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, 2008
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer" "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2007, the last business day of the registrant's
most recently completed second fiscal quarter, was $1,828,681,856, based upon
the closing sales price of the common stock on that date of $8.02 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 261,654,701 shares of $.01 par value common stock outstanding as of
May 16, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2008 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 15
1B. Unresolved Staff Comments 21
2. Properties 21
3. Legal Proceedings 21
4. Submission of Matters to a Vote of Security Holders 21
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 22
6. Selected 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 44
8. Financial Statements and Supplementary Data 46
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 80
9A. Controls and Procedures 80
9B. Other Information 82
PART III
10. Directors, Executive Officers and Corporate Governance 83
11. Executive Compensation 83
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 83
13. Certain Relationships and Related Transactions, and Director
Independence 84
14. Principal Accountant Fees and Services 84
PART IV
15. Exhibits and Financial Statement Schedules 85
2
PART I
ITEM 1. BUSINESS
We deliver value to businesses worldwide by providing software products,
professional services and application 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 use business to business
("B2B") applications to integrate vital business information and processes
between partners, customers and vendors.
We operate in three business segments in the software and technology services
industries: products, professional services and application 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 2008, 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.
This report 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.
3
OUR BUSINESS STRATEGY
Our business strategy is to focus on providing software, professional services
and application services that deliver value 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.
On May 15, 2008, we officially launched Compuware 2.0 which is a rebirth based
on the principles Compuware has always stood for and is based on the following
definable, actionable and measurable objectives:
- Instituting a strategic vision for the Company that positions us as
best-in-class for the businesses in which we choose to compete.
- Going to market with solutions that possess straightforward and
compelling value propositions.
- Establishing a corporate brand identity our customers can identify
with and trust while extending our current brand equity outside our
current client base.
- Aligning the organization in a manner that best allows us to focus on
our target markets and deliver value to our customers.
- Deploying a global recruiting, training and career development
function to attract and retain the highest quality professionals.
- Creating a culture in which employees are energized and empowered, and
that rewards people for their achievements in a consistent and
equitable manner.
- Implementing effective go-to-market programs and delivering
high-value, consistent sales tools to the field that will help our
sales team communicate our value to customers in a consistent and
transparent manner.
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
YEAR ENDED MARCH 31, OF TOTAL REVENUES
------------------------------ ------------------
PRODUCT REVENUE 2008 2007 2006 2008 2007 2006
--------------- -------- -------- -------- ---- ---- ----
Mainframe Products
File-AID $157,207 $157,730 $162,843 12.8% 13.0% 13.5%
Xpediter 98,507 98,949 98,043 8.0 8.2 8.1
Hiperstation 18,787 18,002 17,859 1.5 1.5 1.5
Abend-AID 125,942 127,538 132,503 10.3 10.5 11.0
Strobe 86,244 82,588 91,683 7.0 6.8 7.6
-------- -------- -------- ---- ---- ----
Total Mainframe Products Revenue 486,687 484,807 502,931 39.6 40.0 41.7
-------- -------- -------- ---- ---- ----
Distributed Products
Vantage 130,064 107,993 86,939 10.6 8.9 7.2
Changepoint 28,479 22,481 18,512 2.3 1.8 1.5
Quality 56,169 53,019 47,820 4.6 4.4 4.0
Uniface 48,493 46,137 47,720 3.9 3.8 4.0
DevPartner 23,988 26,569 26,324 1.9 2.2 2.2
-------- -------- -------- ---- ---- ----
Total Distributed Products Revenue 287,193 256,199 227,315 23.3 21.1 18.9
-------- -------- -------- ---- ---- ----
Total Product Revenue $773,880 $741,006 $730,246 62.9% 61.1% 60.6%
======== ======== ======== ==== ==== ====
4
COMPUWARE SOFTWARE PRODUCTS
Our software products consist of six major families - all of which are primarily
intended for use by IT organizations and IT service providers. These solutions
enhance the effectiveness of key disciplines throughout the IT organization and
support all major enterprise computing platforms.
MAINFRAME -- Our File-AID, Xpediter, Hiperstation, Abend-AID and Strobe
products help IT organizations to consistently and efficiently develop,
deliver and manage applications in the IBM mainframe (z/Series)
environment.
VANTAGE -- Our Vantage products are used to manage IT service delivery -
providing IT organizations with the ability to measure, manage and
communicate service in business terms based on the end user experience, and
enabling delivery of consistently high levels of service through systematic
analysis of application and infrastructure performance.
CHANGEPOINT -- 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.
QUALITY -- Our Optimal Trace, File-AID/CS, QA Director, TestPartner, and QA
Load products help IT organizations deliver high quality, high performance
applications by automating business requirements management, functional
testing, test management, performance testing and test data management.
UNIFACE -- Our Uniface products provide a 4GL development and deployment
environment for enterprise applications targeted at a variety of computing
platforms.
DEVPARTNER -- Our DevPartner products are used by application developers to
analyze and measure application code quality, memory usage and performance
in the .NET and Java environments.
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 software products ("mainframe products") focus on improving the
productivity of development, maintenance and support teams in application
analysis, testing, defect detection and remediation, 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.
5
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 five product lines: File-AID, Xpediter,
Hiperstation, Abend-AID and Strobe.
FILE-AID
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 products are 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
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 products deliver powerful analysis and
testing capabilities across multiple environments, helping developers test
more accurately and reliably, in less time.
HIPERSTATION
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. The products' powerful functions and features enhance
unit, concurrency, integration, migration, capacity and stress testing.
When deployed in production, Hiperstation products allow 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.
ABEND-AID
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
Strobe and iStrobe products 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 MARKET
In contrast to the mainframe market, the distributed 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, while facing 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 software products ("distributed products") focus on maximizing
the performance of the entire IT organization, including applications and
operations organizations, as well as enabling top-level IT management
decision-making. 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, and application performance
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 products are grouped into five product lines: Vantage,
Changepoint, Quality, Uniface and DevPartner.
VANTAGE
The Vantage family of IT service management products enables
business-driven service delivery by combining End User Experience
Monitoring, Business Service Management and Application Performance
Management with infrastructure and service desk metrics. This unique
combination provides customers with a real-time, comprehensive perspective
on service delivery allowing IT organizations to operate more effectively.
End User Experience Monitoring ("EUEM") - Provides visibility into
application service from the end user perspective. This enables proactive
IT service management by allowing IT organizations to monitor all
applications all the time. EUEM also puts application performance in
context of key business entities: applications, users and locations. With
this perspective, EUEM helps IT organizations assess the scope of a
performance problem and isolate it to the client, network, server or
application tier in order to assign the right expert to the job.
