate has many more competitors
than our traditional mainframe market. Our ability to compete effectively and
our growth prospects depend upon many factors, including the success of our
existing distributed systems products, the timely introduction and success of
future software products, the ability of our products to interoperate and
perform well with existing and future leading databases and other platforms
supported by our products and our ability to bring products to market that meet
ever-changing customer requirements.
The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture Ltd., Computer Sciences Corporation,
Electronic Data Systems Corporation, IBM Global Services, Analysts International
Corporation, Keane, Inc., Infosys Technologies, Sun Microsystems, Inc., GXS
Strategies, Sterling Commerce Corp. and numerous other regional and local firms
in the markets in which we have professional services offices. Several of these
competitors have substantially greater financial, marketing, recruiting and
training resources than we do. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
We believe, based on our current market position, that we have competed
effectively in the software products and professional services marketplaces.
Nevertheless, a variety of external and internal events and circumstances could
adversely affect our competitive capacity. Our ability to remain competitive
will depend, to a great extent, upon our performance in product development and
customer support, effective sales execution and our ability to acquire and
integrate new technologies. To be successful in the future, we must respond
promptly and effectively to the challenges of technological change and our
competitors' innovations by continually enhancing our own product and services
offerings.
PROPRIETARY RIGHTS
We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable, perpetual licenses. Under the general
terms and conditions of our standard product license agreement, the licensed
software may be used solely for the licensee's own internal operations. Under
certain limited circumstances, we may be required to make source code for our
products available to our customers under an escrow agreement, which restricts
access to and use of the source code. Although we take steps to protect our
trade secrets, there can be no assurance that misappropriation will not occur.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States.
In addition to trade secret protection, we seek to protect our software,
documentation and other written materials under copyright law, which affords
only limited protection. We also assert registered trademark rights in our
product names. As of March 31, 2007, we have been granted 36 patents issued in
the United States and have 15 patent applications pending with the United States
Patent and Trademark Office for certain product technology and have plans to
seek additional patents in the future. Once granted, we expect the duration of
each patent will be up to 20 years from the effective date of filing of the
applications. Our earliest issued patent filing date is fiscal 1992. However,
because the industry is characterized by rapid technological change, we believe
that factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are more important to establishing and maintaining
a technology leadership position than legal protection of our technology.
12
There can be no assurance that third parties will not assert infringement claims
against us with respect to current and future products or that any such
assertion may not require us to enter into royalty arrangements which could
require a partial payment to the third party upon sale of the product, or result
in costly litigation.
EMPLOYEES
As of March 31, 2007, we employed 7,539 people worldwide, with 1,390 in product
sales, sales support and marketing; 1,574 in technology development and support;
3,596 in professional services and 979 in other general and administrative
functions. Only a small number of our employees are represented by labor unions.
We have experienced no work stoppages and believe that our relations with our
employees are good. Our success will depend in part on our continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software developers, professional services staff and
sales and marketing personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers, who serve at the discretion of our Board of
Directors, are listed below:
Name Age Position
---- --- --------
Peter Karmanos, Jr. 64 Chairman of the Board, Chief Executive Officer and
President
Henry A. Jallos 58 President and Chief Operating Officer, Products
Robert C. Paul 44 President and Chief Operating Officer, Covisint
Laura L. Fournier 54 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas M. Costello, Jr. 53 Senior Vice President, Human Resources, Communications
and Investor Relations, General Counsel and Secretary
Peter Karmanos, Jr., is a founder of the Company and has served as Chairman of
the Board since November 1978, as Chief Executive Officer since July 1987 and as
President from January 1992 through October 1994 and October 2003 to present.
Henry A. Jallos has served as President and Chief Operating Officer, Products,
since January 2006. Mr. Jallos served as Corporate Executive Vice President from
May 2005 through December 2005, Executive Vice President, Global Account
Management from October 2001 through April 2005, Executive Vice President,
Products Division from September 1998 through October 2001 and Senior Vice
President, Worldwide Sales from August 1994 through August 1998.
Robert C. Paul has served as President and Chief Operating Officer of Compuware
Covisint since January 2006. Prior to that time, Mr. Paul was Chief Executive
Officer and President of Covisint since its acquisition by Compuware in March
2004. Mr. Paul had spent nearly three years at Covisint prior to the
acquisition.
Laura L. Fournier has served as Senior Vice President, Chief Financial Officer
and Treasurer since April 1998. Ms. Fournier was Corporate Controller from June
1995 through March 1998. From February 1990 through May 1995, Ms. Fournier was
Director of Internal Audit.
13
Thomas M. Costello, Jr., has served as General Counsel since January 1985, Vice
President from January 1995 to September 2003 and Secretary since May 1995. Mr.
Costello was appointed Senior Vice President in September 2003. Mr. Costello is
responsible for legal, human resources, communications and investor relations.
SEGMENT INFORMATION, PAYMENT TERMS AND FOREIGN REVENUES
For a description of revenues and operating profit by segment and for financial
information regarding geographic operations for each of the last three fiscal
years, see Note 13 of the Notes to Consolidated Financial Statements, included
in Item 8 of this report. For a description of extended payment terms offered to
some customers, see Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Software Products
- Revenue. The Company's foreign operations are subject to risks related to
foreign exchange rates and other risks. For a discussion of these risks, see
Item 1A Risk Factors and Item 7A Quantitative and Qualitative Disclosure about
Market Risk.
ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business.
The material risks and uncertainties that we believe affect us are described
below. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties that we are not aware of or focused on
or that we currently deem immaterial may also impair business operations. This
report is qualified in its entirety by these risk factors. If any of the
following risks actually occur, our financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly, and shareholders
could lose all or part of their investment.
THE MAJORITY OF OUR SOFTWARE PRODUCTS REVENUE IS DEPENDENT ON OUR CUSTOMERS'
CONTINUED USE OF IBM AND IBM-COMPATIBLE PRODUCTS
The majority of our revenue from software products is generated from products
designed for use with IBM and IBM-compatible mainframe computers. As a result,
the majority of our revenue from software products is dependent on our
customers' continued use of IBM and IBM-compatible mainframe products. In
addition, because our products operate in conjunction with IBM systems software,
changes to IBM systems software may require us to adapt our products to these
changes. An inability to do so, or any delay in doing so, may adversely affect
our operating results.
OUR SOFTWARE PRODUCT REVENUE IS DEPENDENT ON THE ACCEPTANCE OF OUR PRICING
STRUCTURE FOR SOFTWARE LICENSES AND MAINTENANCE.
The pricing of our software licenses and maintenance is under constant pressure
from customers and competitive vendors which can negatively impact our software
product revenue. Although we plan to increase prices as a means of improving
revenues and gross margin, doing so may disproportionately decrease our sales
volume due to these competitive pressures and, instead, have a negative effect
on our results of operations and cash flows.
WE MAY FAIL TO ACHIEVE OUR FORECASTED FINANCIAL RESULTS DUE TO INACCURATE SALES
FORECASTS OR OTHER FACTORS.
Our revenues, and particularly our software license revenues, are difficult to
forecast, and as a result, our actual financial results can vary substantially
from our forecasted results. We base our financial forecasts on our "sales
pipeline" (a common practice) and on expected sales from proposed initiatives to
increase sales.
Our sales personnel monitor the status of all proposals and estimate when a
customer will make a purchase decision and the dollar amount of the sale. These
estimates are aggregated periodically to generate the sales pipeline. Our sales
pipeline estimates can prove to be unreliable both in a particular quarter and
over a longer period of time, in part because the "conversion rate" of the
pipeline into
14
revenue can be very difficult to estimate due to the large number of variables
that result in our customers making purchase decisions. In addition, changes in
the conversion rate, or in the pipeline itself, could adversely affect our
business or results of operations.
We also base financial forecasts on expected sales from proposed initiatives to
increase sales. These proposed initiatives are longer term in nature and the
sales resulting from them can prove to be unpredictable in both size and timing
due to uncertainties related to sales execution, customer adoption, staffing
requirements, compensation plans, poor estimates of expenses required to achieve
these initiatives and other risks. If we do not achieve the sales volumes in the
periods forecasted our actual financial results can vary significantly from our
financial forecasts.
IF WE FAIL TO ACHIEVE THE RESULTS WE EXPECT FROM OUR EXPENSE REDUCTION PROGRAM,
OUR RESULTS OF OPERATION AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We are in the process of implementing plans to reduce expenses, which include
the consolidation of certain office locations, reduction in discretionary
spending, reduction in the work force and other cost cutting measures. This
might result in us incurring additional restructuring charges during fiscal
2008. There can be no assurance that our plans to reduce expenses will be
completed in a timely manner or will produce the cost savings we anticipate.
OUR SOFTWARE AND TECHNOLOGY MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
During the due diligence stage of any software acquisition, we research and
investigate the title to the software we will be acquiring from the seller. This
investigation generally includes without limitation, litigation searches,
copyright and trademark searches, review of development documents and interviews
with key employees of the seller regarding development, title and ownership of
the software products being acquired. The acquisition document itself generally
contains representations, warranties and covenants concerning the title and
ownership of the software products as well as indemnification and remedy
provisions in the event the representations, warranties and covenants are
breached by the seller. Our new hires sign an offer letter which states that the
new employee is being hired for his or her talent and skill rather than for any
trade secrets or proprietary information of others of which he or she may have
knowledge. Further, our employees execute an agreement stating that work
developed for us or our clients belongs to us or our clients, respectively.
Although we use all reasonable efforts to ensure we do not infringe on third
party intellectual property rights, there can be no assurance that third parties
will not assert infringement claims against us with respect to current and
future products or that any such assertion will not require us to enter into
royalty arrangements or result in costly litigation.
OUR RESULTS COULD BE ADVERSELY AFFECTED IF OUR OPERATING MARGINS DECLINE.
Our operating margins may decline. We are aware that sales expenses associated
with our distributed systems products are higher than those associated with our
traditional mainframe products. Since we believe the best opportunities for
revenue growth are in the distributed systems market, product operating margins
could decline. In addition, operating margins in the professional services
business are significantly impacted by small fluctuations in revenue since most
costs are fixed during any short term period.
OUR RESULTS COULD BE ADVERSELY AFFECTED BY INCREASED COMPETITION, PRICING
PRESSURES AND TECHNOLOGICAL CHANGES.
The markets for our software products are highly competitive. We consider over
40 firms to be directly competitive with one or more of our products. Our
competitors include, among others, BMC Software, Inc., Borland Software Corp.,
Hewlett-Packard Company, CA, Inc. and IBM. The principal competitive factors
affecting the market for our software products include: responsiveness to
customer needs, functionality, performance, reliability, ease of use, quality of
customer support, sales channels, vendor reputation and price. A variety of
external and internal events and circumstances could adversely affect our
competitive capacity. Our ability to remain competitive will depend, to a great
extent, upon our performance in sales, product development and customer support.
To be successful in the future, we must respond promptly and effectively to our
customers' purchasing methodologies, challenges of technological change and our
competitors' innovations by continually enhancing our product offerings.
15
We operate in an industry characterized by rapid technological change, evolving
industry standards, changes in customer requirements and frequent new product
introductions and enhancements. If we fail to keep pace with technological
change in our industry, such failure would have an adverse effect on our
revenues. During the past several years, many new technological advancements and
competing products entered the marketplace. To the extent that our current
product portfolio does not meet such changing requirements, our revenues will
suffer. Delays in new product introductions or less-than-anticipated market
acceptance of these new products are possible and would have an adverse effect
on our revenues.
Developers of third party products, including operating systems, databases,
systems software, applications, networks, servers and computer hardware,
frequently introduce new or modified products. These new or modified third party
products could incorporate features which perform functions currently performed
by our products or could require substantial modification of our products to
maintain compatibility with these companies' hardware or software. While we have
generally been able to adapt our products and our business to changes introduced
by new or modified third party product offerings, there can be no assurance that
we will be able to do so in the future. Failure to adapt our products in a
timely manner to such changes or customer decisions to forego the use of our
products in favor of those with comparable functionality contained either in the
hardware or other software could have a material adverse effect on our business,
financial condition and operating results.
THE MARKET FOR PROFESSIONAL SERVICES IS HIGHLY COMPETITIVE, FRAGMENTED AND
CHARACTERIZED BY LOW BARRIERS TO ENTRY.
Our principal competitors in professional services include, among others,
Accenture Ltd., Computer Sciences Corporation, Electronic Data Systems
Corporation, IBM Global Services, Analysts International Corporation, Keane,
Inc., Infosys Technologies, Sun Microsystems, Inc., GXS Strategies, Sterling
Commerce Corp. and numerous other regional and local firms in the markets in
which we have professional services offices. Several of these competitors have
substantially greater financial, marketing, recruiting and training resources
than we do. The principal competitive factors affecting the market for our
professional services include responsiveness to customer needs, breadth and
depth of technical skills offered, availability and productivity of personnel,
ability to demonstrate achievement of results and price. There is no assurance
that we will be able to compete successfully in the future.
WE MUST DEVELOP OR ACQUIRE PRODUCT ENHANCEMENTS AND NEW PRODUCTS TO SUCCEED.
Our success depends in part on our ability to develop product enhancements and
new products which keep pace with continuing changes in technology and customer
preferences. The majority of our products have been developed from acquired
technology and products. We believe that our future growth lies, in part, in
continuing to identify, acquire and then develop promising technologies and
products. While we are continually searching for acquisition opportunities,
there can be no assurance that we will continue to be successful in identifying,
acquiring and developing products and technology. If any potential acquisition
opportunities are identified, there can be no assurance that we will consummate
and successfully integrate any such acquisitions and there can be no assurance
as to the timing or effect on our business of any such acquisitions. Our failure
to develop technological improvements or to adapt our products to technological
change may, over time, have a material adverse effect on our business.
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.
As part of our overall strategy, we have acquired or invested in, and plan to
continue to acquire or invest in, complementary companies, products, and
technologies and may enter into joint ventures and strategic alliances with
other companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical, sales and managerial personnel; the inability of management to
maximize our financial and strategic position through the successful integration
of acquired businesses; the risk that revenues from acquired
16
companies, products and technologies do not meet our expectations; and decreases
in reported earnings as a result of charges for in-process research and
development and amortization of acquired intangible assets.
For us to maximize the return on some of our investments in acquired companies,
the products of these entities must be integrated with our existing products.
These integrations can be difficult and unpredictable, especially given the
complexity of software and that acquired technology is typically developed
independently and designed with no regard to integration. The difficulties are
compounded when the products involved are well-established because compatibility
with the existing base of installed products must be preserved. Successful
integration also requires coordination of different development and engineering
teams. This too can be difficult and unpredictable because of possible cultural
conflicts and different opinions on technical decisions and product roadmaps.
There can be no assurance that we will be successful in our product integration
efforts or that we will realize the expected benefits.
With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued development,
support, sales and marketing efforts pertaining to the acquired products. We
have implemented retention programs to keep many of the key technical and sales
employees of acquired companies; nonetheless, we have lost some key employees
and may lose others in the future.
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.
Approximately one-third of our total revenues are derived from foreign
operations and we expect that foreign operations will continue to generate a
significant percentage of our total revenues. Products are priced in the
currency of the country in which they are sold. Changes in the exchange rates of
foreign currencies or exchange controls may adversely affect our results of
operations. The international business is also subject to other risks, including
the need to comply with foreign and U.S. laws and the greater difficulty of
managing business overseas. In addition, our foreign operations are affected by
general economic conditions in the international markets in which we do
business. A worsening of economic conditions in these markets could cause
customers to delay or forego decisions to license new products or to reduce
their requirements for professional services.
A FURTHER DECLINE IN THE U.S. DOMESTIC AUTOMOTIVE MANUFACTURING BUSINESS COULD
ADVERSELY AFFECT OUR PROFESSIONAL SERVICES BUSINESS.
Approximately 33% of our worldwide professional services revenue is generated
from customers in the automotive industry, with the vast majority of that
related to U.S. domestic automotive manufacturers. Many participants in the
domestic automotive industry are engaged in restructuring and other efforts to
cut costs, including IT expenditures. Further negative developments in this
industry could reduce the demand for our services from these customers, which
could have a significant impact on our professional services revenue and our
margins.
CURRENT LAWS MAY NOT ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
We regard our software as proprietary and attempt to protect it with copyrights,
trademarks, trade secret laws and/or restrictions on disclosure, copying and
transferring title. Despite these precautions, it may be possible for
unauthorized third parties to copy certain portions of our products or to obtain
and use information that we regard as proprietary. We have many patents and many
patent applications pending. However, existing patent and copyright laws afford
only limited practical protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States. Any claims against those who infringe on our proprietary
rights can be time consuming and expensive to prosecute, and there can be no
assurance that we would be successful in protecting our rights despite
significant expenditures.
17
THE LOSS OF CERTAIN KEY EMPLOYEES AND TECHNICAL PERSONNEL OR OUR INABILITY TO
HIRE ADDITIONAL QUALIFIED PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Our success depends in part upon the continued service of our key senior
management and technical personnel. Such personnel are employed at-will and may
leave Compuware at any time. Our success also depends on our continuing ability
to attract and retain highly qualified technical, managerial and sales
personnel. The market for professional services and software products personnel
has historically been, and we expect that it will continue to be, intensely
competitive. There can be no assurance that we will continue to be successful in
attracting or retaining such personnel. The loss of certain key employees or our
inability to attract and retain other qualified employees could have a material
adverse effect on our business.
OUR QUARTERLY FINANCIAL RESULTS VARY AND MAY BE ADVERSELY AFFECTED BY A NUMBER
OF UNPREDICTABLE FACTORS.
We typically do not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked in the quarter. A
significant amount of our transactions are completed during the final weeks and
days of the quarter, and therefore we generally do not know whether revenues or
earnings will have met expectations until shortly after the end of the quarter.
Our customers license our products under varying structures some of which
require revenues to be deferred or recognized ratably over time. Changes in the
mix of customer agreements could affect revenue in a quarter. Any significant
shortfall in revenues or earnings or lowered expectations could cause our stock
price to decline.
Investors should not rely on the results of prior periods or on historical
seasonality in license revenue as an indication of our future performance. Our
operating expense levels are relatively fixed and are based, in part, on our
expectations of future revenue. If we have a shortfall in revenue in any given
quarter, we will not be able to reduce our operating expenses for that quarter
proportionately in response. Therefore, net income may be disproportionately
affected by a fluctuation in revenue.