Business Service Management ("BSM") - Provides real-time views of IT
service delivery so that Chief Information Officers ("CIOs"), IT managers
and line-of-business counterparts can understand the impact that IT
services have on business operations. As a result, BSM helps the customer
communicate service delivery more effectively, meet service level
agreements, improve operational efficiency, reduce costs and increase
satisfaction with the IT organization. BSM also enhances collaboration both
within the IT organization as well as between the IT organization and the
business by centralizing and correlating technical and business key
performance indicators.
Application Performance Management ("APM") - Provides detailed application
insight that identifies and helps correct the causes of poor application
performance within client workstations, the network, a server or the
application itself, reducing time-consuming guesswork. In addition, APM
helps ensure successful application rollouts and provides crucial
information for establishing and meeting service requirements.
7
CHANGEPOINT
Changepoint provides business management capabilities for 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
expenditure.
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.
QUALITY
Our Quality products deliver a full spectrum of automated testing
capabilities 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.
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.
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.
QADirector 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.
TestPartner provides functional test automation that allows organizations
to validate business-critical applications including web-based,
client/server and packaged applications.
QALoad provides automated load testing to identify bottlenecks and to
optimize performance for internally developed, outsourced and packaged
applications running in distributed environments.
UNIFACE
Uniface is our 4GL automated development and deployment product. With
Uniface, developers can develop, integrate, maintain and deploy complex
distributed applications. Uniface applications are
8
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.
DEVPARTNER
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 and measure testing code coverage. 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.
SEASONALITY
We tend to experience a higher volume of product transactions and associated
license revenue in the quarter ended December 31, which is our third fiscal
quarter, and the quarter ended March 31, which is our fourth fiscal quarter, as
a result of customer spending patterns.
SOFTWARE LICENSING, PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
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. During
fiscal 2008 we began offering premium perpetual license rights that allow
customers a perpetual right to run our mainframe software on hardware with an
unlimited MIPS capacity. Also, our customers purchase maintenance and support
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. 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. We also enter into
agreements with our customers that allow them to license 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.
We believe that effective support of our customers and products during both the
trial period and for the maintenance term is a substantial factor in product
satisfaction and subsequent new product sales. We
9
believe our installed base is a significant asset and intend to continue to
provide customer support and product enhancements to ensure a continuing high
level of customer satisfaction. In fiscal years 2008, 2007, and 2006, we
experienced high customer maintenance renewal rates.
For fiscal years 2008, 2007, and 2006, software license fees represented
approximately 24.2%, 23.4% and 24.6%, respectively, and maintenance fees
represented approximately 38.7%, 37.7% and 36.0%, 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.
During fiscal 2008, the Company consolidated its product development activities
in order to increase the effectiveness and efficiency of our development
operations, which resulted in the closure of certain development labs. As of
March 31, 2008, product development is performed primarily at our headquarters
in Detroit, Michigan; and at our development labs in Amsterdam, The Netherlands;
Gdansk, Poland; and Toronto, Canada. See Note 7 of the Notes to Consolidated
Financial Statements, included in Item 8 of this report, for more details.
Total technology development and support costs were $113.7 million, $135.5
million, and $117.1 million during fiscal 2008, 2007 and 2006, respectively, of
which $12.6 million, $21.4 million, and $20.2 million, respectively, were
capitalized.
PROFESSIONAL SERVICES
We offer a broad range of IT services for distributed and mainframe
environments. Our offerings include technical staffing, application 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. For fiscal 2008, 2007 and 2006,
professional services fees represented approximately 34.1%, 36.4% and 37.9%,
respectively, of our total revenue.
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 operations in other
international locations. In addition, Compuware offers a development center that
serves customers looking for flexible, cost-effective and high-quality services
delivered remotely from our facility in Montreal, Canada.
10
APPLICATION SERVICES
Our application services which are marketed under the brand name "Covisint" use
B2B applications to integrate vital business information and processes between
partners, customers and vendors. For fiscal 2008, 2007 and 2006, application
services fees represented approximately 3.0%, 2.5% and 1.5%, respectively, of
our total revenue.
Covisint provides a secure, collaborative platform that digitizes and integrates
information that crosses 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
receiving 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, professional services and application 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 2008, 2007 or 2006, or greater than 10% of accounts
receivable at March 31, 2008 and 2007.
SALES AND MARKETING
We market software products and product related professional services 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 approximately 60 countries. Our sales force
includes an inside sales division which focuses on sales of our distributed
product offerings. We market our professional and application services primarily
through account managers located in offices throughout North America. This
marketing structure enables us to keep abreast of, and respond quickly to, the
changing needs of our customers and to call on the actual users of our products
and services on a regular basis.
11
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 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 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 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. 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.
The market for application services includes communication and collaboration
services, secure user identity and access management services and system to
system communications provided in a software as a service model. We provide
application services in the Automotive, Healthcare, Financial Services and
Government vertical markets ("verticals"). The application services market is
competitive in some vertical industries and highly competitive related to system
to system communications. Our principal competitors include Electronic Data
Systems Corporation, IBM Global Services, GXS Strategies, Sterling Commerce and
other regional and local firms in the markets in which we have customers or
potential customers particularly in the Automotive vertical. In the other
verticals served, since the market is not yet fully developed, the competition
is not as entrenched but additional startup companies are beginning to emerge
because software as a service models are a new delivery model addressing
automation of processes that are currently manual or at best semi-automated for
the services we deliver. Some key competitive factors are price, speed of
implementation, reduced risk related to regulatory compliance and implementation
problems, inclusion of state of the art technology features, solution
performance and ability to meet customer service level requirements.
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 products, professional services and
application services.
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
12
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, 2008, we have been granted 39 patents issued in
the United States and have 17 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.
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 which could
require a payment to the third party upon sale of the product, or result in
costly litigation.
EMPLOYEES
As of March 31, 2008, we employed 6,344 people worldwide, with 1,141 in product
sales, sales support and marketing; 1,187 in technology development and support;
3,035 in professional services, 256 in application services and 725 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. 65 Chairman of the Board and Chief Executive Officer
Robert C. Paul 45 President and Chief Operating Officer
Laura L. Fournier 55 Executive Vice President, Chief Financial Officer and Treasurer
Christian J. Bockhausen 66 Executive Vice President and Chief Technology Officer
Denise A. Knobblock Starr 53 Executive Vice President and Chief Administrative Officer
Daniel S. Follis, Jr. 42 Vice President, General Counsel and Secretary
13
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 through March
2008.
Robert C. Paul has served as President and Chief Operating Officer of Compuware
since April 2008. Prior to that time, Mr. Paul was President and Chief Operating
Officer of Compuware 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 Executive Vice President since April 2008 and
continues to serve as 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.
Christian J. Bockhausen has served as Executive Vice President and Chief
Technology Officer since April 2008. From April 1998 through March 2008, he
served as Senior Vice President and Chief Information Officer over corporate
information systems and assumed leadership over product technologies in April
2001. Mr. Bockhausen joined Compuware in October 1996 as Vice President of the
North American Testing and Implementation Product Lab.
Denise A. Knobblock Starr has served as Executive Vice President of
Administration since April 2002 and as Chief Administrative Officer since April
2007. Ms. Knobblock Starr was Executive Vice President of Human Resources and
Administration from April 1998 through March 2002. From April 1995 through March
1998, she was Senior Vice President of Purchasing, Facilities, Administration
and Travel. Ms. Knobblock Starr served as the Director of Administration and
Facilities from April 1991 to March 1995. She joined Compuware in January 1989
as Manager of Administration and Facilities.
Daniel S. Follis, Jr. has served as Vice President, General Counsel and
Secretary since March 2008. From January 2006 through February 2008, he served
as Vice President, Associate General Counsel. Mr. Follis joined Compuware in
March 1998 as Senior Counsel.
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 Note 1 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report. The Company's foreign operations are subject
to risks related to foreign exchange rates and other risks. For a discussion of
risks associated with our business, see Item 1A. Risk Factors and Item 7A.
Quantitative and Qualitative Disclosure about Market Risk.
14
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. These competitive pressures may have a negative effect on our
results of operations and cash flows.
OUR STRATEGY TO PACKAGE PRODUCTS AND SERVICES AS A SINGLE OFFERING MAY NOT BE
ACCEPTED BY OUR CUSTOMERS, NEGATIVELY IMPACTING OUR REVENUE.
We offer bundled product and service arrangements to ensure our customers
receive the full value of our products. There can be no assurance that customers
will accept these packages. As a result, this may decrease our sales volume and
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.
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 forecast. Our sales
forecast estimates can prove to be unreliable both in a particular quarter and
over a longer period of time. In addition, even after contracts have been
executed, analysis is required before the timing of revenue recognition can be
determined.
IF WE FAIL TO ACHIEVE THE RESULTS WE EXPECT FROM OUR EXPENSE REDUCTION PROGRAM,
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
In fiscal 2008, we implemented plans to reduce expenses, which included the
consolidation and elimination of certain product development locations,
reduction in discretionary spending, reduction in the work force and other cost
cutting measures, resulting in restructuring charges during fiscal 2008 (see
Note 7 of the Notes to Consolidated Financial Statements, included in Item 8 of
this report). There can be no assurance that our restructuring plan to reduce
expenses will produce the cost savings we anticipate.
15
OUR SOFTWARE AND TECHNOLOGY MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
Our software products are developed or enhanced internally or acquired through
acquisitions.
All employees sign an agreement which states that the employee was 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.
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.
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 MARGIN OR OPERATING
MARGIN PERCENTAGE DECLINE.
Our distributed software and application services businesses have a lower
operating margin percentage than our mainframe business. Further, these
businesses are growing faster than Compuware's other businesses. The growth of
our distributed software and application services could result in a lower
operating margin percentage for Compuware as a whole. In addition, if the
mainframe business experiences a decline in revenue or operating margin
percentage, our operating margin or operating margin percentage may decline.
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.
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
16
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. 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.
THE MARKET FOR APPLICATION SERVICES IS IN ITS EARLY STAGES WITH EMERGING
COMPETITORS. AS THE MARKET MATURES, COMPETITION MAY INCREASE AND COULD HAVE A
NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS.
Our principal competitors in application services include Electronic Data
Systems Corporation, IBM Global Services, GXS Strategies, Sterling Commerce and
other regional and local firms in the markets in which we have customers or
potential customers. Several of these competitors have substantially greater
financial, marketing, recruiting and training resources than we do. The
principal competitive factors affecting the market for application services are
price, speed of implementation, reduced risk related to regulatory compliance
and implementation problems, inclusion of state of the art technology features,
solution performance and ability to meet customer service level requirements.
There is no assurance that we will be able to compete sucessfully 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 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.
17
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.
Over 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 and application services.
A FURTHER DECLINE IN THE U.S. DOMESTIC AUTOMOTIVE MANUFACTURING BUSINESS COULD
ADVERSELY AFFECT OUR PROFESSIONAL SERVICES AND APPLICATION SERVICES BUSINESSES.
Approximately one-third of our worldwide professional and application 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 and
application 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.
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
18
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 common
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 currency
fluctuations and the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as we sell new
products or additional capacity to customers. Declines in our license bookings,
increased customer cancellations or currency fluctuations 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 are subject to income taxes in both the United States and numerous foreign
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. One of the components that needs to be evaluated is
the realization of our deferred tax assets. We must 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. Changes in estimates of projected future operating results or in
assumptions regarding our ability to generate future taxable income could result
in significant increases to our valuation allowance and tax expense which would
reduce net income.
In addition, we recognize reserves for uncertain tax positions through tax
expense for estimated exposures related to our current tax positions. We
evaluate the need for reserves for uncertain tax positions 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 reserves
for uncertain tax positions.
We are also subject to routine corporate income tax audits in these
jurisdictions. Our provision for income taxes includes amounts intended to
satisfy income tax assessments that are likely to 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 changes to tax expense.
19
OUR STOCK REPURCHASE PLANS MAY BE SUSPENDED OR TERMINATED AT ANY TIME, WHICH MAY
RESULT IN A DECREASE IN OUR STOCK PRICE.
We have repurchased shares of our common stock in the market during the past
several years and currently repurchase shares under an arrangement pursuant to
which management is permitted to determine the amount and timing of repurchases
in its discretion subject to an overall limit. Our ability and willingness to
repurchase shares is subject to, among other things, the availability of cash
resources and credit at rates and upon terms we believe are prudent. Stock
market conditions, the market value of our common stock and other factors may
also make it imprudent for us from time to time to engage in repurchase
activity. There can be no assurance that we will continue to repurchase shares
at historic levels or at all. If our repurchase program is curtailed, our stock
price may fall.
IF THE FAIR VALUE OF OUR LONG-LIVED ASSETS DETERIORATED BELOW THEIR CARRYING
VALUE, RECOGNITION OF AN IMPAIRMENT LOSS WOULD BE REQUIRED, WHICH WOULD
ADVERSELY AFFECT OUR FINANCIAL RESULTS.