MAINTENANCE REVENUE COULD DECLINE.
Maintenance revenues have increased in recent years as a result of acquisitions
and the continuing growth in the base of installed products and the processing
capacity on which they run. Maintenance fees increase as the processing capacity
on which the products are installed increases; consequently, we receive higher
absolute maintenance fees with new license and maintenance agreements and as
existing customers install our products on additional processing capacity.
Declines in our license bookings or increased customer cancellations could lead
to declines in our maintenance revenues.
UNANTICIPATED CHANGES IN OUR OPERATING RESULTS OR EFFECTIVE TAX RATES, OR
EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES, COULD AFFECT OUR PROFITABILITY.
We estimate income taxes in each of the jurisdictions in which we operate, net
deferred tax assets based on expected future taxable benefits in such
jurisdictions and our valuation allowance for deferred tax assets. As a result,
management must determine the appropriate allocation of income in accordance
with local law for each of these jurisdictions. We must also assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Changes in estimates of
projected future operating results or in assumptions regarding our ability to
generate future taxable income could result in significant changes to our tax
expense and valuation allowance and, therefore, net income.
In addition, we recognize contingent tax liabilities through tax expense for
estimated exposures related to our current tax positions. We evaluate the need
for contingent tax liabilities on a quarterly basis and any change in the amount
will be recorded in our results of operations, as appropriate. It could take
several years to resolve certain of these contingencies.
We are required to file corporate income tax returns in the United States and in
multiple foreign jurisdictions that are subject to United States, state and
foreign tax laws. The United States, state and
18
foreign tax liabilities are determined, in part, by the amount of operating
profit generated in these different taxing jurisdictions. We are also subject to
routine corporate income tax audits in multiple jurisdictions. Our provision for
income taxes includes amounts intended to satisfy income tax assessments that
may result from the examination of our corporate tax returns that have been
filed in these jurisdictions. The amounts ultimately paid upon resolution of
these examinations could be materially different from the amounts included in
the provision for income taxes and result in additional tax expense.
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.
Natural disasters, acts of war, terrorist attacks and the escalation of military
activity in response to such attacks or otherwise may have negative and
significant effects, such as imposition of increased security measures, changes
in applicable laws, market disruptions and job losses. Such events may have an
adverse effect on the economy in general. Moreover, the potential for future
terrorist attacks and the national and international responses to such threats
could affect the business in ways that cannot be predicted. The effect of any of
these events or threats could have an adverse affect on our business, financial
condition and results of operations.
OUR ARTICLES OF INCORPORATION, BYLAWS AND RIGHTS AGREEMENT AS WELL AS CERTAIN
PROVISIONS OF MICHIGAN LAW MAY HAVE AN ANTI-TAKEOVER EFFECT.
Provisions of our articles of incorporation and bylaws, Michigan law and the
Rights Agreement, dated October 25, 2000, as amended, between Compuware
Corporation and Equiserve Trust Company, N.A. (now known as Computershare Trust
Company N.A.), as rights agent, could make it more difficult for a third party
to acquire Compuware, even if doing so would be perceived to be beneficial to
shareholders. The combination of these provisions inhibits a non-negotiated
acquisition, merger or other business combination involving Compuware, which, in
turn, could adversely affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
19
ITEM 2. PROPERTIES
Our executive offices, primary research and development lab, principal marketing
department, primary professional services office, customer service and support
teams are located in our corporate headquarters building in Detroit, Michigan.
We own the facility, which is approximately 1.1 million square feet, including
approximately 55,000 square feet available for lease to third parties for retail
and related amenities. In addition, we lease approximately 217,000 square feet
of land on which the facility resides.
We lease approximately 96 professional services and sales offices in 32
countries, including 8 remote product research and development facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. The Company does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated financial position, results of
operations and cash flows. See Note 14 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Global Select Market ("NASDAQ") under
the symbol CPWR. As of May 18, 2007, there were approximately 4,885 shareholders
of record of our common stock. We have not paid any cash dividends on our common
stock since fiscal 1986 and have no current intention to pay dividends. The
following table sets forth the range of high and low sale prices for our common
stock for the periods indicated, all as reported by NASDAQ.
HIGH LOW
----- -----
FISCAL YEAR ENDED MARCH 31, 2007
Fourth quarter $9.75 $8.28
Third quarter 8.75 7.30
Second quarter 7.95 6.02
First quarter 8.05 6.56
HIGH LOW
----- -----
FISCAL YEAR ENDED MARCH 31, 2006
Fourth quarter $9.55 $7.60
Third quarter 9.99 6.91
Second quarter 9.98 7.08
First quarter 7.51 5.71
The Company has several stock option plans pursuant to which it grants share
options to employees, officers, and directors, as well as an Employee Stock
Ownership Plan ("ESOP"), an Employee Stock Purchase Plan ("ESPP"), and a
Replacement Stock Option Award Program. For more information about our equity
compensation plans, see Note 15 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report.
The following table sets forth certain information with respect to our equity
compensation plans at March 31, 2007 (shares in thousands):
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
-------------------- ------------------- --------------------
Equity compensation plans
approved by security holders 20,654 $16.22 8,750
Equity compensation plans not
approved by security holders 23,056 $ 8.65 25,351
21
ISSUANCE OF UNREGISTERED SHARES
As disclosed in the Company's annual meeting proxy statement, Peter Karmanos,
Jr., the Company's Chief Executive Officer, purchases shares from the Company on
the same terms and subject to the same conditions and limitations as provided in
the Company's ESPP with respect to all other employees of the Company, although
he does not participate in the ESPP directly and is not entitled to the
favorable tax treatment afforded to participants in the ESPP due to his
beneficial ownership of more than 5% of the Company's outstanding shares. The
description of the ESPP included in Note 15 of the Notes to Consolidated
Financial Statements, included in Item 8 of this report, is incorporated herein
by reference. The Company has treated for administrative purposes the shares
purchased by Mr. Karmanos as purchases pursuant to the ESPP. However, we have
determined based on advice from counsel that since he is not allowed to
participate in the ESPP, the issuance of shares may be considered unregistered.
On February 28, 2007, 2,705 shares were issued to Mr. Karmanos for $8.78 per
share under this arrangement. Mr. Karmanos continues to hold all shares
purchased under this arrangement. The sales of these securities to Mr. Karmanos
were exempt from the registration requirements of the Securities Act of 1933 in
reliance on Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering. There were no underwriters involved in connection
with the sale of the above securities.
22
COMMON SHARE REPURCHASES
The following table sets forth, the repurchases of common stock for the quarter
ended March 31, 2007:
Total Approximate dollar value or
number of maximum number of shares
shares that may yet be purchased
purchased under the plans or programs
Average as part of ---------------------------
Total number price publicly Discretionary Rule 10b5-1
of shares paid per announced Plan (a) Plan (b)
Period purchased share plans ($) (shares)
------------------------------------- ------------ -------- ---------- ------------- -----------
For the month ended January 31, 2007 6,239,000 $8.74 6,050,000 $233,994,000 26,251,000
For the month ended February 28, 2007 12,849,000 9.24 11,799,000 168,714,000 21,501,000
For the month ended March 31, 2007 12,623,000 9.24 12,623,000 103,510,000 16,003,000
---------- ----------
For the quarter ended March 31, 2007 31,711,000 $9.14 30,472,000 $103,510,000 16,003,000
========== ==========
(a) In August 2006 and December 2006, we announced that the Board of Directors
authorized the discretionary repurchase of $300.0 million and $200.0
million, respectively, of the Company's common stock. Our purchases of
stock may occur on the open market or in negotiated or block transactions
based upon market and business conditions. Unless terminated earlier by
resolution of our Board of Directors, the discretionary share repurchase
plans will expire when we have repurchased all shares authorized for
repurchase thereunder.
(b) In December 2006, the Board of Directors adopted a plan under Rule 10b5-1
of the Securities Exchange Act of 1934 to repurchase 34.0 million shares of
our common stock. A broker selected by us has the authority under the terms
and limitations specified in the plan to repurchase shares on our behalf in
accordance with the terms of the plan. In May 2007, we announced the plan
was modified to include an additional 16.0 million shares and we expect
these purchases to continue through September 30, 2007, although the
Company may terminate the plan at any time.
"Total number of shares purchased" includes the surrender of 1.2 million shares
to the Company valued at $8.98 per share to pay the exercise price and related
tax withholding obligations associated with option exercises during the quarter.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
The following line graph compares the yearly percentage change in the cumulative
total shareholder return on our common shares with the cumulative total return
of the cumulative total shareholder return of the S&P 500 Index, the Total
Return Index for The NASDAQ U.S. Index and the cumulative total return of the
Total Return Index for NASDAQ Computer and Data Processing Services Stocks for
the period from April 1, 2002 through March 31, 2007. The graph includes a
comparison to the S&P 500 index in accordance with SEC rules, as the Company's
stock is part of such index. The graph assumes the investment of $100 in our
common shares, the S&P 500 index and each of the two NASDAQ indexes on March 31,
2002 and the reinvestment of all dividends.
23
The comparisons in the graph are required by the SEC. You should be careful
about drawing any conclusions from the data contained in the graph, because past
results do not necessarily indicate future performance. The information
contained in this graph shall not be deemed to be "soliciting material" or
"filed" with the SEC or subject to the liabilities of Section 18 of the Exchange
Act, except to the extent that we specifically incorporate it by reference into
a document filed under the Securities Act or the Exchange Act.
(PERFORMANCE GRAPH)
TOTAL RETURN TO SHAREHOLDERS
(Includes reinvestment of dividends)
Indexed Returns
Base Years Ending
Period March 31,
March 31, -----------------------------------------
Company / Index 2002 2003 2004 2005 2006 2007
--------------- --------- ----- ------ ------ ------ ------
COMPUWARE CORP 100 26.26 57.40 55.77 60.65 73.51
S&P 500 INDEX 100 75.24 101.66 108.47 121.19 135.52
NASDAQ U.S. INDEX 100 73.40 108.33 109.06 128.61 133.38
NASDAQ COMPUTER & DATA PROCESSING INDEX 100 72.80 91.99 97.85 115.17 126.93
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations and balance sheet data presented below are
derived from our audited consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements and notes thereto
and Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 283,412 $ 296,650 $ 305,189 $ 296,627 $ 295,720
Maintenance fees 457,594 433,596 425,310 408,191 412,176
Professional services fees 471,996 475,115 501,340 559,829 667,444
---------- ---------- ---------- ---------- ----------
Total revenues 1,213,002 1,205,361 1,231,839 1,264,647 1,375,340
---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of software license fees 28,581 23,262 27,293 31,579 30,740
Cost of maintenance fees (1) 41,533 41,687 42,128 41,874 40,180
Cost of professional services 420,729 417,485 444,996 513,621 611,644
Technology development and support 114,071 96,858 111,258 121,781 103,109
Sales and marketing 281,730 288,162 319,940 310,643 264,012
Administrative and general 193,578 190,538 199,628 207,613 188,814
---------- ---------- ---------- ---------- ----------
Total operating expenses 1,080,222 1,057,992 1,145,243 1,227,111 1,238,499
---------- ---------- ---------- ---------- ----------
Income from operations 132,780 147,369 86,596 37,536 136,841
Other income, net 60,277 44,091 19,629 18,481 19,374
---------- ---------- ---------- ---------- ----------
Income before income taxes 193,057 191,460 106,225 56,017 156,215
Income tax provision 34,965 48,500 29,743 6,185 53,113
---------- ---------- ---------- ---------- ----------
Net income $ 158,092 $ 142,960 $ 76,482 $ 49,832 $ 103,102
========== ========== ========== ========== ==========
Basic earnings per share (2) $ 0.45 $ 0.37 $ 0.20 $ 0.13 $ 0.27
Diluted earnings per share (2) 0.45 0.37 0.20 0.13 0.27
Shares used in computing net income per share:
Basic earnings computation 350,213 385,147 386,701 382,630 377,028
Diluted earnings computation 350,967 387,569 388,501 384,608 378,440
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 391,823 $ 899,773 $ 780,223 $ 616,628 $ 541,153
Total assets 2,029,412 2,510,968 2,478,218 2,262,709 2,162,798
Long term debt -- -- -- -- --
Total shareholders' equity (3) 1,132,148 1,579,499 1,516,155 1,413,591 1,331,691
(1) The Company presented cost of maintenance fees as a separate line in the
consolidated statements of operations during fiscal 2007. As a result, the
prior year balances have been reclassified to conform to the fiscal 2007
presentation. This reclassification does not affect net income.
(2) See Notes 1 and 11 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report, for the basis of computing earnings per
share.
(3) No dividends were paid or declared during the periods presented.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws. When we use words such as "may," might," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue", "predict",
"forecast", "projected", "intend" or similar expressions, or make statements
regarding our future plans, objectives or expectations, we are making
forward-looking statements. Numerous important factors, risks and uncertainties
affect our operating results, including, without limitation, those discussed in
Item 1A. Risk Factors and elsewhere in this report, 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. 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.
OVERVIEW
In this section, we discuss our results of operations on a segment basis for
each of our financial reporting segments. We operate in two business segments in
the technology industry: products and professional services. We evaluate segment
performance based primarily on segment contribution before corporate expenses.
References to years are to fiscal years ended March 31. This discussion and
analysis should be read in conjunction with the audited consolidated financial
statements and notes included in Item 8 of this report.
We deliver value to businesses worldwide by providing software products and
professional services that improve the performance of IT organizations.
Originally founded in 1973 as a professional services company, in the late
1970's we began to offer mainframe productivity tools for fault diagnosis, file
and data management, and application debugging.
In the 1990's, IT moved toward distributed and web-based platforms. Our
solutions portfolio grew in response, and we now market a comprehensive
portfolio of IT solutions across the full range of enterprise computing
platforms that help:
- Develop and deliver high quality, high performance enterprise business
applications in a timely and cost-effective manner.
- Measure, manage and communicate application service in business terms,
and maintain consistent, high levels of service delivery.
- Provide executive visibility, decision support and process automation
across the entire IT organization to enable all available resources to
be harnessed in alignment with business priorities.
Additionally, to be competitive in today's global economy, enterprises must
securely share applications, information and business processes. We address this
market need through our Covisint offerings, which help manage the supply chain
through the integration of vital business information and processes between
partners, customers and suppliers.
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines, expanding our product and service offerings through key
acquisitions, developing strategic partnerships in order to provide clients with
our product solutions and managing our costs.
26
The following occurred since the beginning of fiscal 2007:
- Acquired Proxima Technology Group, Inc. ("Proxima"), a privately held
provider of the Centauri product that complements our Vantage product
line by giving customers the ability to manage service delivery from a
business perspective.
- Acquired SteelTrace Limited ("SteelTrace"), a privately held provider
of requirements management products.
- Sold our 49% interest in Foresee Results, Inc. for $11.3 million in
cash, resulting in an $11.3 million gain on sale.
- Repurchased approximately 82.3 million shares of our common stock
during fiscal 2007 at an average price of $8.31 per share under the
Discretionary Plans and Rule 10b5-1 Plan.
- Released 21 mainframe and 41 distributed product enhancements, during
fiscal 2007, designed to increase the productivity of the IT
departments of our customers.
- Experienced a decrease in product contribution margin of 37.1% in
fiscal 2007 from 38.4% in fiscal 2006 due to the increase in product
expenses, primarily technology development and support costs,
exceeding the increase in product revenue.
- Achieved a 12.7% increase in distributed product revenue in fiscal
2007 compared to fiscal 2006. The increase was a reflection of our
continued focus on promoting our distributed products and an expanding
maintenance base for those products.
- Experienced a 3.6% decrease in mainframe product revenue in fiscal
2007 compared to fiscal 2006 primarily related to a decline in license
revenue.
- Experienced a decrease in professional services margin to 10.9% in
fiscal 2007 from 12.1% in fiscal 2006 primarily due to an increase in
subcontractor costs within our European operations related to projects
that require specialized skill sets.
- Entered into license and maintenance agreements under the IBM
settlement for approximately $19.4 million. The remaining balance of
$10.6 million from the 2007 commitment of $30.0 million was reported
as "settlement" in the consolidated statements of operations.
- Experienced a $26.6 million reduction in our income tax provision
relating to settlements of prior year tax matters.
Our ability to achieve our strategies and objectives is subject to a number of
factors some of which we may not be able to control. See "Forward-Looking
Statements".
27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of
Total Revenues Period-to-Period
--------------------- Change
Fiscal Year Ended ----------------
March 31, 2006 2005
--------------------- to to
2007 2006 2005 2007 2006
----- ----- ----- ----- ------
REVENUE:
Software license fees 23.4% 24.6% 24.8% (4.5)% (2.8)%
Maintenance fees 37.7 36.0 34.5 5.5 1.9
Professional services fees 38.9 39.4 40.7 (0.7) (5.2)
----- ----- -----
Total revenues 100.0 100.0 100.0 0.6 (2.1)
----- ----- -----
OPERATING EXPENSES:
Cost of software license fees 2.4 1.9 2.2 22.9 (14.8)
Cost of maintenance fees 3.4 3.5 3.4 (0.4) (1.0)
Cost of professional services 34.7 34.7 36.1 0.8 (6.2)
Technology development and support 9.4 8.0 9.1 17.8 (12.9)
Sales and marketing 23.2 23.9 26.0 (2.2) (9.9)
Administrative and general 16.0 15.8 16.2 1.6 (4.6)
----- ----- -----
Total operating expenses 89.1 87.8 93.0 2.1 (7.6)
----- ----- -----
Income from operations 10.9 12.2 7.0 (9.9) 70.2
Other income, net 5.0 3.7 1.6 36.7 124.6
----- ----- -----
Income before income taxes 15.9 15.9 8.6 0.8 80.2
Income tax provision 2.9 4.0 2.4 (27.9) 63.1
----- ----- -----
Net income 13.0% 11.9% 6.2% 10.6 86.9
===== ===== =====
SOFTWARE PRODUCTS
REVENUE
Our products are designed to enhance the effectiveness of key disciplines
throughout the IT organization from application delivery to service management
and IT portfolio management supporting all major enterprise computing platforms.
Product revenue which consists of software license fees and maintenance fees,
comprised 61.1%, 60.6% and 59.3% of total revenue during 2007, 2006 and 2005,
respectively.
Distributed software product revenue increased $28.8 million or 12.7% during
2007 to $256.2 million from $227.4 million in 2006 and increased $23.5 million
or 11.6% during 2006 from $203.8 million in 2005. The increases during 2007 and
2006 were primarily due to license and maintenance revenue growth related to our
Vantage product line resulting from increased customer demand for
performance-related software, primarily agentless monitoring, which was added in
May 2005 when we acquired Adlex, Inc., and to a lesser extent license and
maintenance revenue growth in our Changepoint product line.
Mainframe software product revenue decreased $18.1 million or 3.6% during 2007
to $484.8 million from $502.9 million in 2006 and decreased $23.8 million or
4.5% during 2006 from $526.7 million in 2005. The decrease during 2007 was
primarily a result of lower license revenue due to decreased demand for software
on additional computing capacity in our European operations partially offset by
continued growth in maintenance revenue due to strong renewal rates on
maintenance contracts. The
28
decrease during 2006 compared to 2005 was primarily due to a decrease in license
revenue related to our Xpediter and File-Aid product lines.
License fees decreased $13.3 million or 4.5% during 2007 to $283.4 million from
$296.7 million in 2006 and decreased $8.5 million or 2.8% during 2006 from
$305.2 million in 2005. Fluctuations in foreign currencies positively impacted
license fees by $6.2 million in 2007 compared to 2006. The remaining decrease
during 2007 was primarily due to a reduction of $28.8 million in mainframe
license fees, partially offset by an increase in distributed license fees
related to our Vantage product line. Fluctuations in foreign currencies
negatively impacted license fees by $3.1 million in 2006 compared to 2005. The
remaining decrease in 2006 was primarily due to weaker demand for our Xpediter
and File-Aid product lines partially offset by growth in our Vantage product
line.
Maintenance fees increased $24.0 million or 5.5% to $457.6 million during 2007
from $433.6 million in 2006 and increased $8.3 million or 1.9% during 2006 from
$425.3 million in 2005. Fluctuations in foreign currencies positively impacted
maintenance fees by $9.6 million in 2007 compared to 2006. The remaining
increase during 2007 was primarily due to strong growth in distributed
maintenance fees related to our Vantage product line and growth in our mainframe
maintenance revenue. The increase in maintenance fees during 2006 compared to
2005 was primarily due to growth in our Vantage product line, partially offset
by a $4.4 million decline in maintenance fees due to the negative impact of
foreign currency changes.
We license software to customers using two types of software licenses, perpetual
and term. Generally, perpetual software licenses allow customers a perpetual
right to run our software on hardware up to a licensed aggregate MIPS (Millions
of Instructions Per Second) capacity or to run our distributed software for a
specified number of users or servers. Term licenses allow customers a right to
run our software for a limited period of time on hardware up to a licensed
aggregate MIPS capacity or for a specific number of users or servers. Also, our
customers purchase maintenance services that provide technical support and
advice, including problem resolution services and assistance in product
installation, error corrections and any product enhancements released during the
maintenance period. Furthermore, based on customers' business needs, we enter
into agreements with our customers that allow them to license additional
software and purchase multiple years of maintenance in a single transaction
(multi-year transactions). In support of these multi-year transactions, we allow
extended payment terms to qualifying customers.
To recognize revenue for these multi-year transactions the contract price is
allocated between maintenance revenue and license revenue. License revenue
associated with perpetual license agreements is recognized when the customer
commits unconditionally to the transaction, the software products and quantities
are fixed, the software has been delivered to the customer and collection is
reasonably probable. License revenue associated with term transactions or with
certain transactions that include an option to exchange or select products in
the future is deferred and recognized over the term of the agreement or when all
revenue recognition criteria have been met, depending on the terms of the
agreement. When the license portion is paid over a number of years, the license
portion of the payment stream is discounted to its net present value. Interest
income is recognized over the payment term. The maintenance revenue associated
with all sales is deferred and is recognized over the applicable maintenance
period.
Product revenue by geographic location is presented in the table below (in
thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
United States $403,820 $391,421 $399,690
Europe and Africa 234,079 245,553 240,233
Other international operations 103,107 93,272 90,576
-------- -------- --------
Total product revenue $741,006 $730,246 $730,499
======== ======== ========
29
PRODUCT CONTRIBUTION AND EXPENSES
Financial information for the product segment is as follows (in thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Revenue $741,006 $730,246 $730,499
Expenses 465,915 449,969 500,619
-------- -------- --------
Product contribution $275,091 $280,277 $229,880
======== ======== ========
The product segment generated contribution margins of 37.1%, 38.4% and 31.5%
during 2007, 2006 and 2005, respectively. The decrease in the contribution
margin from 2007 compared to 2006 was due to the increase in product expenses,
primarily technology development and support costs, exceeding the increase in
product revenue. The improvement in the contribution margin from 2006 compared
to 2005 was primarily due to decreases in sales and marketing expenses and
technology development and support costs. These factors are discussed below.
Product expenses include cost of software license fees, cost of maintenance
fees, technology development and support costs, and sales and marketing
expenses.
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 increased $5.3 million or 22.9%, during 2007 to $28.6 million from
$23.3 million in 2006 and decreased $4.0 million or 14.8% during 2006 from $27.3
million in 2005. The increase in costs for 2007 was primarily due to an increase
in amortization of capitalized software and an increase in hardware costs
resulting from increased demand in our Vantage product line. The decrease in
costs for 2006 was primarily due to a reduction in amortization expense related
to capitalized software acquired as a result of the fiscal 2000 Programart
acquisition that became fully amortized in September 2004. As a percentage of
software license fees, cost of software license fees were 10.1%, 7.8% and 8.9%
in 2007, 2006 and 2005, respectively.
Cost of maintenance fees consists of the direct costs allocated to maintenance
and product support such as helpdesk and technical support. Customers who
subscribe to maintenance are also eligible to receive the benefit of new
releases as well as support. New releases include significant research and
development costs and are available to be licensed to new customers as well as
maintenance customers. Cost of maintenance fees decreased $200,000 or 0.4%,
during 2007 to $41.5 million from $41.7 million in 2006 and decreased $400,000
or 1.0% during 2006 from $42.1 million in 2005. As a percentage of maintenance
fees, cost of maintenance fees were 9.1%, 9.6% and 9.9% in 2007, 2006 and 2005,
respectively, with the percentage decline due to the growth in maintenance
revenue.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Also included here are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support all technology initiatives. As a
percentage of product revenue, costs of technology development and support were
15.4%, 13.3% and 15.2% in 2007, 2006 and 2005, respectively.
30
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 for the years
ended March 31, 2007, 2006 and 2005 were as follows (in thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Technology development and support costs incurred $135,455 $117,124 $130,575
Capitalized technology development and support costs (21,384) (20,266) (19,317)
-------- -------- --------
Technology development and support costs reported $114,071 $ 96,858 $111,258
======== ======== ========
Before the capitalization of internally developed software products, total
technology development and support expenditures increased $18.4 million or
15.7%, to $135.5 million during 2007 from $117.1 million in 2006 and decreased
$13.5 million or 10.3% during 2006 from $130.6 million in 2005. The increase in
costs for 2007 was primarily due to higher compensation and benefit costs
resulting from increased employee headcount, primarily programming personnel, in
order to meet new product initiatives. The decrease in costs for 2006 was
primarily attributable to lower compensation and benefit costs due to reductions
in employee headcount in this area.
Sales and marketing costs consist primarily of personnel related costs
associated with product sales and sales support and marketing for all our
offerings. Sales and marketing costs decreased $6.5 million or 2.2%, during 2007
to $281.7 million from $288.2 million in 2006 and decreased $31.7 million or
9.9% during 2006 from $319.9 million in 2005. As a percentage of product
revenue, sales and marketing costs were 38.0%, 39.5% and 43.8% in 2007, 2006 and
2005, respectively. The decrease in costs for 2007 was primarily attributable to
lower bonus and commission costs in 2007 due to the decline in mainframe license
revenue, partially offset by an increase in stock option expense related to the
adoption of SFAS 123(R) effective April 1, 2006. The decrease in costs for 2006
was primarily attributable to lower compensation, benefit, bonus and commission
costs due to a first quarter 2006 sales realignment that reduced headcount.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of IT services to help businesses make the most of their
IT assets. Some of these services include outsourcing and co-sourcing,
application services and management, product solutions, project management,
enterprise resource planning and customer relationship management services.
Revenue from professional services decreased $3.1 million or 0.7% during 2007 to
$472.0 million from $475.1 million in 2006 and decreased $26.2 million or 5.2%
during 2006 from $501.3 million in 2005. The decrease in revenue for 2007
primarily occurred in the United States due to cost cutting initiatives and
pricing pressures on staff supplementation services for certain customers within
the automotive sector. This reduction was partially offset by growth in
application services revenue. The decrease in revenue for 2006 was primarily due
to reduced spending from local and state government agencies related to budget
reductions on IT programs and to reduced spending by our customers in the
automotive sector primarily related to cost cutting initiatives adopted by
domestic automotive manufacturers and suppliers.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
United States $396,765 $405,638 $436,730
Europe and Africa 67,477 63,177 59,383
Other international operations 7,754 6,300 5,227
-------- -------- --------
Total professional services revenue $471,996 $475,115 $501,340
======== ======== ========
31
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for the professional services segment is as follows (in
thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Revenue $471,996 $475,115 $501,340
Expenses 420,729 417,485 444,996
-------- -------- --------
Professional services contribution $ 51,267 $ 57,630 $ 56,344
======== ======== ========
During 2007, the professional services segment generated a contribution margin
of 10.9%, compared to 12.1% and 11.2% during 2006 and 2005, respectively. The
decrease in contribution margin for 2007 compared to 2006 was primarily due to
an increase in subcontractor costs within our European operations related to
projects that require specialized skill sets. The increase in contribution
margin for 2006 compared to 2005 was primarily due to improved utilization of
professional services personnel and, to a lesser extent, a concerted effort to
reduce low margin subcontractor projects.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services increased $3.2 million or 0.8% during
2007 to $420.7 million from $417.5 million in 2006 and decreased $27.5 million
or 6.2% during 2006 from $445.0 million in 2005. The increase in costs for 2007
was primarily attributable to an increase in subcontractor expense as
specialized skill sets were needed for certain projects within our application
services and European operations. The decrease in costs for 2006 compared to
2005 was primarily attributable to lower compensation, benefit, bonus and travel
costs of approximately $18.6 million due to a reduction in employee headcount in
this area and reductions in subcontractor expense of approximately $9.2 million
as a result of our ongoing efforts to reduce low margin subcontractor projects
within our North American operations.
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, utilities, etc., associated with worldwide sales,
professional services and software development offices. Administrative and
general expenses increased $3.1 million or 1.6% during 2007 to $193.6 million
from $190.5 million in 2006 and decreased $9.1 million or 4.6% during 2006 from
$199.6 million in 2005.
The increase in cost for 2007 primarily related to a $7.5 million increase in
donations to charities, a $6.9 million increase in foreign currency losses
primarily related to inter-company balances with our wholly owned subsidiaries
and a $3.0 million increase in stock option expense related to the adoption of
SFAS 123(R) effective April 1, 2006. The increases in these costs were partially
offset by the effect of the following charges that occurred in 2006: (1) an
impairment charge of $3.9 million recorded in the first quarter of 2006 related
to a purchased software application that management no longer intended to use;
(2) impairment charges of $6.7 million related to our former headquarters
building in Farmington Hills, Michigan that were recorded during 2006; and (3) a
litigation judgment charge of $4.2 million recorded during 2006.
The decrease in cost for 2006 was primarily due to a $16.9 million decline in
legal expenses associated with the IBM litigation partially offset by the items
discussed above.
32
Other income, net ("other income") consists primarily of interest income
realized from investments, interest earned on deferred customer receivables,
gain on sale of investment in ForeSee Results, Inc. ("ForeSee"), income
associated with the IBM settlement agreement and income/losses generated from
our investments in partially owned companies.
Other income increased $16.2 million or 36.7% during 2007 to $60.3 million from
$44.1 million in 2006 and increased $24.5 million or 124.6% during 2006 from
$19.6 million in 2005. The increase in income for 2007 was a result of the
following:
- Increase of $11.3 million recorded for the gain on sale of our common
shares in ForeSee (see Note 5 to the Consolidated Financial Statements
for more information);
- Increase of $5.2 million in interest income primarily resulting from
higher interest rates earned on investments, partially offset by a
lower average balance; and
- Increase of $1.1 million in income generated from our investments in
partially owned companies.
These increases were partially offset by a $1.5 million decrease in interest
earned on deferred customer receivables resulting from a decline in our
non-current accounts receivable balance.
The increase in other income for 2006 was primarily attributable to a $14.9
million increase in investment interest income, of which $11.7 million was due
to higher interest rates earned on investments and $3.2 million was due to
having a higher average investment balance throughout 2006 compared to 2005. In
addition, we recorded $10.6 million to other income related to the IBM
settlement, representing the portion of the IBM settlement payment for the year
that did not relate to the sale of products or services (see Note 14 to the
Consolidated Financial Statements for more information).
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 $35.0 million, $48.5 million and $29.7 million, respectively,
in 2007, 2006 and 2005 representing an effective tax rate of 18%, 25% and 28%.
During 2007, we reduced our income tax provision by $26.6 million for certain
items related to settlements of prior year tax matters. Substantially all of the
decrease concerns taxes related to foreign operations. Approximately $18.9
million of the reduction was driven by agreement on issues that affected a
special deduction and credits afforded to United States based taxpayers that
generate income from sales to foreign customers. In addition, a reduction of
$3.3 million was the result of an agreement regarding the proper character and
timing of certain deductions. The remainder of the reduction is due primarily to
interest.
During 2006, we reduced our income tax provision by $11.1 million for certain
items related to settlements of prior year tax matters. We concluded two
separate Competent Authority proceedings resulting in a reduction to our income
tax provision of approximately $5.8 million. The remainder of the reduction was
due primarily to taxes related to domestic operations, most notably the U.S.
Research and Experimentation tax credit. We also decreased our valuation
allowance by $12.4 million during the quarter ended March 31, 2006 due almost
entirely to U.S. foreign tax credit carryforwards that during the fourth quarter
of fiscal 2006 became more likely than not to be realized.
For additional information regarding the difference between our effective tax
rate and the statutory rate for fiscal 2007, 2006 and 2005, see Note 12 of the
Consolidated Financial Statements included in Item 8 of this report.
33
RESTRUCTURING CHARGE
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability by better aligning cost structures with
current market conditions. See Note 7 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report, for changes in the restructuring
accrual for 2005, 2006 and 2007.
The Company is currently examining cost structures and implementing plans to
reduce expenses, including consolidation of facilities and workforce reductions.
Therefore, the Company may incur additional restructuring charges during fiscal
2008.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1 of the Notes to Consolidated Financial Statements, included in Item 8 of
this report, contains a summary of our significant accounting policies.
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("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 facts and
circumstances existing at March 31, 2007. However, future events rarely develop
exactly as forecast, and the best estimates routinely require adjustment. The
accounting policies discussed below are considered by management to be the most
important to an understanding of our financial statements, because their
application places the most significant demands on management's judgment and
estimates about the effect of matters that are inherently uncertain. We have
discussed the development and selection of the critical accounting policies
described below with the Audit Committee.
Product Revenue Recognition - We recognize product 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. We evaluate
collectibility based on past customer history, external credit ratings and
payment terms within various customer agreements. Future events or inaccuracies
in reported credit data that result in a change to collectibility expectations
could have a negative effect on our operating results.
Based on our interpretation of U.S. GAAP including Statement of Position 97-2
"Software Revenue Recognition" and 98-9 "Modifications of SOP 97-2, "Software
Revenue Recognition," With Respect to Certain Transactions", Securities and
Exchange Commission Staff Accounting Bulletin 104 and Emerging Issues Task Force
Issue 00-21 "Revenue Arrangements with Multiple Deliverables", we believe our
revenue has been properly reported. New interpretations or pronouncements
related to software revenue recognition policies could result in changes to our
method of revenue recognition in the future.
Perpetual license fee revenue is recognized using the residual method, under
which the fair value, based on vendor specific objective evidence ("VSOE") of
all undelivered elements of the agreement (e.g. maintenance and professional
services) is deferred. VSOE is based on rates charged for maintenance and
professional services when sold separately. Based on market conditions, we
periodically change pricing methodologies for license, maintenance and
professional services. Changes in rates charged for stand alone maintenance and
professional services could have an impact on how bundled revenue agreements are
characterized as license, maintenance or professional services and therefore, on
the timing of revenue recognition in the future. Pricing modifications made
during the years covered by this report have not had a significant impact on the
timing or characterization of revenue recognized.
34
We have an increasing need for flexibility in licensing rights and offerings to
our customers. As our contractual arrangements evolve to meet the needs of our
customers, an increasing percentage of our license arrangements must be
recognized over the terms of the arrangement. While this ratable recognition has
no impact on our results over time, it may change the timing of forecasted
revenue and impact quarterly and annual results.
Generally, revenues from license and maintenance transactions that include
installment payment terms are recognized in the same manner as those requiring
current payment. This is because we have an established business practice of
offering installment payment terms to customers and have a history of
successfully enforcing original payment terms without making concessions.
However, because a significant portion of our license fee revenue is earned in
connection with installment sales, changes in future economic conditions or
technological developments could adversely affect our ability to immediately
record license fees for these types of transactions and/or limit our ability to
collect these receivables.
Professional Services Fees - Professional services fees are generally based on
hourly or daily rates. Therefore, revenues from professional services are
recognized in the period the services are performed, provided that collection of
the related receivable is deemed probable. However, for services rendered under
fixed-price contracts, revenue is recognized using the percentage of completion
method. Certain professional services contracts include a project and on-going
support for the project. Revenue associated with these contracts is recognized
over the support period as the customer derives value from the services,
consistent with the proportional performance method. Unforeseen events that
result in additional time or costs being required to complete such projects
could affect the timing of revenue recognition for the balance of the project as
well as services margins going forward, and could have a negative effect on our
results of operations.