We evaluate our long-lived assets, including property and equipment, goodwill,
acquired product rights and other intangible assets, whenever events or
circumstances occur which indicate that these assets might be impaired or
periodically as required by generally accepted accounting principles. In the
continuing process of evaluating the recoverability of the carrying amount of
our long-lived assets, there is the possibility that we could identify a
substantial impairment, which could adversely affect our financial results.
ACTS OF TERRORISM, ACTS OF WAR AND OTHER UNFORESEEN EVENTS MAY CAUSE DAMAGE OR
DISRUPTION TO US OR OUR CUSTOMERS WHICH COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS.
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.
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our executive offices, primary research and development lab, principal marketing
department, primary professional and application 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 and approximately 35,000 square
feet donated for use by local not-for-profit organizations. In addition, we
lease approximately 217,000 square feet of land on which the facility resides.
We lease approximately 88 professional services and sales offices in 30
countries, including 3 remote product research and development facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims 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, for a description of certain legal proceedings.
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.
21
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 16, 2008, there were 4,491 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.
FISCAL YEAR ENDED MARCH 31, 2008 HIGH LOW
-------------------------------- ------ -----
Fourth quarter $ 8.91 $6.10
Third quarter 10.44 7.96
Second quarter 12.22 7.32
First quarter 12.56 9.44
FISCAL YEAR ENDED MARCH 31, 2007 HIGH LOW
-------------------------------- ------ -----
Fourth quarter $9.75 $8.28
Third quarter 8.75 7.30
Second quarter 7.95 6.02
First quarter 8.05 6.56
22
COMMON SHARE REPURCHASES
The following table sets forth, the repurchases of common stock for the quarter
ended March 31, 2008:
Approximate dollar
Total number of value of shares that
shares purchased as may yet be purchased
Total number of Average price part of publicly under the plan or
Period shares purchased paid per share announced plans program (1)
------ ---------------- -------------- ------------------- --------------------
For the month ended January 31, 2008 2,050,000 $7.92 2,050,000 $ 66,406,000
For the month ended February 29, 2008 7,958,000 8.28 7,958,000 750,512,000
For the month ended March 31, 2008 2,754,000 7.66 2,754,000 729,433,000
---------- ----------
Total 12,762,000 $8.09 12,762,000
========== ==========
(1) Our purchases of common stock may occur on the open market or in negotiated
or block transactions based upon market and business conditions. Unless
terminated earlier by resolution of our Board of Directors, the
discretionary share repurchase plan will expire when we have repurchased
all shares authorized for repurchase thereunder. On February 7, 2008, the
Board of Directors authorized an additional repurchase of up to $750.0
million of our common stock under our discretionary share repurchase
program. We do not anticipate any significant changes in our approach to
the repurchase program. The maximum amount of repurchase activity under the
discretionary program continues to be limited on a daily basis to 25% of
the average trading volume of our common stock for the previous four week
period. In addition, no purchases are made during our self-imposed trading
black-out periods in which the Company and our insiders are prohibited from
trading in our common shares.
23
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 each of the following indices: S&P 500 Index, the NASDAQ Market Index and the
NASDAQ Computer and Data Processing Index for the period from April 1, 2003
through March 31, 2008. The graph includes a comparison to the S&P 500 Index in
accordance with SEC rules, as the Company's common 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 indices on March 31, 2003 and the reinvestment of all
dividends.
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.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
(PERFORMANCE GRAPH)
TOTAL RETURN TO SHAREHOLDERS
(Includes reinvestment of dividends)
Base
Period Indexed Returns Years Ending March 31,
March 31, -----------------------------------------------
Company / Index 2003 2004 2005 2006 2007 2008
--------------- --------- ------- ------- ------- ------- -------
COMPUWARE CORP $100 $218.58 $212.39 $230.97 $279.94 $216.52
S&P 500 INDEX 100 135.12 144.16 161.07 180.12 170.98
NASDAQ MARKET INDEX 100 149.26 149.91 176.74 183.30 171.69
NASDAQ COMPUTER & DATA PROCESSING INDEX 100 126.10 134.57 163.70 180.43 172.91
The information contained in Item 12 of this report is incorporated herein by
reference.
24
ITEM 6. SELECTED 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,
--------------------------------------------------------------
2008 2007 2006 2005 2004
---------- ---------- ---------- ---------- ----------
(In thousands, except earnings per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 297,506 $ 283,412 $ 296,650 $ 305,189 $ 296,627
Maintenance fees 476,374 457,594 433,596 425,310 408,191
Professional services fees 455,731 471,996 475,115 501,340 559,829
---------- ---------- ---------- ---------- ----------
Total revenues 1,229,611 1,213,002 1,205,361 1,231,839 1,264,647
---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of software license fees 30,475 28,581 23,262 27,293 31,579
Cost of maintenance fees 46,300 41,533 41,687 42,128 41,874
Cost of professional services 413,921 420,729 417,485 444,996 513,621
Technology development and support 101,132 114,071 96,858 111,258 121,781
Sales and marketing 267,800 281,730 288,162 319,940 310,643
Administrative and general 182,488 193,578 190,538 199,628 207,613
Restructuring costs (1) 42,645
---------- ---------- ---------- ---------- ----------
Total operating expenses 1,084,761 1,080,222 1,057,992 1,145,243 1,227,111
---------- ---------- ---------- ---------- ----------
Income from operations 144,850 132,780 147,369 86,596 37,536
Other income, net 35,542 60,277 44,091 19,629 18,481
---------- ---------- ---------- ---------- ----------
Income before income taxes 180,392 193,057 191,460 106,225 56,017
Income tax provision 45,998 34,965 48,500 29,743 6,185
---------- ---------- ---------- ---------- ----------
Net income $ 134,394 $ 158,092 $ 142,960 $ 76,482 $ 49,832
========== ========== ========== ========== ==========
Basic earnings per share (2) $ 0.47 $ 0.45 $ 0.37 $ 0.20 $ 0.13
Diluted earnings per share (2) 0.47 0.45 0.37 0.20 0.13
Shares used in computing net income per share:
Basic earnings computation 286,402 350,213 385,147 386,701 382,630
Diluted earnings computation 287,628 350,967 387,569 388,501 384,608
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 274,036 $ 391,823 $ 899,773 $ 780,223 $ 616,628
Total assets 2,018,557 2,029,412 2,510,968 2,478,218 2,262,709
Long term debt -- -- -- -- --
Total shareholders' equity (3) 927,031 1,132,148 1,579,499 1,516,155 1,413,591
(1) During fiscal 2008 the Company undertook various restructuring activities
to improve the effectiveness and efficiency of a number of the Company's
critical business processes, primarily within the products segment. These
activities resulted in a restructuring charge of $42.6 million for fiscal
2008. See Note 7 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report, for more details regarding our
restructuring plan.