Allowance for Doubtful Accounts - The collectibility of accounts receivable is
regularly evaluated and we believe our allowance for doubtful accounts is
appropriate for our accounts receivable balances. In evaluating the allowance,
we consider historical loss experience, including the need to adjust for current
conditions, and the aging of outstanding receivables. Larger accounts are
reviewed on a detail basis, giving consideration to collection experience and
any information on the financial viability of the customer. The allowance is
reviewed and adjusted each quarter based on the best information available at
the time. Unforeseen events which negatively affect the ability of our customers
to meet their payment obligations would negatively impact our ability to collect
outstanding amounts due from customers and may cause a material impact on our
financial position and results of operations due to a change in the assumptions
and judgment on which we base this estimate.
Capitalized Software - In accordance with SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed", the cost of
purchased and internally developed software is capitalized and stated at the
lower of unamortized cost or expected net realizable value. We compute annual
amortization using the straight-line method over the remaining estimated
economic life of the software product which is generally five years. Software is
subject to rapid technological obsolescence and future product revenue estimates
supporting the capitalized software cost can be negatively affected based upon
competitive products and pricing. Such adverse developments could reduce the
estimated net realizable value of our capitalized software and could result in
impairment or a shorter estimated life. Such events would require us to take a
charge in the period in which the event occurred or to increase the amortization
expense in future periods and would have a negative effect on our results of
operations. We review for impairments each balance sheet date.
Impairment of Goodwill - In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets", we are required to assess the impairment of goodwill
annually, or more frequently if events or changes in circumstances indicate that
the carrying value may exceed the fair value. To analyze goodwill, we measure
its fair value using an estimate of the related business' discounted cash flow
and market comparable valuations. The discounted cash flow approach uses
significant assumptions, including projected future cash flows, the discount
rate reflecting the risk inherent in future cash flows, and a terminal growth
rate.
35
The fair value of the reporting unit including the goodwill is compared to the
carrying value of each reporting unit. If the carrying amount of the reporting
unit exceeds its fair value, the goodwill associated with such reporting unit
must be further evaluated for impairment. Under such evaluation, if the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of the
goodwill, the impairment loss is recognized as an operating expense in an amount
equal to that excess. Changes in any of these estimates and assumptions, and
unknown future events or circumstances (e.g. economic conditions or
technological developments), could have a significant impact on whether or not
an impairment charge is recognized and the magnitude of any such charge.
Investments in Partially Owned Company - As discussed in Note 5 of the Notes to
Consolidated Financial Statements, included in Item 8 of this report, we have a
minority investment in and advances to CareTech Solutions, Inc. ("CareTech"), a
privately held company, for strategic purposes. At March 31, 2007, the net
carrying value of our investments and advances to this entity totaled $16.4
million. We regularly evaluate the financial condition of CareTech to assess
potential impairment in the carrying value of our investments in and advances to
this entity. We consider their current financial situation, including their
ability to meet current cash requirements, expected future cash flows and any
other information known to us in determining whether an impairment charge is
appropriate. Unknown factors or unforeseen events that impair their ability to
pay their obligations or to operate profitably could have an impact on our
ability to recoup our investments in and outstanding advances to CareTech and
could require us to expense all or a portion of the outstanding investments and
advances in that period.
Deferred Tax Assets Valuation Allowance and Tax Liabilities - We operate in
multiple tax jurisdictions both inside and outside the United States. As a
result, management must determine the appropriate allocation of income in
accordance with local law for each of these jurisdictions. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events and are determined based on the difference between the tax basis of
assets and liabilities and their reported amounts using enacted tax rates in
effect for the year in which the differences are expected to reverse. We must
then assess the likelihood that our deferred tax assets will be realized and, to
the extent we believe that realization is not likely, we must establish a
valuation allowance. For additional information regarding these matters see Note
12 of the Notes to Consolidated Financial Statements, included in Item 8 of this
report. Changes in estimates of projected future operating results or in
assumptions regarding our ability to generate future taxable income during the
periods in which temporary differences are deductible could result in
significant changes to these accruals and, therefore, to our net income.
In addition, we recognize contingent tax liabilities through tax expense for
estimated exposures related to our current tax positions. We evaluate the need
for contingent tax liabilities on a quarterly basis and any change in the amount
will be recorded in our results of operations, as appropriate. It could take
several years to resolve certain of these contingencies.
Stock-Based Compensation - We measure compensation expense for stock options
using a Black-Scholes option pricing model. The expense for unvested stock
options at April 1, 2006 is based upon the grant date fair value of those
options as calculated using a Black-Scholes option pricing model for pro forma
disclosures under SFAS No. 123, "Accounting for Stock-Based Compensation". The
expense for all awards granted after April 1, 2006 is based on the grant date
fair value estimated in accordance with the provisions of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). We
recognize these compensation costs net of an estimated forfeiture rate of 10% on
a straight-line basis over the requisite service period of the award, which is
generally the vesting term of five years.
The fair value of stock options was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions for 2007:
risk-free interest rate - 4.82%, volatility factor - 68.75% and expected option
life - 6.9 years (dividend yield is not a factor as we have never issued cash
dividends and do not anticipate issuing cash dividends in the future). For SFAS
No. 123(R) calculation purposes, the weighted average grant date fair value of
option shares granted in 2007 was $5.04 per option share.
36
If we increased the assumptions for the risk-free interest rate and the
volatility factor by 50 percent, the fair value of stock options granted in 2007
would increase 25 percent. If the Company decreased its assumptions for the
risk-free interest rate and the volatility factor by 50 percent, the fair value
of stock options granted in 2007 would decrease 42 percent.
Other - Other accounting policies, although not generally subject to the same
level of estimation as those discussed above, are nonetheless important to an
understanding of the financial statements. Many assets, liabilities, revenue and
expenses require some degree of estimation or judgment in determining the
appropriate accounting.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, cash and cash equivalents and investments totaled
approximately $439.1 million. During 2007 and 2006, cash flow from operations
was $204.7 million and $229.7 million, respectively. During these periods,
capital expenditures for property and equipment and capitalized research and
software development totaled $40.0 million and $35.4 million, respectively.
We hold a $100 million revolving credit facility maturing on July 26, 2007. See
Note 9 of the Notes to Consolidated Financial Statements, included in Item 8 of
this report, for a description of the facility. No borrowings have occurred
under this facility.
The Board of Directors has authorized the repurchase of our common stock under
two plans, the "Discretionary Plan" and the "10b5-1 Plan". Under the
Discretionary Plan, the Board of Directors has authorized the repurchase of a
total of up to $750.0 million of our common stock (See Note 10 of the
Consolidated Financial Statements). Our purchases of stock under the
Discretionary Plan may occur on the open market, through negotiated or block
transactions based upon market and business conditions and subject to applicable
legal limitations. During 2007 and 2006, we repurchased 64.3 million shares and
14.9 million shares, respectively, of our common stock under the Discretionary
Plan at an average price of $8.11 and $8.30 per share for a total of $521.5
million and $124.0 million, respectively. Approximately $103.5 million remains
authorized for future purchases under the Discretionary Plan.
We entered into the 10b5-1 Plan in December 2006 to repurchase up to 34.0
million shares of our common stock subject to price, volume and timing
constraints set forth in the plan pursuant to Rule 10b5-1(c) of the Securities
Exchange Act of 1934. The 10b5-1 Plan allows the repurchase of our common stock
at times when we might be prevented from doing so under insider trading laws or
because of self-imposed trading blackout periods. A broker selected by us has
the authority under the terms and limitations specified in the plan to
repurchase shares on our behalf. As of March 31, 2007, the Company had
repurchased 18.0 million shares for an aggregate $162.4 million under the 10b5-1
Plan and approximately 16.0 million shares remained authorized for future
repurchases. In May 2007, we executed an amendment to the 10b5-1 Plan that,
among other things, extended the termination date from June 30, 2007 to
September 30, 2007. In conjunction with its approval of the amendment, the Board
also authorized the repurchase of up to an additional 16.0 million shares under
the 10b5-1 Plan. The actual number of shares to be repurchased will depend on
the terms of the 10b5-1 Plan and prevailing market conditions. The Company may
terminate the plan at any time.
During fiscal 2007, we entered into a stock repurchase agreement whereby ForeSee
purchased our minority equity interest in ForeSee for approximately $11.3
million in cash. As part of the transaction, $750,000 of the accrued interest on
existing notes due to us was paid, and the notes were modified to increase the
interest rate to 10.25% and to extend the term of the notes so that $618,000
will become due (with interest) at March 30, 2009 and $5.6 million will become
due (with interest) at March 30, 2012. Our prior obligation to make up to
$367,000 in additional loans to ForeSee has been terminated (see Note 5 of the
Consolidated Financial Statements for more information).
37
During fiscal 2007, we sold our former headquarters and distribution center
buildings for a total of approximately $15.4 million. These buildings were
classified as held for sale in our consolidated financial statements at March
31, 2006.
In January 2007, we acquired Proxima for approximately $37.3 million in cash.
Proxima is a privately held provider of the Centauri product that complements
our Vantage product line by giving customers the ability to manage service
delivery from a business perspective. The acquisition was accounted for as a
purchase and, accordingly, assets and liabilities acquired were recorded at fair
value as of the acquisition date.
In April 2006, we acquired SteelTrace Limited, a privately held provider of
requirements management products that align application delivery to business
needs through a structured, visual approach to the management of enterprise
application requirements, for approximately $20.7 million in cash. The
acquisition was accounted for using the purchase method in accordance with SFAS
No. 141, "Business Combinations" and, accordingly, the assets and liabilities
acquired were recorded at fair value as of the acquisition date.
During fiscal 2006, we acquired ProviderLink Technologies and Adlex for
approximately $48.0 million in cash. During fiscal 2005, we acquired Changepoint
and Devstream for approximately $109.8 million in cash. For more information
about these acquisitions, see Note 2 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report.
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
We believe cash flow from operations will be sufficient to meet operating cash
needs for the foreseeable future. We anticipate borrowing up to $300.0 million
in order to fund the planned expansion of the stock buyback program.
Recently Issued Accounting Pronouncements
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force
(EITF) Issue No. 06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement" (EITF
06-03). The scope of EITF 06-03 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to, sales, use, value
added and some excise taxes. The Task Force affirmed its conclusion that
entities should present these taxes in the income statement on either a gross or
a net basis, based on their accounting policy, which should be disclosed
pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. If such taxes
are significant, and are presented on a gross basis, the amounts of those taxes
should be disclosed. The consensus on EITF 06-03 is effective for interim and
annual reporting periods beginning after December 15, 2006. We currently record
all such taxes on a net basis in our consolidated statements of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109". This
Interpretation prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more likely than not to be sustained on its merits if
audited and challenged. The amount recognized is measured as the largest amount
of benefit that is greater than 50% likely to be realized upon ultimate
settlement. This Interpretation will be applicable for us beginning April 1,
2007. We will be required to apply the provisions of this Interpretation to all
tax positions upon initial adoption with any cumulative effect to be recognized
as an adjustment to retained earnings. Upon application, management estimates
that a cumulative effect of less than $5.0 million will be required to account
for potential tax detriments not previously recognized under historical
practice.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair
38
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value, and therefore, does
not expand the use of fair value in any new circumstances. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact this Statement will have on our consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115," which permits entities to
measure eligible financial assets, financial liabilities and firm commitments at
fair value, on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating if it will elect the fair value option for any of our
eligible financial instruments.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), codified as SAB Topic 1.N, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements." SAB 108 describes the approach that should
be used to quantify the materiality of a misstatement and provides guidance for
correcting prior year errors. We adopted SAB 108 in the second quarter of 2007.
The adoption of SAB 108 did not result in any adjustments to our consolidated
financial statements.
Contractual Obligations
The following table summarizes our payments under contractual obligations and
our other commercial commitments as of March 31, 2007 (in thousands):
Payment Due by Period as of March 31,
---------------------------------------------------------------------
2013 and
Total 2008 2009 2010 2011 2012 Thereafter
-------- ------- ------- ------- ------ ------ ----------
Contractual obligations:
Operating leases $327,015 $35,178 $29,033 $17,874 $9,277 $4,568 $231,085
Other 11,403 3,340 3,213 2,550 450 450 1,400
-------- ------- ------- ------- ------ ------ --------
Total $338,418 $38,518 $32,246 $20,424 $9,727 $5,018 $232,485
======== ======= ======= ======= ====== ====== ========
"Other" includes commitments under various advertising and charitable
contribution agreements totaling $10.0 million and $1.4 million, respectively,
at March 31, 2007. There are no long term debt obligations, capital lease
obligations or purchase obligations.
Off-Balance Sheet Arrangements
We currently do not have any off balance sheet or non-consolidated special
purpose entity arrangements as defined by the applicable SEC rules.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. We believe that we take the necessary
steps to appropriately reduce the potential impact of interest rate and foreign
exchange exposures on our financial position and operating performance. We do
not use derivative financial instruments or forward foreign exchange contracts
for investment, speculative or trading purposes. Immediate changes in interest
rates and foreign currency rates discussed in the following paragraphs are
hypothetical rate scenarios used to calibrate risk and do not currently
represent management's view of future market developments. A discussion of our
accounting policies for derivative instruments is included in Note 1 of the
Notes to Consolidated Financial Statements, included in Item 8 of this report.
INTEREST RATE RISK
Exposure to market risk for changes in interest rates relates primarily to our
cash investments and installment receivables. Derivative financial instruments
are not a part of our investment strategy. Investments are placed with high
quality issuers to preserve invested funds by limiting default and market risk.
In addition, marketable debt securities and long term debt investments are
classified as held-to-maturity which does not expose the consolidated statements
of operations to fluctuations in interest rates.
The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates (in thousands, except
interest rate):
Year Ended March 31,
-------------------- Fair Value at
2008 2009 Total March 31, 2007
-------- ------- -------- --------------
Cash Equivalents $260,681 $260,681 $260,681
Average Interest Rate 3.44% 3.44%
Average Interest Rate (tax equivalent) 3.65% 3.65%
Investments $107,062 $71,391 $178,453 $178,204
Average Interest Rate 3.60% 3.46% 3.00%
Average Interest Rate (tax equivalent) 5.26% 5.32% 4.30%
We offer financing arrangements with installment payment terms in connection
with our multi-year software sales. Installment accounts are generally
receivable over a two to five year period. As of March 31, 2007, non-current
accounts receivable amounted to $172.3 million, and are due approximately $114.6
million, $38.9 million, $16.7 million, $1.7 million and $400,000 in each of the
years ending March 31, 2009 through 2013, respectively. The fair value of
non-current accounts receivable is estimated by discounting the future cash
flows using the current rate at which the Company would finance a similar
transaction. At March 31, 2007, the fair value of such receivables is
approximately $167.9 million. Each 100 basis point increase in interest rates
would have an associated $1.2 million and $1.7 million negative impact on the
fair value of non-current accounts receivable based on the balance of such
receivables at March 31, 2007 and 2006, respectively. Each 100 basis point
decrease in interest rates would have an associated $1.3 million and $1.7
million positive impact on the fair value of non-current accounts receivable
based on the balance of such receivables at March 31, 2007 and 2006,
respectively. A change in interest rates will have no impact on cash flows or
net income associated with non-current accounts receivable.
40
FOREIGN CURRENCY RISK
We have entered into forward foreign exchange contracts primarily to hedge
amounts due to or from select subsidiaries denominated in foreign currencies
(mainly in Europe and Asia-Pacific) against fluctuations in exchange rates. Our
accounting policies for these contracts are based on our designation of the
contracts as hedging transactions. The criteria we use for designating a
contract as a hedge include the contract's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. Gains
and losses on forward foreign exchange contracts are recognized in income,
offsetting foreign exchange gains or losses on the foreign balances being
hedged. If the underlying hedged transaction is terminated earlier than
initially anticipated, the offsetting gain or loss on the related forward
foreign exchange contract would be recognized in income in the same period. In
addition, since we enter into forward contracts only as a hedge, any change in
currency rates would not result in any material net gain or loss, as any gain or
loss on the underlying foreign currency denominated balance would be offset by
the gain or loss on the forward contract.
We operate in certain countries in Latin America and Asia-Pacific where there
are limited forward currency exchange markets. We also have non-U.S.
subsidiaries with financial instruments that are not denominated in their
reporting currency. At March 31, 2007, we performed a sensitivity analyses to
assess the potential loss a 10% positive or negative change in foreign currency
exchange rates would have on our income from operations. Based upon the analyses
performed, such a change would not materially affect our consolidated financial
position, results of operations or cash flows.
The table below provides information about our foreign exchange forward
contracts at March 31, 2007. The table presents the value of the contracts in
U.S. dollars at the contract maturity date and the fair value of the contracts
at March 31, 2007 (dollars in thousands):
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2007 2007 Rate U.S. Dollars March 31, 2007
-------- -------- -------- ------------ --------------
Forward Sales
South Africa March 30 April 30 7.3623 $ 869 $ 882
Swiss Francs March 30 April 30 1.2203 574 576
------- -------
1,443 1,458
======= =======
Forward Purchases
Australian Dollar March 30 April 30 1.2356 9,955 9,953
Canadian Dollar March 30 April 30 1.1562 9,514 9,527
Euro Dollar March 30 April 30 0.7501 21,897 21,941
Hong Kong Dollar March 30 April 30 7.7987 6,283 6,271
Singapore Dollar March 30 April 30 1.5143 495 494
------- -------
$48,144 $48,186
======= =======
Approximately 34% of our revenue is derived from foreign sources. This exposes
us to exchange rate risks on foreign currencies related to the fair value of
foreign assets and liabilities, net income and cash flows.
41
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Compuware Corporation
Detroit, Michigan
We have audited the accompanying consolidated balance sheets of Compuware
Corporation and subsidiaries (the "Company") as of March 31, 2007 and 2006, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Compuware Corporation and
subsidiaries as of March 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements, effective April
1, 2006 the Company changed its method of accounting for stock-based
compensation to conform to Statement of Financial Accounting Standards No.