(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
The following discussion contains certain forward-looking statements within the
meaning of the federal securities laws. When we use words such as "may",
"might", "will", "should", "believe", "expect", "anticipate", "estimate",
"continue", "predict", "forecast", "projected", "intend" or similar expressions,
or make statements regarding our future plans, objectives or expectations, we
are making forward-looking statements. Numerous important factors, risks and
uncertainties affect our operating results, 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. We
operate in three business segments in the technology industry: products,
professional services and application services. We evaluate segment performance
based primarily on segment contribution before corporate expenses. References to
years are to fiscal years ended March 31. This discussion and analysis should be
read in conjunction with the 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 application services, which are marketed under the brand
name "Covisint". Our application services offerings use B2B applications to
integrate vital business information and processes between partners, customers
and vendors.
26
ANNUAL UPDATE
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines and solutions, expanding our product and service offerings
through key acquisitions, developing strategic partnerships and managing our
costs.
The following occurred during fiscal 2008:
- Achieved an increase in product contribution margin to 42.4% in
fiscal 2008 from 37.1% in fiscal 2007 due to an increase in
product revenue and a decrease in product expenses; primarily
sales and marketing expense and technology development and
support costs.
- Achieved a 12.1% increase in distributed product revenue in
fiscal 2008 compared to fiscal 2007 driven by the continued
growth within our Vantage and Changepoint product lines.
- Experienced a decrease in professional services segment
contribution margin to 10.5% in fiscal 2008 from 13.1% in fiscal
2007 due to a greater percentage decline in revenue compared to
the decline in costs.
- Repurchased approximately 49 million shares of our common stock
during fiscal 2008 at an average price of $8.86 per share.
- Initiated restructuring actions that resulted in a charge of
$42.6 million.
- Entered into a new revolving credit facility with Comerica Bank
and other lenders. The new credit facility expanded our revolving
line of credit availability from $100 million to $150 million and
expires on November 1, 2012.
- Released 24 mainframe and 27 distributed product enhancements.
- Acquired Hilgraeve, Inc. ("Hilgraeve"), a privately held company
which developed an on-demand collaboration platform for lab and
prescription data sharing.
- Announced that the Company promoted Robert C. Paul to the
position of President and Chief Operating Officer, effective
April 1, 2008, leading the Company's product and service
operations, Compuware 2.0 efforts and other key functions.
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 Period-to-Period
Total Revenues Change
Fiscal Year Ended ----------------
March 31, 2007 2006
--------------------- to to
2008 2007 2006 2008 2007
----- ----- ----- ----- -----
REVENUE:
Software license fees 24.2% 23.4% 24.6% 5.0% (4.5)%
Maintenance fees 38.7 37.7 36.0 4.1 5.5
Professional services fees (1) 37.1 38.9 39.4 (3.4) (0.7)
----- ----- -----
Total revenues 100.0 100.0 100.0 1.4 0.6
----- ----- -----
OPERATING EXPENSES:
Cost of software license fees 2.5 2.4 1.9 6.6 22.9
Cost of maintenance fees 3.7 3.4 3.5 11.5 (0.4)
Cost of professional services (1) 33.7 34.7 34.7 (1.6) 0.8
Technology development and support 8.2 9.4 8.0 (11.3) 17.8
Sales and marketing 21.8 23.2 23.9 (4.9) (2.2)
Administrative and general 14.8 16.0 15.8 (5.7) 1.6
Restructuring costs 3.5 n/a n/a
----- ----- -----
Total operating expenses 88.2 89.1 87.8 0.4 2.1
----- ----- -----
Income from operations 11.8 10.9 12.2 9.1 (9.9)
Other income, net 2.9 5.0 3.7 (41.0) 36.7
----- ----- -----
Income before income taxes 14.7 15.9 15.9 (6.6) 0.8
Income tax provision 3.8 2.9 4.0 31.6 (27.9)
----- ----- -----
Net income 10.9% 13.0% 11.9% (15.0) 10.6
===== ===== =====
(1) Professional services fees and cost of professional services includes both
the professional services and the application services segments.
SOFTWARE PRODUCTS SEGMENT
Financial information for the product segment is as follows (in thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
Revenue $773,880 $741,006 $730,246
Expenses 445,707 465,915 449,969
-------- -------- --------
Product segment contribution $328,173 $275,091 $280,277
======== ======== ========
The product segment generated contribution margins of 42.4%, 37.1%, and 38.4%
during 2008, 2007, and 2006, respectively. The improvement in the contribution
margin in 2008 compared to 2007 was due to an increase in product revenue and a
decrease in product expenses; primarily sales and marketing expense and
technology development and support costs. The decrease in the contribution
margin in 2007 compared to 2006 was due to the increase in product expenses,
primarily technology development and support costs, exceeding the increase in
product revenue.
28
SOFTWARE PRODUCTS SEGMENT 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 62.9%, 61.1%, and 60.6% of total revenue during 2008, 2007 and 2006,
respectively.
Distributed software product revenue increased $31.0 million or 12.1% during
2008 to $287.2 million from $256.2 million in 2007 and increased $28.8 million
or 12.7% during 2007 from $227.4 million in 2006. The increases during 2008 and
2007 were primarily due to license and maintenance revenue growth related to the
Vantage product line, primarily agentless monitoring, and to a lesser extent
license and maintenance revenue growth in the Changepoint product line.
Mainframe software product revenue increased $1.9 million or 0.4% during 2008 to
$486.7 million from $484.8 million in 2007 and decreased $18.1 million or 3.6%
during 2007 from $502.9 million in 2006. The increase during 2008 was due to a
slight increase in license revenue led by the Strobe product line partially
offset by a slight decline in maintenance revenue caused by the Abend-AID
product line. The decrease in 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.
License fees increased $14.1 million or 5.0%, which included a positive impact
from foreign currency fluctuations of $13.1 million, during 2008 to $297.5
million from $283.4 million in 2007 and decreased $13.3 million or 4.5%, which
included a positive impact from foreign currency fluctuations of $6.1 million,
during 2007 from $296.7 million in 2006. Distributed license fees represented
$9.4 million of the $14.1 million increase in license fees during 2008 led by
the Vantage and Changepoint product lines. The remaining increase of $4.7
million related to mainframe license fees led by the Strobe and Abend-AID
product lines. The $13.3 million decrease in license fees during 2007 was due to
a $28.8 million reduction in mainframe license fees, partially offset by an
increase in distributed license fees related to the Vantage product line.