123(R), Share-Based Payment.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of March 31, 2007, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated May 24, 2007, expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 24, 2007
42
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND 2006
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES 2007 2006
----- ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 260,681 $ 612,062
Investments 3 107,062 265,131
Accounts receivable, net 420,774 418,745
Deferred tax asset, net 12 33,392 32,015
Income taxes refundable, net 58,266 77,956
Prepaid expenses and other current assets 41,019 24,455
Buildings - held for sale 4 14,816
---------- ----------
Total current assets 921,194 1,445,180
---------- ----------
INVESTMENTS 3 71,391 32,149
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 385,227 395,653
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 8 72,276 61,918
---------- ----------
OTHER:
Accounts receivable 172,255 206,964
Goodwill 2,8 353,682 320,082
Deferred tax asset, net 12 15,987 13,983
Other assets 5,8 37,400 35,039
---------- ----------
Total other assets 579,324 576,068
---------- ----------
TOTAL ASSETS $2,029,412 $2,510,968
========== ==========
NOTES 2007 2006
----- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 27,713 $ 24,468
Accrued expenses 7 99,651 98,015
Accrued income tax reserve 12 11,555 37,819
Accrued bonuses and commissions 30,764 34,756
Deferred revenue 359,688 350,349
---------- ----------
Total current liabilities 529,371 545,407
DEFERRED REVENUE 321,881 343,246
ACCRUED EXPENSES 7 11,346 17,244
DEFERRED TAX LIABILITY, NET 12 34,666 25,572
---------- ----------
Total liabilities 897,264 931,469
---------- ----------
COMMITMENTS AND CONTINGENCIES 14
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 10
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
303,031,787 and 377,903,799 shares in 2007
and 2006, respectively 10,15 3,030 3,779
Additional paid-in capital 673,660 763,420
Retained earnings 444,159 805,781
Accumulated other comprehensive income 11,299 6,519
---------- ----------
Total shareholders' equity 1,132,148 1,579,499
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,029,412 $2,510,968
========== ==========
See notes to consolidated financial statements.
43
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES 2007 2006 2005
----- ---------- ---------- ----------
REVENUES:
Software license fees $ 283,412 $ 296,650 $ 305,189
Maintenance fees 457,594 433,596 425,310
Professional services fees 471,996 475,115 501,340
---------- ---------- ----------
Total revenues 1,213,002 1,205,361 1,231,839
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 28,581 23,262 27,293
Cost of maintenance fees 41,533 41,687 42,128
Cost of professional services 420,729 417,485 444,996
Technology development and support 114,071 96,858 111,258
Sales and marketing 281,730 288,162 319,940
Administrative and general 193,578 190,538 199,628
---------- ---------- ----------
Total operating expenses 1,080,222 1,057,992 1,145,243
---------- ---------- ----------
INCOME FROM OPERATIONS 132,780 147,369 86,596
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 39,427 35,705 22,252
Settlement 14 10,598 10,603
Gain on sale of investment in partially owned company 5 11,250
Other 5 (998) (2,217) (2,623)
---------- ---------- ----------
Other income, net 60,277 44,091 19,629
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 193,057 191,460 106,225
INCOME TAX PROVISION 12 34,965 48,500 29,743
---------- ---------- ----------
NET INCOME $ 158,092 $ 142,960 $ 76,482
========== ========== ==========
Basic and diluted earnings per share 11 $ 0.45 $ 0.37 $ 0.20
========== ========== ==========
See notes to consolidated financial statements.
44
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Common Stock Additional Other Total
------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income Equity Income
----------- ------ ---------- ---------- ------------- ------------- -------------
BALANCE AT APRIL 1, 2004 385,343,692 $3,853 $ 722,206 $ 681,115 $ 6,417 $1,413,591
Net income 76,482 76,482 $ 76,482
Foreign currency translation, net of
tax 3,510 3,510 3,510
--------
Comprehensive income $ 79,992
========
Issuance of common stock 2,536,030 26 13,154 13,180
Acquisition tax benefits 6,986 6,986
Exercise of employee stock options
and related tax benefit (Note 15) 523,732 5 2,401 2,406
----------- ------ --------- --------- ------- ----------
BALANCE AT MARCH 31, 2005 388,403,454 3,884 744,747 757,597 9,927 1,516,155
Net income 142,960 142,960 $142,960
Unrealized loss on marketable
securities, net of tax (71) (71) (71)
Foreign currency translation, net of
tax (3,337) (3,337) (3,337)
--------
Comprehensive income $139,552
========
Issuance of common stock and related
tax benefit 1,368,967 14 9,463 9,477
Repurchase of common stock (14,941,279) (149) (29,214) (94,641) (124,004)
Acquisition tax benefits 20,783 20,783
Exercise of employee stock options
and related tax benefit (Note 15) 3,072,657 30 17,369 (135) 17,264
Other 272 272
----------- ------ --------- --------- ------- ----------
BALANCE AT MARCH 31, 2006 377,903,799 3,779 763,420 805,781 6,519 1,579,499
Net income 158,092 158,092 $158,092
Unrealized loss on marketable
securities, net of tax 71 71 71
Foreign currency translation, net of
tax 4,709 4,709 4,709
--------
Comprehensive income $162,872
========
Issuance of common stock and related
tax benefit 599,442 6 4,737 4,743
Repurchase of common stock (82,301,156) (823) (171,878) (511,214) (683,915)
Acquisition tax benefits 5,257 5,257
Exercise of employee stock options
and related tax benefit (Note 15) 6,829,702 68 62,692 (8,500) 54,260
Stock option compensation 9,432 9,432
----------- ------ --------- --------- ------- ----------
BALANCE AT MARCH 31, 2007 303,031,787 $3,030 $ 673,660 $ 444,159 $11,299 $1,132,148
=========== ====== ========= ========= ======= ==========
See notes to consolidated financial statements.
45
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(IN THOUSANDS)
2007 2006 2005
--------- --------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 158,092 $ 142,960 $ 76,482
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 55,026 50,193 56,388
Gain on sale of investment in partially owned company (11,250)
Building impairment 6,702
Issuance of common stock to Employee Stock Ownership Trust 200 4,872
Acquisition tax benefits 5,257 20,783 6,986
Stock option compensation 9,432
Deferred income taxes 6,953 23,057 27,731
Other (208) 6,274 3,189
Net change in assets and liabilities, net of effects from
acquisitions and currency fluctuations:
Accounts receivable 61,202 58,972 (32,614)
Prepaid expenses and other current assets (13,857) 187 (2,307)
Other assets (1,211) (1,767) 2,346
Accounts payable and accrued expenses (46,483) (6,722) (25,110)
Deferred revenue (38,448) (30,366) 122,316
Income taxes 20,027 (40,548) 2,008
--------- --------- ---------
Net cash provided by operating activities 204,732 229,725 242,287
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of:
Businesses, net of cash acquired (51,818) (42,896) (104,993)
Property and equipment (18,590) (14,480) (28,702)
Capitalized software (21,457) (20,894) (19,299)
Proceeds from sale of property 15,466
Proceeds from sale of investment in partially owned company 11,250
Investments:
Proceeds 495,371 450,865 208,427
Purchases (376,387) (380,922) (267,740)
--------- --------- ---------
Net cash provided by (used in) investing activities 53,835 (8,327) (212,307)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits 54,364 13,590 1,772
Employee contribution to stock purchase plans 4,635 8,902 8,288
Repurchase of common stock (676,757) (124,004)
--------- --------- ---------
Net cash provided by (used in) financing activities (617,758) (101,512) 10,060
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,810 (5,511) 2,731
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (351,381) 114,375 42,771
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 612,062 497,687 454,916
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 260,681 $ 612,062 $ 497,687
========= ========= =========
See notes to consolidated financial statements.
46
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Compuware Corporation (the "Company" or "Compuware") develops,
markets and supports an integrated set of systems software products designed to
improve the effectiveness of information technology ("IT") organizations in
application delivery, service management and IT portfolio management. In
addition, the Company's professional services include business systems analysis,
design, communication, programming and implementation as well as software
conversion and systems planning and consulting. The Company's products and
services are offered worldwide across a broad spectrum of technologies,
including mainframe and distributed systems platforms.
Basis of Presentation - The consolidated financial statements include the
accounts of Compuware Corporation and its wholly owned subsidiaries after
elimination of all intercompany balances and transactions. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP"), which require management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, shareholders' equity and the disclosure of contingencies at March
31, 2007 and 2006 and the results of operations for the years ended March 31,
2007, 2006 and 2005. While management has based their assumptions and estimates
on the facts and circumstances existing at March 31, 2007, final amounts may
differ from estimates.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services. The Company's revenue recognition policies are consistent
with U.S. GAAP including Statements of Position 97-2 "Software Revenue
Recognition" and 98-9 "Modification of SOP 97-2, 'Software Revenue Recognition,'
With Respect to Certain Transactions", Securities and Exchange Commission Staff
Accounting Bulletin 104 and Emerging Issues Task Force Issue 00-21 "Revenue
Arrangements with Multiple Deliverables". Accordingly, the Company recognizes
revenue when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
fee is fixed or determinable, and collectibility is reasonably assured.
Software license fees - The Company's software license agreements provide its
customers with a right to use its software perpetually (perpetual licenses) or
during a defined term (term licenses). Perpetual license fee revenue is
recognized using the residual method, under which the fair value, based on
vendor specific objective evidence ("VSOE") of all undelivered elements of the
agreement (e.g., maintenance and professional services) is deferred. VSOE is
based on rates charged for maintenance and professional services when sold
separately. The remaining portion of the fee, net of discretionary discounts
(the residual), is recognized as license fee revenue upon delivery of the
products, provided that no significant obligations remain and collection of the
related receivable is deemed probable. For term licenses and for agreements in
which the fair value of the undelivered elements cannot be determined using
VSOE, the Company recognizes the license fee revenue on a ratable basis over the
term of the license agreement or when all elements have been delivered,
depending on the nature of the undelivered elements.
The Company offers flexibility to customers purchasing licenses for its products
and related maintenance. Terms of these transactions range from standard
perpetual license sales that include one year of maintenance to large multi-year
(generally two to five years), multi-product contracts. The Company allows
deferred payment terms on multi-year contracts, with installments collectible
over the term of the contract. Based on the Company's successful collection
history for deferred payments, the license fee portion of the receivable is
discounted to its net present value and recognized as discussed above. The
discount is recognized as interest income over the term of the receivable, and
amounted to
47
$5.2 million, $6.7 million and $8.2 million for fiscal 2007, 2006 and 2005,
respectively. At March 31, 2007, current accounts receivable includes
installments on multi-year contracts totaling $225.0 million due within the year
ending March 31, 2008. Non-current accounts receivable at March 31, 2007
amounted to $172.3 million, and approximately $114.6 million, $38.9 million,
$16.7 million, $1.7 million and $400,000 are due in each of the years ending
March 31, 2009 through 2013, respectively.
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all license
agreements for up to one year and is renewable thereafter for an annual fee.
Maintenance fees are deferred and recognized as revenue on a ratable basis over
the maintenance period.
Professional services fees - Professional services fees are generally based on
hourly or daily rates; therefore, revenues from professional services are
recognized in the period the services are performed provided that collection of
the related receivable is deemed probable. For development services rendered
under fixed-price contracts, revenue is recognized using the percentage of
completion method. Certain professional services contracts include a project and
on-going operations for the project. Revenue associated with these contracts is
recognized over the service period as the customer derives value from the
services, consistent with the proportional performance method.
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 contracts that are being recognized on a ratable basis.
Commission costs associated with deferred revenue are also deferred. Long term
deferred revenue at March 31, 2007 amounted to $321.9 million, of which
approximately $183.8 million, $88.6 million, $31.1 million, $15.7 million and
$2.7 million is expected to be recognized in each of the years ending March 31,
2009 through 2013, respectively.
Cash and Cash Equivalents - The Company considers all investments with an
original maturity of three months or less to be cash equivalents.
Investments consist of municipal obligations, U.S. Treasury securities and tax
free auction rate securities. Those investments that mature within one year from
the balance sheet date are classified as current assets. The auction rate
securities are classified as available-for-sale and are recorded at fair value
based on market quotes. Net unrealized gains or losses associated with
available-for-sale investments are recorded as a component of accumulated other
comprehensive income. All other investments are classified as held-to-maturity
and carried at amortized cost. The amortization of bond premiums and discounts
is included in "interest income" in the consolidated statements of operations.
48
Allowance for Doubtful Accounts - The Company considers historical loss
experience, including the need to adjust for current conditions, the aging of
outstanding accounts receivable and information available related to specific
customers when estimating the allowance for doubtful accounts. The allowance is
reviewed and adjusted based on the Company's best estimates.
The following table summarizes the allowance for doubtful accounts and changes
to the allowance during each of the years ended March 31, 2007, 2006 and 2005
(in thousands):
(1)
Balance at Charged Charged Balance at
Allowance for Beginning Against to Other (2) End of
Doubtful Accounts: of Period Income Accounts Deductions Period
----------------------------------- ---------- ------- -------- ---------- ----------
Year ended March 31, 2007 $12,263 $ 1,168 $ 15 $4,516 $ 8,930
Year ended March 31, 2006 18,084 162 9 5,992 12,263
Year ended March 31, 2005 22,565 (2,393) 300 2,388 18,084
(1) Allowance for doubful accounts related to recent acquisitions.
(2) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
The decreases of $3.3 million from March 31, 2006 to March 31, 2007 and $5.8
million from March 31, 2005 to March 31, 2006 were primarily due to write-offs
of customer accounts receivable balances that were reserved for in prior years
and for which the inability to collect became certain during the respective
fiscal years.
Property and Equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets, which are generally estimated to be 40 years
for buildings and three to ten years for furniture and fixtures, computer
equipment and software. Leasehold improvements are amortized over the term of
the lease, or the estimated life of the improvement, whichever is less.
Depreciation and amortization of property and equipment totaled $28.4 million,
$29.3 million and $31.9 million for the years ended March 31, 2007, 2006 and
2005, respectively.
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 SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed". Net purchased
software included in capitalized software at March 31, 2007 and 2006 is $20.9
million and $15.5 million, respectively.
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. Total
technology development and support costs incurred internally and capitalized by
the Company for the years ended March 31, 2007, 2006 and 2005 were as follows
(in thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Technology development and support costs incurred $135,455 $117,124 $130,575
Capitalized technology development and support costs (21,384) (20,266) (19,317)
-------- -------- --------
Technology development and support costs reported $114,071 $ 96,858 $111,258
======== ======== ========
49
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. Capitalized software is reviewed for
impairment each balance sheet date. The annual amortization is the greater of
the amount computed using (a) the ratio of current gross revenues compared with
the total of current and anticipated future revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product,
including the period being reported on. Amortization begins when the product is
available for general release to customers. The amortization period for
capitalized software is generally five years. Capitalized software amortization
amounted to $22.4 million, $18.2 million and $22.4 million in fiscal 2007, 2006
and 2005, respectively, which is primarily included in "cost of software license
fees" in the consolidated statements of operations.
Goodwill and Other Intangibles - Goodwill for each operating segment and those
intangible assets with indefinite lives are tested for impairment annually
and/or when events or circumstances indicate that their fair value may have been
reduced below carrying value. The Company evaluated its goodwill as of March 31,
2007 and 2006 and determined there was no impairment.
Fair Value of Financial Instruments - The carrying value of cash equivalents,
current accounts receivable and accounts payable approximate fair values due to
the short-term maturities of these instruments. At March 31, 2007, the fair
value of non-current receivables is approximately $167.9 million compared to the
carrying amount of $172.3 million. At March 31, 2006, the fair value of
non-current receivables was approximately $202.4 million compared to the
carrying amount of $207.0 million. Fair value is estimated by discounting the
future cash flows using the current rate at which the Company would finance a
similar transaction.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. Deferred income taxes are provided for the differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements.
Foreign Currency Translation - The Company's foreign subsidiaries use their
respective local currency as their functional currency. Accordingly, assets and
liabilities in the consolidated balance sheets have been translated at the rate
of exchange at the respective balance sheet dates, and revenues and expenses
have been translated at average exchange rates prevailing during the period the
transactions occurred. Translation adjustments have been excluded from the
results of operations and are reported as accumulated other comprehensive
income.
Foreign Currency Transactions and Derivatives - Gains and losses from foreign
currency transactions are included in the determination of net income. To
partially offset the risk of future currency fluctuations on balances due to or
from foreign subsidiaries, the Company enters into foreign exchange contracts to
sell or buy currencies at specified rates on specific dates. Market value gains
and losses on these contracts are recognized, offsetting foreign exchange gains
or losses on foreign receivables or payables. The Company does not use foreign
exchange contracts to hedge anticipated transactions. The net foreign currency
transaction gain (loss) was $(5.9) million, $1.0 million and $(1.7) million for
the years ended March 31, 2007, 2006 and 2005, respectively. These amounts are
included in "administrative and general" in the consolidated statements of
operations.
At March 31, 2007, the Company had contracts maturing through April 2007 to sell
$1.4 million and purchase $48.1 million in foreign currencies. At March 31,
2006, the Company had contracts maturing through April 2006 to sell $7.5 million
and purchase $35.7 million in foreign currencies.
Stock-Based Compensation - Effective April 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") using the modified
prospective transition method and therefore has not restated results for prior
periods. Under this transition method, stock-based compensation expense for
fiscal 2007 includes compensation expense for all stock-based compensation
awards ("awards") granted prior to, but not yet vested as of April 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
50
("SFAS 123"). Stock-based compensation expense for all awards granted after
April 1, 2006 is based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). The Company recognizes these compensation costs
net of an estimated forfeiture rate on a straight-line basis over the requisite
service period of the award, which is generally the vesting term of five years.
In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of
SFAS 123(R) and the valuation of share-based payments for public companies. The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
See Note 15 to the consolidated financial statements for a further discussion on
stock-based compensation including the impact on net income during the period.
Prior to the adoption of SFAS 123(R), the Company measured compensation expense
for its stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Awards were granted at current market prices at
the date of grant. Therefore, no compensation cost was recognized for the
Company's fixed stock option plans or its stock purchase plans. The Company
applied the disclosure provisions of SFAS 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure", as if
the fair-value-based method had been applied in measuring compensation expense.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for fiscal 2006 and 2005
consistent with the method prescribed by SFAS No. 123, the Company's net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except earnings per share data):
Year Ended
March 31,
-------------------
2006 2005
-------- --------
Net income:
As reported $142,960 $ 76,482
Compensation cost, net of tax (8,990) (29,912)
-------- --------
Pro forma $133,970 $ 46,570
======== ========
Earnings per share:
As reported:
Basic and diluted earnings per share $ 0.37 $ 0.20
Pro forma:
Basic and diluted earnings per share 0.35 0.12
51
The weighted average fair value of stock options granted in the years ended
March 31, 2006 and 2005 and the assumptions used to estimate those values using
a Black-Scholes option pricing model were as follows:
Year Ended
March 31,
-------------
2006 2005
----- -----
Expected volatility 73.9% 47.8%
Risk-free interest rate 3.7% 3.9%
Expected lives at date of grant (in years) 5.1 5.0
Weighted average fair value of the options granted $4.47 $3.48
Dividend yields were not a factor, as the Company has never issued cash
dividends.