Maintenance fees increased $18.8 million or 4.1%, which included a positive
impact from foreign currency fluctuations of $18.3 million, during 2008 to
$476.4 million from $457.6 million in 2007 and increased $24.0 million or 5.5%,
which included a positive impact from foreign currency fluctuations of $9.6
million, during 2007 from $433.6 million in 2006. The $18.8 million increase in
maintenance fees during 2008 was due to a $21.6 million increase in distributed
maintenance fees led by the Vantage and Changepoint product lines, partially
offset by a slight decline in mainframe maintenance fees. The $24.0 million
increase in maintenance fees during 2007 was a result of a $13.3 million
increase in distributed maintenance fees primarily due to strong growth within
the Vantage product line with the remaining increase resulting from growth in
our mainframe maintenance revenue led by the Abend-AID, File-AID and Strobe
product lines.
Product revenue by geographic location is presented in the table below (in
thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
United States $395,029 $403,820 $391,421
Europe and Africa 258,467 234,079 245,553
Other international operations 120,384 103,107 93,272
-------- -------- --------
Total product segment revenue $773,880 $741,006 $730,246
======== ======== ========
29
SOFTWARE PRODUCT SEGMENT EXPENSES
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 $1.9 million or 6.6% during 2008 to $30.5 million from
$28.6 million in 2007 and increased $5.3 million or 22.9% during 2007 from $23.3
million in 2006. The increase in cost for 2008 was primarily due to a $3.9
million capitalized software impairment charge recorded during the first quarter
of 2008 (see Note 1 of the Notes to Consolidated Financial Statements, included
in Item 8 of this report) offset in part by a decline in hardware costs and
lower capitalized software amortization costs incurred subsequent to the
impairment charge. 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. As a
percentage of software license fees, cost of software license fees were 10.2%,
10.1%, and 7.8% in 2008, 2007, and 2006, 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 technical support. Cost of maintenance fees increased $4.8
million or 11.5% during 2008 to $46.3 million from $41.5 million in 2007 and
decreased $200,000 or 0.4% during 2007 from $41.7 million in 2006. The increase
for 2008 was primarily due to higher compensation and benefit costs associated
with the transfer of technical personnel from sales support to customer support
in order to meet product development and maintenance initiatives and to provide
increased customer support in our international operations consistent with the
revenue growth in those markets. As a percentage of maintenance fees, cost of
maintenance fees were 9.7%, 9.1%, and 9.6% in 2008, 2007 and 2006, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Also included are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support all technology initiatives. As a
percentage of product revenue, costs of technology development and support were
13.1%, 15.4%, and 13.3% in 2008, 2007 and 2006, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Total technology
development and support costs incurred internally and capitalized for the years
ended March 31, 2008, 2007 and 2006 were as follows (in thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
Technology development and support costs incurred $113,693 $135,455 $117,124
Capitalized technology development and support costs (12,561) (21,384) (20,266)
-------- -------- --------
Technology development and support costs reported $101,132 $114,071 $ 96,858
======== ======== ========
Before the capitalization of internally developed software products, total
technology development and support expenditures decreased $21.8 million or
16.1%, to $113.7 million during 2008 from $135.5 million in 2007 and increased
$18.4 million or 15.7% during 2007 from $117.1 million in 2006. The decrease in
cost for 2008 was primarily attributable to lower compensation and benefit costs
due to headcount reductions as a result of the restructuring program initiated
during 2008 (see Note 7 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report). The increase in costs for
30
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.
Sales and marketing costs consist primarily of personnel related costs
associated with product sales and sales support and marketing for all our
product offerings. Sales and marketing costs decreased $13.9 million or 4.9%
during 2008 to $267.8 million from $281.7 million in 2007 and decreased $6.5
million or 2.2% during 2007 from $288.2 million in 2006. As a percentage of
product revenue, sales and marketing costs were 34.6%, 38.0%, and 39.5% in 2008,
2007 and 2006, respectively. The decrease in costs for 2008 was primarily
attributable to lower compensation, benefit and travel expenses due to headcount
reductions as a result of the sales reorganization undertaken as part of the
Company's restructuring efforts in 2008 (see Note 7 of the Notes to Consolidated
Financial Statements, included in Item 8 of this report) and lower costs
associated with marketing and promotional programs, partially offset by higher
bonus and commission expense primarily resulting from the growth in distributed
sales compared to the prior year. 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.
PROFESSIONAL SERVICES SEGMENT
Financial information for the professional services segment is as follows (in
thousands):
Year Ended March 31, *
------------------------------
2008 2007 2006
-------- -------- --------
Revenue $418,559 $442,082 $456,645
Expenses 374,626 384,189 391,995
-------- -------- --------
Professional services segment contribution $ 43,933 $ 57,893 $ 64,650
======== ======== ========
* The professional services and the application services segments are
combined on the consolidated statement of operations, included in Item 8 of
this report.
During 2008, the professional services segment generated a contribution margin
of 10.5%, compared to 13.1% and 14.2% during 2007 and 2006, respectively. The
decrease in contribution margin for 2008 compared to 2007 was due to a
disproportionate percentage decline in revenue compared to costs. The percentage
decline in revenue exceeded the percentage decline in costs due to annual salary
increases and higher costs associated with certain fixed price projects
partially offsetting the reductions in compensation costs associated with
headcount reductions in 2008. 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.
PROFESSIONAL SERVICES SEGMENT REVENUE
We offer a broad range of IT services to help businesses make the most of their
IT assets. Some of these services include outsourcing and co-sourcing,
application management, product solutions, project management, enterprise
resource planning and customer relationship management services. Revenue from
professional services decreased $23.6 million or 5.3% during 2008 to $418.5
million from $442.1 million in 2007 and decreased $14.5 million or 3.2% during
2007 from $456.6 million in 2006. The decreases in revenue for 2008 and 2007
were primarily due to a general slow down in customer spending on certain IT
programs and on staff supplementation services within our U.S. operations.
Fluctuations in foreign currencies positively impacted professional services
segment revenue by $6.6 million in 2008 compared to 2007 and by $4.1 million in
2007 compared to 2006.
During fiscal 2008, we consummated an agreement whereby over 160 of our
professional services staff will be transitioned from Compuware employees to
become direct employees of a customer in fiscal 2009. Annualized revenue loss
associated with this transition is approximately $14 million.
31
Professional services segment revenue by geographic location is presented in the
table below (in thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
United States $342,519 $371,448 $388,220
Europe and Africa 68,170 65,050 62,850
Other international operations 7,870 5,584 5,575
-------- -------- --------
Total professional services segment revenue $418,559 $442,082 $456,645
======== ======== ========
PROFESSIONAL SERVICES SEGMENT EXPENSES
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services decreased $9.6 million or 2.5% during
2008 to $374.6 million from $384.2 million in 2007 and decreased $7.8 million or
2.0% during 2007 from $392.0 million in 2006. The decreases in cost for 2008 and
2007 were primarily attributable to lower compensation and benefit costs due to
a reduction in employee headcount as management continues to align headcount
with customer demand for our services. The decrease in 2007 was partially offset
by an increase in subcontractor expense as specialized skill sets were needed
for certain projects within our European operations.
APPLICATION SERVICES SEGMENT
Our application services, which are marketed under the brand name "Covisint",
use B2B applications to integrate vital business information and processes
between partners, customers and vendors.
Financial information for the application services segment is as follows (in
thousands):
Year Ended March 31, *
---------------------------
2008 2007 2006
------- ------- -------
Revenue $37,172 $29,914 $18,470
Expenses 39,295 36,540 25,490
------- ------- -------
Application services segment contribution $(2,123) $(6,626) $(7,020)
======= ======= =======
* The professional services and the application services segments are
combined on the consolidated statement of operations included in Item 8 of
this report.
During 2008, the application services segment generated a negative contribution
margin of 5.7%, compared to a negative contribution margin of 22.2% and 38.0%
during 2007 and 2006, respectively. The improvement in 2008 was a result of
revenue growth, primarily within the healthcare sector, exceeding the increases
in personnel costs incurred to support our business expansion. The improvement
in 2007 resulted from revenue growth within the automotive and healthcare
industry partially offset by cost increases as we expanded into the healthcare
market primarily through the acquisition of ProviderLink Technologies in March
2006 (see Note 2 of the Notes to Consolidated Financial Statements, included in
Item 8 of this report).
32
APPLICATION SERVICES SEGMENT REVENUE
Revenue from application services increased $7.3 million or 24.3% during 2008 to
$37.2 million from $29.9 million in 2007 and increased $11.4 million or 62.0%
during 2007 from $18.5 million in 2006. The increase in revenue for 2008 was
primarily a result of Covisint expanding its presence within the healthcare
industry. The increase in revenue for 2007 resulted from our continued growth
within the automotive industry and our expansion into the healthcare industry.
Application services segment revenue by geographic location is presented in the
table below (in thousands):
Year Ended March 31,
---------------------------
2008 2007 2006
------- ------- -------
United States $32,447 $25,317 $17,418
Europe and Africa 2,833 2,427 327
Other international operations 1,892 2,170 725
------- ------- -------
Total application services segment revenue $37,172 $29,914 $18,470
======= ======= =======
APPLICATION SERVICES SEGMENT EXPENSES
Cost of application services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of application services increased $2.8 million or 7.5% during
2008 to $39.3 million from $36.5 million in 2007 and increased $11.0 million or
43.4% during 2007 from $25.5 million in 2006. The increases in cost during 2008
and 2007 were primarily due to higher compensation and benefit costs due to
increases in employee headcount in order to support the expansion or addition of
client contracts entered into during these fiscal years.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist primarily of costs associated with
the corporate executive, finance, human resources, administrative, legal,
communications and investor relations departments. In addition, administrative
and general expenses include all facility-related costs, such as rent, building
depreciation, maintenance and utilities, associated with worldwide sales,
professional services and software development offices. Administrative and
general expenses decreased $11.1 million or 5.7% during 2008 to $182.5 million
from $193.6 million in 2007 and increased $3.1 million or 1.6% during 2007 from
$190.5 million in 2006.
The decrease in cost for 2008 was primarily attributable to a $5.0 million
decrease in charitable contributions and a $3.5 million decrease in travel
expense resulting from the termination of the corporate jet lease in April 2007.
The remaining decrease in cost was primarily due to lower third party recruiting
fees and consulting fees in 2008 compared to 2007.
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.
33
Other income, net ("other income") consists primarily of interest income
realized from investments, interest earned on deferred customer receivables, the
portion of the IBM settlement commitment not utilized through sale of products
and income/losses generated from our investments in partially owned companies.
Other income decreased $24.8 million or 41.0% during 2008 to $35.5 million from
$60.3 million in 2007 and increased $16.2 million or 36.7% during 2007 from
$44.1 million in 2006.
The decrease in income for 2008 was a result of the following:
- Decrease of $19.5 million in interest income primarily attributable to
a decline in investment interest income resulting from a lower average
cash equivalent and investment balance during 2008 compared to 2007 as
we continue to use funds to repurchase our common shares.
- Decrease of $11.3 million related to the 2007 gain on sale associated
with the sale of ForeSee Results, Inc. (see Note 5 to the Consolidated
Financial Statements, included in Item 8 of this report).
These decreases in income for 2008 were partially offset by an increase of $5.6
million associated with the IBM settlement. The portion of the IBM settlement
commitment that does not get utilized through sale of products is recorded to
other income (for additional information on the IBM settlement, see Note 14 of
the Notes to Consolidated Financial Statements, included in Item 8 of this
report).
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 equity
interest in ForeSee.
- Increase of $5.2 million in interest income primarily resulting from
higher interest rates earned on investments, partially offset by a
lower average balance.
- Increase of $1.1 million in income generated from our investments in
partially owned companies.
These increases in income for 2007 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.
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 $46.0 million, $35.0 million and $48.5 million, respectively,
in 2008, 2007 and 2006 representing an effective tax rate of 25%, 18%, and 25%.
The increase in the effective tax rate for 2008 compared to 2007 was primarily a
result of recording an income tax benefit of $26.6 million during the fourth
quarter of 2007 related to the settlement of prior year tax matters with the
Internal Revenue Service ("IRS"). The benefit consisted of the following: (1)
settlement of special deductions associated with foreign sales commissions under
the former foreign sales corporation rules and the extraterritorial income
exclusion rules of $8.7 million; (2) settlement of credits afforded to U.S.
based taxpayers that generate income from sales to foreign customers of $10.2
million; (3) settlement of the proper character and timing of certain deductions
of $3.3 million; (4) the remaining items consist primarily of interest income
and reductions in state taxes totaling $4.4 million.
This was offset by $15.0 million of income tax benefits recorded during 2008
relating to the recognition of a deferred tax asset for Brownfield Redevelopment
credits which are available to offset Michigan Business Tax ("MBT") liabilities
through fiscal 2022 (see Note 12 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report).