Effective April 1, 2006, the Company modified the terms of the international and
domestic employee stock purchase plans eliminating the option component
associated with the plan and increasing the purchase price from 85% to 95% of
the last day's average high and low price for each offering period consistent
with the non-compensatory requirements of SFAS 123(R). The fair value of the
option component of the employee purchase plan shares purchased prior to April
2006 was estimated using the Black-Scholes model with assumptions comparable to
the stock option plans above. The weighted-average fair value of the purchase
rights granted in fiscal 2006 and 2005 were $1.47 and $1.21 per share,
respectively.
Earnings Per Share ("EPS") - Basic EPS is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS assumes the issuance of common stock for
all potentially dilutive equivalent shares outstanding.
Business Segments - The Company's reporting segments are products and
professional services that are comprised of multiple operating segments. The
Company provides software products and professional services that help
information technology professionals of the world's largest IT organizations
efficiently develop, implement and support the applications that run their
businesses.
Recently Issued Accounting Pronouncements - In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123 (R) that requires
companies to expense the value of employee stock options and other forms of
stock-based compensation effective for annual periods beginning after June 15,
2005. The Company adopted SFAS No. 123(R) using the modified prospective method
in the first quarter of fiscal 2007.
In June 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20 and FASB Statement No. 3" ("SFAS No. 154"). This Statement became effective
for accounting changes and corrections of errors made in fiscal 2007 and beyond.
The adoption of SFAS No. 154 did not have a material effect on the Company's
consolidated results of operations and financial position.
In June 2006, the FASB ratified the consensus on Emerging Issues Task Force
("EITF") Issue No. 06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement" ("EITF
06-03"). The scope of EITF 06-03 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to, sales, use, value
added and some excise taxes. The Task Force affirmed its conclusion that
entities should present these taxes in the income statement on either a gross or
a net basis, based on their accounting policy, which should be disclosed
pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. If such taxes
are significant, and are presented on a gross basis, the amounts of those taxes
should be disclosed. The consensus on EITF 06-03 is effective for interim and
annual reporting periods beginning after December 15, 2006. The Company
currently records all such taxes on a net basis in its consolidated statements
of operations.
52
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109". This
Interpretation prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more likely than not to be sustained on its merits if
audited and challenged. The amount recognized is measured as the largest amount
of benefit that is greater than 50% likely to be realized upon ultimate
settlement. This Interpretation will be applicable for the Company beginning
April 1, 2007. The Company will be required to apply the provisions of this
Interpretation to all tax positions upon initial adoption with any cumulative
effect to be recognized as an adjustment to retained earnings. Upon application,
management estimates that a cumulative effect of less than $5.0 million will be
required to account for potential tax detriments not previously recognized under
historical practice.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and therefore, does not expand the use
of fair value in any new circumstances. This Statement is effective for fiscal
years beginning after November 15, 2007. Management is currently evaluating the
impact this Statement will have on the Company's financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115," which permits entities to
measure eligible financial assets, financial liabilities and firm commitments at
fair value, on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings. This Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating if it will elect the fair value option for any of the
Company's eligible financial instruments.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), codified as SAB Topic 1.N, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements." SAB 108 describes the approach that should
be used to quantify the materiality of a misstatement and provides guidance for
correcting prior year errors. The Company adopted SAB 108 in the second quarter
of 2007. The adoption of SAB 108 did not result in any adjustments to the
Company's financial statements.
Reclassification - The Company presented cost of maintenance fees as a separate
line in the consolidated statements of operations during fiscal 2007. As a
result, the fiscal 2006 and 2005 financial statements have been reclassified to
conform to the fiscal 2007 presentation. This reclassification does not affect
net income.
2. ACQUISITIONS
Acquisitions are accounted for using the purchase method in accordance with SFAS
No. 141, "Business Combinations" and, accordingly, the assets and liabilities
acquired are recorded at fair value as of the acquisition date.
In January 2007, the Company acquired Proxima Technology Group, Inc. ("Proxima")
for approximately $37.3 million in cash. Proxima is a privately held provider of
the Centauri product that complements our Vantage product line by giving
customers the ability to manage service delivery from a business perspective.
The purchase price exceeded the fair value of the acquired assets and
liabilities by $19.9 million which was recorded to goodwill. Intangible assets
subject to amortization totaled $9.9 million, of
53
which $6.2 million and $3.0 million related to purchased software and customer
relationships, respectively, each with a useful life of five years. The
remaining intangible assets subject to amortization have useful lives of up to
two years.
In April 2006, the Company acquired SteelTrace Limited, a privately held
provider of requirements management products that align application delivery to
business needs through a structured, visual approach to the management of
enterprise application requirements, for approximately $20.7 million in cash.
The purchase price exceeded the fair value of the acquired assets and
liabilities by $14.2 million which was recorded to goodwill. Intangible assets
subject to amortization totaled $6.7 million of which $4.8 million and $1.5
million related to purchased software and customer relationships, respectively,
with a useful life of five and three years, respectively. The remaining
intangible assets subject to amortization have a useful life of one year.
In March 2006, the Company acquired ProviderLink Technologies ("ProviderLink"),
a privately held company that offers technology that improves efficiency in the
sharing of healthcare information and records for approximately $12.0 million in
cash. The purchase price exceeded the fair value of the acquired assets and
liabilities by $8.2 million which was recorded to goodwill. Intangible assets
subject to amortization totaled $3.5 million, of which $1.7 million and $1.6
million related to purchased software and customer relationships, respectively,
each with a useful life of five years. The remaining intangible assets subject
to amortization have a useful life of two years.
In May 2005, the Company acquired Adlex, Inc. ("Adlex"), a privately owned
software company that helps companies manage the quality of service that
business critical applications deliver to end users, for approximately $36.0
million in cash. The purchase price exceeded the fair value of the acquired
assets and liabilities by $25.4 million which was recorded to goodwill.
Intangible assets subject to amortization totaled $5.4 million, of which $3.5
million and $1.5 million related to purchased software and customer
relationships, respectively, each with a useful life of five years. The
remaining intangible assets subject to amortization have a useful life of two
years.
In October 2004, the Company acquired certain assets and liabilities of
DevStream Corporation ("DevStream"), a privately owned software company, for
$9.8 million of which $1.8 million was based on a percentage of revenue
generated from the DevStream products from the time of acquistion through
December 31, 2006. The purchase price exceeded the fair value of the acquired
assets and liabilities by $7.2 million, which was recorded to goodwill. Included
in the acquisition was $2.7 million of purchased software which has a useful
life of five years.
In May 2004, the Company acquired privately held Changepoint Corporation
("Changepoint"), a provider of IT Governance application software for
approximately $100.0 million in cash. The purchase price exceeded the fair value
of the acquired assets and liabilities by $71.3 million, which was recorded to
goodwill. Intangible assets subject to amortization totaled $15.7 million of
which $9.0 million and $5.2 million related to purchased software and customer
relationships, respectively, each with a useful life of five years. The
remaining intangible assets subject to amortization have a useful life of three
years.
54
3. INVESTMENTS
A summary of securities at March 31, 2007 and 2006 is set forth below (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2007 Cost Gains Losses Value
-------------- --------- ---------- ---------- --------
Held-to-maturity securities:
Municipal obligations $167,617 $10 $260 $167,367
U.S. Treasury securities and obligations
of U.S. government agencies 10,836 1 10,837
-------- --- ---- --------
Total held-to-maturity $178,453 $11 $260 $178,204
======== === ==== ========
March 31, 2006
Held-to-maturity securities:
Municipal obligations $130,288 $409 $129,879
U.S. Treasury securities and obligations
of U.S. government agencies 51,975 99 51,876
-------- ---- --------
Total held-to-maturity 182,263 508 181,755
Available-for-sale:
Tax free auction rate securities 115,130 113 115,017
-------- ---- --------
Total investments $297,393 $621 $296,772
======== ==== ========
Scheduled maturities of securities classified as held-to-maturity at March 31,
2007 were as follows (in thousands):
Amortized Fair
Cost Value
--------- --------
Held-to-maturity
Due in:
2008 $107,062 $107,003
2009 71,391 71,201
-------- --------
Total $178,453 $178,204
======== ========
55
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
March 31,
-------------------
2007 2006
-------- --------
Buildings and improvements $370,052 $369,210
Leasehold improvements 24,493 19,522
Furniture and fixtures 77,575 75,572
Computer equipment and software 78,759 73,826
-------- --------
550,879 538,130
Less accumulated depreciation and
amortization 165,652 142,477
-------- --------
Total $385,227 $395,653
======== ========
Buildings held for sale as of March 31, 2006 with net book values of $14.8
million were sold during fiscal 2007 for approximately $15.4 million. During
fiscal 2006, an impairment charge of $6.7 million related to one of the
buildings was included in "administrative and general" in the consolidated
statements of operations.
56
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2007, the Company held a 33.3% interest in CareTech Solutions, Inc.
("CareTech").
CareTech provides information technology outsourcing for healthcare
organizations including data, voice, applications and data center operations.
This investment is accounted for under the equity method.
At March 31, 2007 and 2006, the Company's carrying value of its investments in
and advances to CareTech was $16.4 million and $16.6 million, respectively.
Included in the net investment at March 31, 2007 and 2006, is a note receivable
with a basis of $10.4 million and $12.2 million, respectively, and accounts
receivable due from CareTech of $4.8 million and $3.9 million, respectively. The
note is payable in quarterly installments through January 2012 and bears
interest at 5.25%.
The Company reviewed CareTech's financial situation at March 31, 2007 and
concluded that no impairment charge or valuation allowance related to its
investment in CareTech was warranted. For the years ended March 31, 2007, 2006
and 2005, the Company recognized income of $646,000, $679,000 and $784,000,
respectively, from its investment in CareTech.
During fiscal 2007, the Company sold its 49% interest in ForeSee Results, Inc.
("ForeSee") which was incorporated in October 2001 to provide online customer
satisfaction management. This investment was also accounted for under the equity
method including consideration of EITF 98-13, "Accounting by an Equity Method
Investor for Investee Losses When the Investor has Loans to and Investments in
Other Securities of an Investee".
On March 30, 2007, the Company entered into a stock repurchase agreement whereby
ForeSee purchased all of the common shares in ForeSee owned by the Company
(4,410,000 common shares) for approximately $11.3 million in cash. The entire
amount was recorded to "gain on sale of investment in partially owned company"
in the consolidated statements of operations as the Company's equity investment
in ForeSee was zero. As part of the transaction, a portion of the accrued
interest on existing notes due the Company was paid, and the notes were modified
to increase the interest rate to 10.25% and to extend the term of the notes so
that $618,000 will become due (with interest) at March 30, 2009 and $5.6 million
will become due (with interest) at March 30, 2012. The notes will be subordinate
in payment rights to certain third party financing obtained by ForeSee in
connection with the transaction. As of March 31, 2007, the carrying value of the
notes was $3.3 million. The Company's prior obligation to make up to $367,000 in
additional loans to ForeSee has been terminated.
At March 31, 2006, the Company's carrying value of its investments in and
advances to ForeSee was $2.4 million. Included in the net investment at March
31, 2006 was notes receivable from ForeSee totaling $5.6 million with an
adjusted basis of $2.2 million. During fiscal 2004, the Company's equity
investment in ForeSee was reduced to zero. At that point, the Company began
recording 100% of the losses sustained by ForeSee as a reduction to the
Company's outstanding advances to ForeSee since the Company was uncertain
whether the other shareholders were willing or able to sustain their share of
the losses. For the years ended March 31, 2007, 2006 and 2005, the Company
recognized income (loss) of $472,000, $(638,000) and $(1.2) million,
respectively, from its investment in ForeSee in addition to the fiscal 2007 gain
on the disposal of the common shares in ForeSee.
Professional services revenue for the years ended March 31, 2007, 2006 and 2005
included approximately $24.9 million, $23.0 million and $20.5 million,
respectively, from services provided to CareTech customers on a subcontractor
basis. Professional services revenue for the years ended March 31, 2007, 2006
and 2005 included approximately $334,000, $698,000 and $844,000, respectively,
from services provided to ForeSee.
57
6. RELATED PARTY TRANSACTIONS
The Company sells and purchases products and services to and from companies
associated with certain officers or directors of the Company.
G. Scott Romney, Director of the Company, is a partner in the law firm of
Honigman Miller Schwartz and Cohn LLP ("Honigman"). For the years ended March
31, 2007, 2006 and 2005, fees for legal services provided by Honigman to the
Company were approximately $97,000, $498,000 and $2.9 million, respectively.
These costs are included in "administrative and general" in the consolidated
statements of operations.
Dennis W. Archer, Director of the Company, is a partner in the law firm of
Dickinson Wright PLLC ("Dickinson"). For the years ended March 31, 2007, 2006
and 2005, fees for legal services provided by Dickinson to the Company were
approximately $134,000, $107,000 and $291,000, respectively. These costs are
included in "administrative and general" in the consolidated statements of
operations.
Peter Karmanos, Jr., Chairman of the Board, is a shareholder of Compuware Sports
Corporation ("CSC"). CSC operates an amateur hockey program in Southeastern
Michigan. On September 8, 1992, the Company entered into a Promotion Agreement
with CSC to promote the Company's business. The promotion agreement
automatically renews each year, unless terminated with 60 days prior notice by
either party. Advertising costs related to this agreement were approximately
$840,000 for each of the years ended March 31, 2007, 2006 and 2005. These costs
are included in "sales and marketing" in the consolidated statements of
operations.
Peter Karmanos, Jr. and a partner control the entities that own and/or manage
various sports arenas. The Company entered into an advertising agreement with
one arena to promote the Company's business, including the right to name the
arena "Compuware Arena". The Company also rents suites and places advertising at
the arenas. Total costs related to these agreements were approximately $627,000,
$376,000 and $415,000 for the years ended March 31, 2007, 2006 and 2005,
respectively. These costs are included in "sales and marketing" in the
consolidated statements of operations.
58
7. RESTRUCTURING CHARGES
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
to reorganize its operating divisions, primarily the professional services
segment. These changes were designed to increase profitability in the future by
better aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization.
The following table summarizes the restructuring accrual and charges against the
accrual during fiscal 2005, 2006 and 2007 (in thousands):
Employee Facilities Costs Total
Termination (Primarily Lease Restructuring
Benefits Abandonments) Other Charge
----------- ---------------- ----- -------------
Balance at April 1, 2004 $107 $13,488 $ 11 $13,606
Paid during year ended
March 31, 2005 (82) (2,695) (1) (2,778)
---- ------- ---- -------
Accrual at March 31, 2005 25 10,793 10 10,828
Paid during year ended
March 31, 2006 (21) (2,529) (2,550)
Adjustment (4) (2,314) (10) (2,328)
---- ------- ---- -------
Accrual at March 31, 2006 5,950 5,950
Paid during year ended
March 31, 2007 (1,748) (1,748)
Adjustment (1,783) (1,783)
---- ------- ---- -------
Accrual at March 31, 2007 $ $ 2,419 $ $ 2,419
==== ======= ==== =======
During the year ended March 31, 2007 and 2006, the Company recorded a reduction
of $1.8 million and $2.3 million, respectively, in the restructuring accrual
related to subleases of abandoned lease space in excess of what was originally
anticipated. These adjustments were included in "administrative and general" in
the consolidated statements of operations.
Approximately $1.2 million and $4.1 million of the accrual related to facilities
costs is included in "long term accrued expenses" in the consolidated balance
sheets at March 31, 2007 and 2006, respectively.
59
8. GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
March 31, 2007
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,865 $ 5,865
======== =======
Amortized intangible assets:
Capitalized software (2) $328,957 $(256,681) $72,276
Customer relationship agreements (3) 13,827 (5,571) 8,256
Non-compete agreements (3) 2,794 (2,222) 572
Other (4) 6,883 (5,900) 983
-------- --------- -------
Total amortized intangible assets $352,461 $(270,374) $82,087
======== ========= =======
March 31, 2006
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,853 $ 5,853
======== =======
Amortized intangible assets:
Capitalized software (2) $295,996 $(234,078) $61,918
Customer relationship agreements (3) 9,235 (2,935) 6,300
Non-compete agreements (3) 2,057 (1,164) 893
Other (4) 6,381 (5,091) 1,290
-------- ---------- -------
Total amortized intangible assets $313,669 $(243,268) $70,401
======== ========== =======
(1) Certain trademarks were acquired as part of the Covisint and Changepoint
acquisitions in fiscal 2004 and 2005. These trademarks are deemed to have
an indefinite life and therefore are not being amortized.
(2) Amortization of capitalized software is primarily included in "cost of
software license fees" in the consolidated statements of operations.
Capitalized software is generally amortized over five years.
(3) Customer relationship agreements and non-compete agreements were acquired
as part of recent acquisitions. The customer relationship agreements are
being amortized over periods up to five years. The non-compete agreements
are being amortized over periods up to three years.
(4) Other amortized intangible assets include trademarks associated with
product acquisitions and are being amortized over periods up to ten years.
60
Amortization expense of intangible assets for the years ended March 31, 2007,
2006 and 2005 was $26.6 million, $20.9 million, and $24.5 million, respectively.
Annual amortization expense, based on identified intangible assets at March 31,
2007, is expected to be as follows (in thousands):
Year Ended March 31,
-----------------------------------------------------------
2008 2009 2010 2011 2012 Thereafter
------- ------- ------- ------- ------ ----------
Capitalized software $22,115 $20,280 $15,115 $10,144 $4,354 $268
Customer relationships 2,516 2,516 1,568 1,205 451
Non-compete agreements 322 250
Other 488 330 165
------- ------- ------- ------- ------ ----
Total $25,441 $23,376 $16,848 $11,349 $4,805 $268
======= ======= ======= ======= ====== ====
The Company evaluated its goodwill at March 31, 2007 and 2006 and determined
there was no impairment in either fiscal year. Changes in the carrying amounts
of goodwill for the years ended March 31, 2007 and 2006 are as follows (in
thousands):
Products Services Total
-------- -------- --------
Goodwill:
Balance at March 31, 2005, net $152,044 $141,347 $293,391
Acquisitions 33,561 33,561
Adjustment to previously recorded purchase price (1) (6,705) (6,705)
Effect of foreign currency translation 10 (175) (165)
-------- -------- --------
Balance at March 31, 2006, net $178,910 $141,172 $320,082
Acquisitions 34,087 34,087
Adjustment to previously recorded purchase price (1) (1,063) 68 (995)
Effect of foreign currency translation 13 495 508
-------- -------- --------
Balance at March 31, 2007, net $211,947 $141,735 $353,682
======== ======== ========
(1) At the time of certain acquisitions, the Company treated amounts associated
with prior acquisitions as a contingent liability for tax purposes and
reduced the basis of tax amortizable goodwill for these amounts not
recognized for tax purposes creating a deferred tax liability ("DTL"). It
became evident in fiscal 2006 that no tax adjustments will be made to the
Company's treatment of these amounts, therefore the DTL will not be
realized and $5.3 million was reversed against goodwill. The remaining
adjustment to goodwill in fiscal 2006 and the adjustment in fiscal 2007
primarily relates to tax adjustments for Changepoint that resulted from the
completion of audits of tax years prior to the acquisition.
61
9. DEBT
The Company has no long term debt.
The Company holds a $100 million revolving credit facility. On July 27, 2006,
the Company amended the credit agreement extending the maturity to July 26,
2007. The amended credit agreement eliminated the liquidity and net worth
covenants and no longer restricts merger and acquisition activity when the
Company is the continuing or surviving entity. Interest is payable at 1% over
the Eurodollar rate or at the prime rate (8.25% at March 31, 2007), at the
Company's option. No borrowings have occurred under this facility.
The Company incurs interest expense primarily related to the accrual for certain
abandoned leases. Cash paid for interest totaled approximately $1.9 million,
$2.0 million and $2.0 million for the years ended March 31, 2007, 2006 and 2005,
respectively.
10. CAPITAL STOCK
Preferred Stock Purchase Rights - The Company entered into a Rights Agreement
with Equiserve Trust Company, N.A., now known as Computershare Trust Company
N.A., as Rights Agent, in October 2000 (as subsequently amended, the "rights
plan"). The rights plan was adopted to discourage abusive, undervalued and other
undesirable attempts to acquire control of the Company by making acquisitions of
control that are not approved by the Company's Board of Directors economically
undesirable for the acquiror. Pursuant to the rights plan, each share of the
Company's common stock has attached to it one right, which initially represents
the right to purchase one two-thousandth of a share of Series A Junior
Participating Preferred Stock (a right) for $40. The rights are not exercisable
until (1) the first public announcement that a person or group has acquired, or
obtained the right to acquire, except under limited circumstances, beneficial
ownership of 20% or more of the outstanding common stock; or (2) the close of
business on the tenth business day (or such later date as the Company's Board of
Directors may determine) after the commencement of a tender or exchange offer
the consummation of which would result in a person or group becoming the
beneficial owner of 20% or more of the outstanding common stock. If a person
becomes a beneficial owner of 20% or more of the outstanding common stock, each
right converts into a right to purchase multiple shares of common stock of the
Company, or in certain circumstances securities of the acquirer, at a 50%
discount from the then current market value. In connection with the rights plan,
the Company has designated 800,000 shares of its 5,000,000 shares of authorized
but unissued Preferred Stock as "Series A Junior Participating Preferred Stock."
The rights are redeemable for a specified period at a price of $0.001 per right
and expire on May 9, 2009, unless extended or earlier redeemed by the Board of
Directors.
62
Stock Repurchase Plans - The Company's Board of Directors has authorized the
repurchase of the Company's common stock under two plans, the "Discretionary
Plan" and the "10b5-1 Plan".
Under the Discretionary Plan, the Board of Directors has authorized management
to regularly evaluate market conditions for an opportunity to repurchase common
stock at its discretion within the parameters established by the Board. The
authorizations and repurchases under this plan were as follows (in thousands):
Shares Acquired Balance Remaining
During Fiscal for Future
Date Amount --------------- Purchases at
Authorized Authorized 2006 2007 March 31, 2007
------------- ---------- ------ ------ -----------------
May 2003 $125,000 14,941
April 2006 125,000 17,631
August 2006 300,000 36,169
December 2006 200,000 10,504 $103,510
There were no Company shares repurchased under this plan in 2005.
The Company entered into the 10b5-1 Plan in December 2006 to repurchase up to
34.0 million shares of the Company's common stock subject to price, volume and
timing restraints set forth in the plan pursuant to Rule 10b5-1(c) of the
Securities Exchange Act of 1934. The 10b5-1 Plan allows the repurchase of common
stock at times when the Company might be prevented from doing so under insider
trading laws or because of self-imposed trading blackout periods. A broker
selected by the Company has the authority under the terms and limitations
specified in the plan to repurchase shares on behalf of the Company. As of March
31, 2007, the Company had repurchased 18.0 million shares for an aggregate
$162.4 million under the 10b5-1 Plan of which $7.2 million was paid subsequent
to March 2007. Approximately 16.0 million shares remained authorized for future
repurchases. The Company may terminate the plan at any time.
11. EARNINGS PER COMMON SHARE
Earnings per common share data were computed as follows (in thousands, except
for per share data):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Basic earnings per share:
Numerator: Net income $158,092 $142,960 $ 76,482
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 350,213 385,147 386,701
-------- -------- --------
Basic earnings per share $ 0.45 $ 0.37 $ 0.20
======== ======== ========
Diluted earnings per share:
Numerator: Net income $158,092 $142,960 $ 76,482
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 350,213 385,147 386,701
Dilutive effect of stock options 754 2,422 1,800
-------- -------- --------
Total shares 350,967 387,569 388,501
-------- -------- --------
Diluted earnings per share $ 0.45 $ 0.37 $ 0.20
======== ======== ========
During the years ended March 31, 2007, 2006 and 2005, stock options to purchase
approximately 33,608,000, 38,231,000 and 58,492,000 shares, respectively, were
excluded from the diluted EPS calculation because they were anti-dilutive.
63
12. INCOME TAXES
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows (in thousands):
March 31,
-------------------
2007 2006
-------- --------
Deferred tax assets:
Deferred maintenance $ 21,907 $ 12,853
Amortization of intangible assets 42,121 29,949
Accrued expenses 22,987 21,722
U.S. tax credit carryforwards 20,025 28,050
Net operating loss carryforwards 12,150 12,415
Other 14,880 16,743
-------- --------
134,070 121,732
Less valuation allowance 4,029 2,966
-------- --------
Net deferred tax assets 130,041 118,766
Current portion 36,430 33,032
-------- --------
Long term portion $ 93,611 $ 85,734
======== ========
Deferred tax liabilities:
Amortization of intangible assets $ 21,420 $ 18,010
Capitalized research and development costs 18,357 16,232
Depreciation 66,924 61,068
Other 8,627 3,030
-------- --------
Total deferred tax liabilities 115,328 98,340
Current portion 3,038 1,017
-------- --------
Long term portion $112,290 $ 97,323
======== ========
Income before income taxes and the income tax provision include the following
(in thousands):
Year Ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Income before income taxes:
U.S. $172,819 $159,028 $ 82,115
Foreign 20,238 32,432 24,110
-------- -------- --------
Total income before income taxes $193,057 $191,460 $106,225
======== ======== ========
Income tax provision
Current:
U.S. Federal $ 16,967 $ 8,117 $ 2,353
Foreign 11,265 14,934 747
U.S. State 2,434 2,055 294
-------- -------- --------
Total current tax provision 30,666 25,106 3,394
-------- -------- --------
Deferred:
U.S. Federal 6,165 22,763 19,287
Foreign (3,024) 1,540 6,256
U.S. State 1,158 (909) 806
-------- -------- --------
Total deferred tax provision 4,299 23,394 26,349
-------- -------- --------
Total income tax provision $ 34,965 $ 48,500 $ 29,743
======== ======== ========
64
The Company's income tax expense differed from the amount computed on pre-tax
income at the U.S. federal income tax rate of 35% for the following reasons (in
thousands):
Year Ended March 31,
-----------------------------
2007 2006 2005
-------- -------- -------
Federal income tax at statutory rates $ 67,570 $ 67,011 $37,179
Increase (decrease) in taxes:
State income taxes, net 2,215 1,326 715
Export sales benefit (2,954) (3,088) (7,676)
Settlement of prior year tax matters (1) (26,550) (11,126)
Taxes relating to foreign operations 992 6,948 (5,571)
Tax credits (5,060) (4,698) 1,037
Valuation allowance (2) (3,768) (12,400) 5,870
Other, net 2,520 4,527 (1,811)
-------- -------- -------
Provision for income taxes $ 34,965 $ 48,500 $29,743
======== ======== =======
(1) During the quarter ended March 31, 2007, the Company reduced its income tax
provision by $26.6 million for certain items related to settlements of
prior year tax matters. Substantially all of the decrease concerns taxes
related to foreign operations. Approximately $18.9 million of the reduction
was driven by an agreement on issues that affected a special deduction and
credits afforded to U.S. based taxpayers that generate income from sales to
foreign customers. In addition, a reduction of $3.3 million was the result
of an agreement regarding the proper character and timing of certain
deductions. The remainder of the reduction is due primarily to interest.
During the quarter ended March 31, 2006, the Company reduced its income tax
provision by $11.1 million for certain items related to settlements of
prior year tax matters. The Company concluded two separate Competent
Authority proceedings resulting in a reduction to the Company's income tax
provision of approximately $5.8 million. The remainder of the reduction was
due primarily to taxes related to domestic operations, most notably the
U.S. Research and Experimentation tax credit.
(2) During the quarter ended March 31, 2007, the Company released a valuation
allowance related to the potential expiration of capital loss carryforwards
in the amount of $2.9 million as a result of the sale of the Company's
investment in ForeSee. In addition, the Company recognized approximately
$900,000 related to operating losses in Brazil, which the Company now
believes are more likely than not to be realized.
During the quarter ended March 31, 2006, additional positive evidence
became available to allow the Company to decrease its valuation allowance
by $12.4 million. The decrease relates almost entirely to U.S. foreign tax
credit carryforwards that during the fourth quarter of fiscal 2006 became
more likely than not to be realized.
65
At March 31, 2007, the Company has foreign net operating loss carryforwards for
income tax purposes of $8.5 million which expire as follows (in thousands):
Year ending March 31:
2008 $ 190
2015 50
2016 100
2017 65
2018 3
Unlimited carryforward 8,129
The deferred tax asset for these foreign loss carryforwards has been reduced by
a valuation allowance of $1.5 million.
For U.S. tax purposes, $2.5 million (expiring in fiscal 2008 through 2026) of
net operating losses are available to reduce U.S. federal income taxes. In
addition, $13.2 million (expiring in fiscal 2014 through 2015) of foreign tax
credits are available to offset future U.S. federal income tax liabilities.
Deferred tax assets related to charitable contribution and general business
credit carryforwards are available to offset future U.S. federal income tax
liabilities of $9.5 million (expiring in fiscal 2025 through 2027).
In addition, the Company has $45,000 (expiring in fiscal 2008) of tax credits in
foreign jurisdictions available to offset future foreign income tax liabilities.
Cash paid for income taxes totaled $28.0 million, $35.0 million and $55,000 for
the years ended March 31, 2007, 2006 and 2005, respectively.
The Company has open tax years, from tax periods 1996 and forward, with various
significant taxing jurisdictions, including the U.S., Brazil and the United
Kingdom. These open years contain matters that could be subject to differing
interpretations of applicable tax laws and regulations as they relate to the
amount, timing or inclusion of revenue and expenses or the sustainability of
income tax credits for a given audit cycle. The Company has now concluded on
nearly all matters with the U.S. Internal Revenue Service related to its
examination for tax years 2000 through 2004. As of March 31, 2007 and 2006, the
Company has a reserve of $11.6 million and $37.8 million, respectively, for
those matters where the amount of loss is probable and estimable. The amount of
the reserve is based on management's best estimate given the Company's history
with similar matters and interpretations of current laws and regulations.
66
13. SEGMENT INFORMATION
Compuware reports on two reportable business segments in the software industry:
products and professional services. The Company provides software products and
professional services to the world's largest IT organizations that help IT
professionals increase the effectiveness of their organizations.
The Company's products are designed to enhance the effectiveness of key
disciplines throughout IT organizations from application development and
delivery to service management and IT portfolio management supporting all major
enterprise computing platforms. The Company also offers a broad range of IT
professional services including business systems analysis, design,
communication, programming, software conversion and system planning and
consulting.
No single customer accounted for greater than 10% of total revenue during the
years ended March 31, 2007, 2006 or 2005, or greater than 10% of accounts
receivable at March 31, 2007 or 2006.
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses and other charges. The allocation of
income taxes is not evaluated at the segment level. Financial information for
the Company's business segments is as follows (in thousands):
Year Ended March 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Revenues:
Products:
Mainframe $ 484,807 $ 502,931 $ 526,743
Distributed systems 256,199 227,315 203,756
---------- ---------- ----------
Total products revenue 741,006 730,246 730,499
Professional services 471,996 475,115 501,340
---------- ---------- ----------
Total revenues $1,213,002 $1,205,361 $1,231,839
========== ========== ==========
Income (loss) from operations:
Products $ 275,091 $ 280,277 $ 229,880
Professional services 51,267 57,630 56,344
Corporate expenses (193,578) (190,538) (199,628)
---------- ---------- ----------
Income from operations 132,780 147,369 86,596
Other income, net 60,277 44,091 19,629
---------- ---------- ----------
Income before income taxes $ 193,057 $ 191,460 $ 106,225
========== ========== ==========
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided.
67
Financial information regarding geographic operations is presented in the table
below (in thousands):
Year Ended March 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Revenues:
United States $ 800,585 $ 797,059 $ 836,420
Europe and Africa 301,556 308,730 299,616
Other international operations 110,861 99,572 95,803
---------- ---------- ----------
Total revenues $1,213,002 $1,205,361 $1,231,839
========== ========== ==========
March 31,
-------------------
2007 2006
-------- --------
Long-lived assets:
United States $681,128 $677,954
Europe and Africa 44,274 13,388
Other international operations 85,783 86,311
-------- --------
Total long-lived assets $811,185 $777,653
======== ========
Long-lived assets are comprised of property, plant and equipment, goodwill and
capitalized software.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and land under various operating
lease agreements extending through fiscal 2100. Total rent payments under these
agreements were approximately $36.9 million, $35.0 million and $40.7 million,
respectively, for the years ended March 31, 2007, 2006 and 2005. Certain of
these leases contain provisions for renewal options and escalation clauses. The
Company also has commitments under various advertising and charitable
contribution agreements totaling $10.0 million and $1.4 million, respectively,
at March 31, 2007. Total expense related to these agreements was approximately
$3.5 million, $3.3 million and $6.4 million, respectively, for the years ended
March 31, 2007, 2006 and 2005. The following is a schedule of future minimum
commitments (in thousands):
Payment Due by Period as of March 31,
---------------------------------------------------------------------
2013 and
Total 2008 2009 2010 2011 2012 Thereafter
-------- ------- ------- ------- ------ ------ ----------
Contractual obligations:
Operating leases $327,015 $35,178 $29,033 $17,874 $9,277 $4,568 $231,085
Other 11,403 3,340 3,213 2,550 450 450 1,400
-------- ------- ------- ------- ------ ------ --------
Total $338,418 $38,518 $32,246 $20,424 $9,727 $5,018 $232,485
======== ======= ======= ======= ====== ====== ========
68
The Company also leases a portion of the new headquarters facility to retail
tenants. The following is a schedule of future minimum lease income commitments
(in thousands):
Payment Due by Period as of March 31,
------------------------------------------------------
2013 and
Total 2008 2009 2010 2011 2012 Thereafter
------ ---- ---- ---- ---- ---- ----------
Lease income commitments:
Operating lease income $7,190 $870 $848 $781 $714 $704 $3,273
Director Compensation - Effective April 1, 2002, the Board of Directors approved
the 2002 Directors Phantom Stock Plan (the "Plan") for non-employee directors to
provide increased incentive to make contributions to the long term growth of the
Company, to align the interests of directors with the interests of shareholders,
and to facilitate attracting and retaining directors of exceptional ability. The
Plan provides for issuance of rights to receive the value of a share of the
Company's common stock in cash upon vesting which occurs upon the retirement of
the director from the Board. Phantom shares are granted automatically at the
beginning of each fiscal year and at the discretion of the Board. As of March
31, 2007, approximately 461,000 phantom shares were outstanding. The expense
incurred related to this program was approximately $1,906,000, $1,499,000 and
$397,000 for the years ended March 31, 2007, 2006 and 2005, respectively, and is
included in "administrative and general" in the consolidated statements of
operations. Any fluctuation in the Company's stock price as quoted on the NASDAQ
will result in a change to the expected payments under the Plan.
In May 2005, the Board of Directors authorized non-employee directors to defer
receipt of all or a portion of their director's fees via a deferred compensation
plan. As an alternative to a cash deferral, the plan allows non-employee
directors to defer their cash compensation into deferred compensation stock
units, which are based upon the price of Compuware's common stock. As of March
31, 2007, approximately 6,000 units were outstanding. No amounts were deferred
under this plan during the year ended March 31, 2006.
Settlement - In March 2005, the Company settled all of its outstanding
litigation with International Business Machines Corporation ("IBM"). Under the
settlement agreement and subsequent clarifications, IBM and the Company entered
into a business arrangement whereby IBM will purchase software licenses and
maintenance from the Company valued at $140 million over five years ($20 million
in fiscal 2006, $30 million in each of the following years.) During fiscal 2007
and 2006, IBM utilized $19.4 million and $9.4 million, respectively, of their
license and maintenance commitment, resulting in an unused commitment balance of
$10.6 million for each fiscal year. These amounts are reported as "settlement"
in the consolidated statements of operations.
Legal Matters - The Company and one of its employees were parties to a libel
lawsuit filed in April 2002 by two former employees titled Mary McCarthy O'Lee
and Aidan O'Lee v. Compuware Corp., et al., Case No. 406409, Superior Court of
the State of California, City and County of San Francisco. Plaintiffs alleged
damages totaling $1 million. The case was tried to a jury in late June and early
July 2005. The jury rendered a verdict against the Company and awarded
plaintiffs a total of $1.15 million in compensatory and $10 million in punitive
damages. On post-trial motions, the trial court affirmed the compensatory
damages but reduced the punitive damages award to $3.45 million. The Company
appealed seeking a further reduction of the damages award. The plaintiffs also
appealed seeking to reinstate the original verdict award. The appellate court
affirmed the trial court's decision, and the Company has satisfied the judgment
in April 2007. The matter is now closed.
The Company is one of dozens of defendants in a patent infringement lawsuit
filed on April 10, 2007 titled Disc Link Corporation v. Oracle Corp., et al.,
Case No. 5:07-cv-58 in the United States District Court for the Eastern District
of Texas. The plaintiff claims that the Company and the other defendants supply,
distribute or offer for sale products that infringe U.S. Patent No. 6,314,574
entitled "Information Distribution System". Plaintiff seeks unspecified
compensatory damages, trebling of damages for willful infringement, and fees and
costs. We deny the allegation and are vigorously defending against it.
69
From time to time, in addition to the matters identified above, Compuware is
subject to legal proceedings, claims, investigations and proceedings in the
ordinary course of business. In accordance with U.S. generally accepted
accounting principles, Compuware makes a provision for a liability when it is
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. These provisions are reviewed at least quarterly and
adjusted to reflect the impacts of negotiations, settlements, rulings, advice of
legal counsel, and other information and events pertaining to a particular case.
Litigation is inherently unpredictable. However, we believe that we have valid
defenses with respect to the legal matters pending against Compuware. It is
possible, nevertheless, that our consolidated financial position, cash flows or
results of operations could be affected by the resolution of one or more of such
contingencies.
15. BENEFIT PLANS
Employee Stock Ownership Plan - In July 1986, the Company established an
Employee Stock Ownership Plan ("ESOP") and Trust. Under the terms of the ESOP,
the Company makes annual contributions to the Plan for the benefit of
substantially all U.S. employees of the Company. The contribution may be in the
form of cash or common shares of the Company. The Board of Directors may
authorize contributions between a maximum of 25% of eligible compensation and a
minimum sufficient to cover current obligations of the Plan. Contributions
totaled $200,000 in fiscal 2007. During fiscal 2006 and 2005, only the minimum
contribution was made to the Plan. This is a non-leveraged ESOP plan.
Employee Stock Purchase Plan - During fiscal 2002, the shareholders approved
international and domestic employee stock purchase plans under which the Company
was authorized to issue up to 15 million shares of common stock to eligible
employees. Under the terms of the plan, employees can elect to have up to 10% of
their compensation withheld to purchase Company stock at the close of the
offering period. The value of the stock purchased in any calendar year cannot
exceed $25,000 per employee. The purchase price is 95% of the last day's average
high and low price for each three month offering period. During fiscal 2007,
2006 and 2005, the Company sold approximately 570,000, 1,369,000 and 1,901,000
shares, respectively, to eligible employees under the plan.
Employee Stock Option Plans - The Company adopted five stock option plans dating
back to 1991. These plans provide for grants of options to employees and to
directors to purchase up to 91,000,000 shares of the Company's common stock, of
which approximately 20,118,000 options were outstanding at March 31, 2007. Under
the terms of the plans, the Company may grant nonqualified options at the fair
market value of the stock on the date of grant. During fiscal 2007, the Company
granted approximately 655,000 options under these Plans. Fifty percent of the
option shares granted under these plans become exercisable on the third year
anniversary of the date of grant, and 25% of the option shares vest on each of
the fourth year and fifth year anniversaries of the date of grant. All options
were granted at fair market value and expire ten years from the date of grant.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval, as shareholder approval was not required at the time.
The plan provides for grants of options to employees and to directors to
purchase up to 50,000,000 shares of the Company's common stock. Under the terms
of the plan, the Company may grant nonqualified stock options at the fair market
value of the stock on the date of grant. During fiscal 2007, the Company granted
approximately 1,495,000 options under the Broad Based Stock Option Plan.
Approximately 23,057,000 options were outstanding at March 31, 2007. Option
shares granted under the Broad Based Stock Option Plan either vest every six
months over a four year period or 50% of the option shares become exercisable on
the third year anniversary of the date of grant, and 25% of the option shares
vest on each of the fourth year and fifth year anniversaries of the date of
grant. All options were granted at fair market value and expire ten years from
the date of grant.
70
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming a
director. The Company did not grant options under the Non-Employee Director
Stock Option Plan during fiscal 2007. Approximately 534,000 options were
outstanding at March 31, 2007.
At March 31, 2007, approximately 1,000 options were outstanding under plans that
were terminated by the Company, of which virtually all are fully vested. All
outstanding options under the terminated plans remain in effect in accordance
with the terms under which they were granted.
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction. There
were no exercises under the Replacement Stock Option Award program during fiscal
2007.
A summary of option activity under the Company's stock-based compensation plans
as of March 31, 2007, and changes during the the year then ended is presented
below (shares and intrinsic value in thousands):
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
------ -------- ----------- ---------
Outstanding as of April 1, 2006 55,710 $11.66
Granted 2,150 7.39
Exercised (8,069) 7.66
Forfeited (1,115) 6.94
Cancelled/expired (4,966) 12.33
------ ------
Outstanding as of March 31, 2007 43,710 $12.23 3.92 $31,384
====== ======
Ending vested and expected to vest 42,083 $12.42 3.75 $27,636
Exercisable as of March 31, 2007 36,041 $13.32 3.12 $13,013
The total fair value of shares vested and the total intrinsic value of options
exercised during the years end March 31, 2007, 2006 and 2005 were as follows
(intrinsic values in thousands):
Year Ended March 31,
-------------------------
2007 2006 2005
------ ------- ------
Fair value of shares vested $ 5.58 $ 5.45 $14.77
Intrinsic value of options exercised 9,986 12,866 1,812
SFAS 123(R) requires the use of a valuation model to calculate the fair value of
stock option awards. The Company has elected to use the Black-Scholes option
pricing model, which incorporates various assumptions including volatility,
expected term, risk-free interest rates and dividend yields. The volatility is
based on historical volatility of the Company's common stock over the most
recent period commensurate with the estimated expected term of the stock option
granted. The Company uses historical volatility because management believes such
volatility is representative of prospective trends. The expected term of an
award is based on the simplified method as described in SAB 107. The risk-free
interest rate assumption is based upon observed interest rates appropriate for
the expected term
71
of our awards. The dividend yield assumption is based on the Company's history
and expectation regarding dividend payouts.
The weighted average fair value of stock options granted in the year ended March
31, 2007 and the assumptions used to estimate those values using a Black-Scholes
option pricing model were as follows:
Year Ended
March 31, 2007
--------------
Expected volatility 68.75%
Risk-free interest rate 4.82%
Expected lives at date of grant (in years) 6.9
Weighted average fair value of the options granted $ 5.04
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.
For the year ended March 31, 2007, stock-based compensation expense was
allocated as follows (in thousands):
Year Ended
March 31, 2007
--------------
Stock-based compensation classified as:
Cost of software license fees $ 4
Cost of maintenance fees 283
Cost of professional services 1,508
Technology development and support 777
Sales and marketing 3,910
Administrative and general 2,950
-------
Total stock-based compensation expense
before income taxes 9,432
Income tax benefit (3,270)
-------
Total stock-based compensation expense
after income taxes $ 6,162
=======
Effect on basic and diluted earnings per share $ 0.02
As of March 31, 2007, $16.0 million of total unrecognized compensation cost, net
of estimated forfeitures, related to unvested stock options is expected to be
recognized over a weighted-average period of approximately 2.65 years.
72
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2007 and 2006 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ----------
Fiscal 2007:
Revenues $296,318 $288,507 $315,148 $313,029 $1,213,002
Gross profit 171,991 168,057 195,273 186,838 722,159
Operating income 32,882 25,446 42,741 31,711 132,780
Pre-tax income 43,763 36,059 51,753 61,482 193,057
Net income 29,321 24,809 36,486 67,476 158,092
Basic and diluted
earnings per
share 0.08 0.07 0.11 0.21 0.45
Fiscal 2006:
Revenues $297,328 $292,646 $305,905 $309,482 $1,205,361
Gross profit 175,269 171,823 187,971 187,864 722,927
Operating income 29,477 28,253 47,034 42,605 147,369
Pre-tax income 36,210 36,105 56,268 62,877 191,460
Net income 24,623 24,190 37,700 56,447 142,960
Basic and diluted
earnings per
share 0.06 0.06 0.10 0.15 0.37
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure information required to be disclosed in the Company's reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its 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, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934 (the "Exchange Act"). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, at the reasonable assurance
level, to cause the information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act to be recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Internal control over financial reporting
is defined under applicable Securities and Exchange Commission rules as a
process designed under the supervision of the Company's Chief Executive Officer
and Chief Financial Officer and effected by the Company's Board of Directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
- provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with U. S. generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
- provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become ineffective because of changes in conditions and that the
degree of compliance with the policies or procedures may deteriorate.
As of March 31, 2007, management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of the
Company's internal control over financial reporting based on the criteria for
effective internal control over financial reporting established in "Internal
Control -- Integrated Framework," issued by the Committee of Sponsoring
Organizations ("COSO") of the Treadway Commission. Based on the assessment,
management determined that the Company's internal control over financial
reporting was effective, as of March 31, 2007, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
Deloitte & Touche LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
Annual Report on Form 10-K, has issued an attestation report on management's
assessment of the Company's internal control over financial reporting as of
March 31, 2007. The report, which expresses unqualified opinions on management's
assessment and on the effectiveness of the Company's internal control over
financial reporting as of March 31, 2007, is included in this Item under the
heading "Report of Independent Registered Public Accounting Firm."
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company's internal control over financial reporting occurred
during the quarter ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Compuware Corporation
Detroit, Michigan
We have audited management's assessment, included in the accompanying
Mangement's Report on Internal Control Over Financial Reporting, that Compuware
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of March 31, 2007, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to
75
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of March 31, 2007, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2007, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2007, of the Company and our
report dated May 24, 2007, expressed an unqualified opinion on those financial
statements and included an explanatory paragraph regarding the adoption of
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 24, 2007
ITEM 9B. OTHER INFORMATION
None
76
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is contained in the Proxy Statement under
the captions "Corporate Governance" (excluding the Report of the Audit
Committee), "Election of Directors" and "Other Matters - Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Proxy Statement under
the caption "Compensation of Executive Officers" and "Corporate Governance -
Compensation of Directors" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is contained in the Proxy Statement under
the caption "Security Ownership of Management and Major Shareholders" and is
incorporated herein by reference. In addition, the information contained in the
Equity Compensation table under Item 5 of this report and in Note 15 in the
Notes to Consolidated Financial Statements which are included in this report in
Item 8 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is contained in the Proxy Statement under
the caption "Other Matters - Related Party Transactions" and "Corporate
Governance - Board of Directors - Director Independence" and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is contained in the Proxy Statement under
the caption "Ratification of Appointment of the Independent Registered Public
Accounting Firm" and is incorporated herein by reference.
77
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are filed herewith:
Page
-----
Report of Independent Registered Public Accounting Firm 42
Consolidated Balance Sheets as of March 31, 2007 and 2006 43
Consolidated Statements of Operations for each of the years ended March
31, 2007, 2006, and 2005 44
Consolidated Statements of Shareholders' Equity for each of the years
ended March 31, 2007, 2006, and 2005 45
Consolidated Statements of Cash Flows for each of the years ended March
31, 2007, 2006, and 2005 46
Notes to Consolidated Financial Statements 47-73
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted as the required
information is not applicable or the information is presented in the
consolidated financial statements or related notes.
3. EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index attached to this report. The Exhibit Index
is incorporated herein by reference.
78
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Detroit, State of Michigan on May 25, 2007.
COMPUWARE CORPORATION
By: /S/ PETER KARMANOS, JR.
------------------------------------
Peter Karmanos, Jr.
Chairman of the Board, Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ PETER KARMANOS, JR. Chairman of the Board, Chief May 25, 2007
------------------------- Executive Officer And Director
Peter Karmanos, Jr. (Principal Executive Officer)
/S/ LAURA L. FOURNIER Senior Vice President, Chief May 25, 2007
------------------------- Financial Officer and Treasurer
Laura L. Fournier (Chief Financial and Accounting
Officer)
/S/ DENNIS W. ARCHER Director May 22, 2007
-------------------------
Dennis W. Archer
/S/ GURMINDER S. BEDI Director May 23, 2007
-------------------------
Gurminder S. Bedi
/S/ WILLIAM O. GRABE Director May 25, 2007
-------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director May 25, 2007
-------------------------
William R. Halling
/S/ FAYE A. NELSON Director May 25, 2007
-------------------------
Faye A. Nelson
/S/ GLENDA D. PRICE Director May 22, 2007
-------------------------
Glenda D. Price
/S/ W. JAMES PROWSE Director May 25, 2007
-------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director May 25, 2007
-------------------------
G. Scott Romney
79
EXHIBITS
The following exhibits are filed herewith or incorporated by reference. Each
management contract or compensatory plan or arrangement filed as an exhibit to
this report is identified below with an asterisk before the exhibit number. The
Company's SEC file number is 000-20900.
Exhibit
Number Description of Document
------- -----------------------
2.6 Agreement and Plan of Merger dated May 6, 2005 by and among Compuware
Corporation, Compuware Acquisition Corp., Adlex, Inc., and with
respect to Article VIII, Tad Witkowicz, as Shareholder Representative
(15)
2.7 Stock Purchase Agreement by and among Compuware Corporation, Proxima
Technology Group, Inc., and each of the shareholders of Proxima
Technology Group, Inc. dated as of January 2, 2007 (23)
3(i).1 Restated Articles of Incorporation of Compuware Corporation, as
amended, as of October 25, 2000 (9)
3(i).1 Amended and Restated Bylaws of Compuware Corporation, as of January 3,
2002. (12)
4.0 Rights Agreement dated as of October 25, 2000 between Compuware
Corporation and Equiserve Trust Company, N.A., as Rights Agent (7)
4.2 Revolving Credit Agreement dated as of May 2, 2003, between Compuware
Corporation and Comerica Bank (10)
4.3 Amendment No. 1 to Credit Agreement, dated as of April 30, 2004 (11)
4.4 Amendment No. 2, dated as of July 29, 2004, Revolving Credit Agreement
dated as of May 2, 2003, between Compuware Corporation and Comerica
Bank (13)
4.5 Amendment No. 3 to Credit Agreement, dated July 28, 2005 (18)
4.6 Amendment To Rights Agreement, dated as of October 29, 2001 (19)
4.7 Amendment No. 2 To Rights Agreement, dated as of May 9, 2006 (19)
4.8 Amended and Restated Credit Agreement dated May 2, 2003 as of July 27,
2006 (22)
*10.4 1992 Stock Option Plan (1)
10.24 Promotion Agreement, dated September 8, 1992, between Compuware Sports
Corporation and the Company (1)
*10.35 Fiscal 1993 Stock Option Plan (1)
*10.36 Stock Option Plan for Non-Employee Directors (1)
*10.37 Fiscal 1998 Stock Option Plan (3)
*10.51 Fiscal 1996 Stock Option Plan (6)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (6)
*10.83 Fiscal 1999 Stock Option Plan (8)
*10.85 2001 Broad Based Stock Option Plan (5)
*10.86 First Amendment to 1992 Stock Option Plan (2)
*10.87 First Amendment to 1993 Stock Option Plan (2)
*10.88 First Amendment to 1996 Stock Option Plan (2)
*10.89 First Amendment to Stock Option Plan For Non-Employee Directors (4)
*10.90 Phantom Stock Plan (10)
*10.91 Nonqualified Stock Option Agreement for Executive Officers (13)
*10.92 Nonqualified Stock Option Agreement for Outside Directors (13)
*10.93 Phantom Share Award Agreement (13)
*10.95 Settlement Agreement dated March 21, 2005 by and among Compuware
Corporation and International Business Machines Corporation (14)
*10.96 First Amendment to the Compuware Corporation 2002 Directors Phantom
Stock Plan (16)
*10.97 Amendment Number 1 to Settlement Agreement dated November 29, 2005 by
and among Compuware Corporation and International Business Machines
Corporation (17)
*10.98 2005 Non-Employee Directors' Deferred Compensation Plan (20)
*10.99 Executive Incentive Plan - Corporate (21)
*10.100 Parallel Nonqualified Stock Purchase Plan Arrangement (25)
*10.101 Fifth Amendment to the Compuware Corporation ESOP/401(k) Plan (22)
*10.102 Post-Retirement Consulting Agreement, dated March 1, 2007, between
Compuware Corporation and Peter Karmanos, Jr. (24)
21.1 Subsidiaries of the Registrant (25)
23.1 Consent of Independent Registered Public Accounting Firm (25)
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (25)
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (25)
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (25)
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 33-53652).
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration Statement No. 333-37873).
(4) Incorporated by reference to the Company's fiscal 1998 Annual Report on
Form 10-K.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration Statement No. 333-57984).
(6) Incorporated by reference to the Company's fiscal 2000 Annual Report on
Form 10-K.
(7) Incorporated by reference to the Company's Registration Statement on Form
8-A filed with the Securities and Exchange Commission on October 26, 2000.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2000.
(9) Incorporated by reference to the Company's fiscal 2001 Annual Report on
Form 10-K.
(10) Incorporated by reference to the Company's fiscal 2003 Annual Report on
Form 10-K.
(11) Incorporated by reference to the Company's fiscal 2004 Annual Report on
Form 10-K.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2004.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004.
(14) Incorporated by reference to the Company's Form 8-K filed on March 21, 2005
(15) Incorporated by reference to the Company's Form 8-K filed on May 9, 2005.
(16) Incorporated by reference to the Company's Form 8-K/A filed on May 17,
2005.
(17) Incorporated by reference to the Company's Form 8-K filed on November 29,
2005.
(18) Incorporated by reference to the Company's Form 8-K filed on August 2,
2005.
(19) Incorporated by reference to the first Form 8-K filed by the Company on May
11, 2006.
(20) Incorporated by reference to the second Form 8-K filed by the Company on
May 11, 2006.
(21) Incorporated by reference to the Company's Form 8-K filed on June 6, 2006.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2006.
(23) Incorporated by reference to the Company's Form 8-K filed on January 8,
2007.
(24) Incorporated by reference to the Company's Form 8-K filed on March 2, 2007.
(25) Filed herewith.