The decrease in the effective tax rate for 2007 compared to 2006 was primarily a
result of recording the income tax benefit of $26.6 million during the fourth
quarter of 2007 which is discussed above. This was offset by a decrease in our
valuation allowances of $12.4 million during 2006 as it became apparent in 2006
that our U.S. foreign tax credit carryforwards were more likely than not to be
realized. We also recorded income tax benefits of $11.1 million during fiscal
2006 related to the settlement of
34
prior year tax matters with the IRS as we concluded two separate Competent
Authority proceedings resulting in a reduction to our income tax provision
(approximately $5.8 million) and reached settlement on taxes associated with our
domestic operations, most notably the U.S. Research and Experimentation tax
credit.
For additional information regarding the difference between our effective tax
rate and the statutory rate for fiscal 2008, 2007 and 2006 see Note 12 of the
Notes to Consolidated Financial Statements, included in Item 8 of this report.
RESTRUCTURING CHARGE
2008 Restructuring Initiative
During fiscal 2008, we undertook various restructuring initiatives to improve
the effectiveness and efficiency of a number of our critical business processes,
primarily within the products segment. These initiatives included the
realignment and centralization of certain product development activities leading
to the full or partial closing of certain development labs and termination of
approximately 325 employees, primarily programming personnel. We also terminated
approximately 200 employees from various other functions of the organization,
primarily within sales and marketing. These activities resulted in a
restructuring charge of $42.6 million for fiscal 2008. Our restructuring and
other actions are expected to reduce costs by approximately $100 million on an
annualized basis before taking into consideration any increased expenditures we
may incur related to our Compuware 2.0 initiative (see Item 1. Business of this
report for more details related to Compuware 2.0).
Substantially all costs related to the fiscal 2008 restructuring initiatives
have been expensed as of March 31, 2008. We continue to review the impact of
these actions and will, based on future results of operations, determine if
additional actions are needed. The total amount of any potential future charges
for such actions will depend upon the nature, timing and extent of those
actions.
2002 Restructuring Initiative
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 2006, 2007 and
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, 2008. 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.
35
Product Revenue Recognition - We recognize product revenue when all of the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, 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.
For revenue arrangements where there is a lack of VSOE of fair value for any
undelivered elements, license fee revenue is deferred and recognized upon
delivery of those elements or when VSOE of fair value can be established. When
maintenance or services are the only undelivered elements, the license fee
revenue is recognized on a ratable basis over the longer of the maintenance term
or over the period in which the services are expected to be performed. Such
transactions include term licenses as we do not sell maintenance for term
licenses separately and therefore cannot establish VSOE for the undelivered
elements in these arrangements. These arrangements do not qualify for separate
recognition of the software license fees, maintenance fees and as applicable,
professional services fees under SOP 97-2 as amended. However, to comply with
SEC Regulation S-X, Rule 5-03(b), which requires product, services and other
categories of revenue to be displayed separately on the income statement, we
separate the license fee, maintenance fee and professional services fee revenue
based on its determination of fair value. We apply our VSOE of fair value for
maintenance related to perpetual license transactions and stand alone services
arrangements as a reasonable and consistent approximation of fair value to
separate license fee, maintenance fee and professional services fee revenue for
income statement classification purposes.
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.
36
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 assured. License revenue associated with term transactions is
deferred and recognized over the term 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.
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 and if determined that costs will exceed revenue, the expected
loss is recorded at the time the loss becomes apparent. Certain engagements
involve a project to setup the customer's structure and provide on-going support
for the project. Revenue associated with these projects is recognized over the
service 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 the collection and credit risk associated with 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 occurs or to increase the amortization
expense in future periods and would have a negative effect on our results of
operations. At a minimum, we review for impairments each balance sheet date.
Impairment of Goodwill and Other Intangible Assets - In accordance with SFAS No.
142, "Goodwill and Other Intangible Assets", we are required to assess the
impairment of goodwill and other intangible assets annually, or more frequently
if events or changes in circumstances indicate that the carrying value may
exceed the fair value. We measure the fair value of goodwill and other
intangible assets using an estimate of the related discounted cash flow and
market comparable valuations, where appropriate.
In assessing the fair value of goodwill, the fair value of the reporting unit
including the goodwill is compared to the carrying value of each reporting unit.
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. If the carrying
37
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 that provides information technology outsourcing to
healthcare organizations. 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 - Income tax
expense, deferred tax assets and liabilities and reserves for uncertain tax
positions reflect management's best assessment of estimated future taxes to be
paid. We are subject to income taxes in both the U.S. and numerous foreign
jurisdictions. Significant judgments and estimates are required in determining
the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and
financial statement recognition of revenue and expense. In evaluating our
ability to recover our deferred tax assets we consider all available positive
and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent
financial operations. In projecting future taxable income, we develop
assumptions including the amount of future state, federal and foreign pretax
operating income, the reversal of temporary differences, and the implementation
of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are
consistent with the plans and estimates we are using to manage the underlying
businesses.
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.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a multitude of
jurisdictions across our global operations.
In July 2006, the Financial Accounting Standards Board ("FASB") issued Financial
Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes," which
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109, "Accounting for Income Taxes."
FIN 48 provides that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. We adopted FIN 48 effective April 1, 2007.
38
We recognize tax liabilities in accordance with FIN 48 and we adjust these
liabilities when our judgment changes as a result of the evaluation of new
information not previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax liabilities. These
differences will be reflected as increases or decreases to income tax expense in
the period in which they are determined.
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 2008:
risk-free interest rate - 4.15%, volatility factor - 59.34% and expected option
life - 6.8 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
123(R) calculation purposes, the weighted average grant date fair value of
option shares granted in 2008 was $6.07 per option share.
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 2008
would increase 29 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 2008 would decrease 43 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, 2008 and 2007, cash and cash equivalents and investments totaled
approximately $286.4 million and $439.1 million, respectively.
Fiscal 2008 compared to fiscal 2007
Net cash provided by operating activities:
Cash provided by operating activities during 2008 was $234.7 million, an
increase of $30.0 million from 2007. The increase was due to lower payroll and
vendor related disbursements of approximately $28.0 million primarily resulting
from the net operating cost savings achieved through our 2008 restructuring
initiatives (see Note 7 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report) and a reduction of $15.9 million in income
tax payments in 2008 compared to 2007. The increase was partially offset by a
decrease in investment interest income received during 2008 resulting from a
lower average cash equivalent and investment balance in 2008 as we continue to
use funds to repurchase our common shares.
The Consolidated Statements of Cash Flows included in item 8 of this report
computes net cash from operating activities using the indirect cash flow method.
Therefore non-cash adjustments and net changes in assets and liabilities (net of
the effects of acquisitions and currency fluctuations) are adjusted from net
income to derive net cash from operating activities.
39
Changes in accounts receivable and deferred revenue have typically had the
largest impact on the reconciliation of net income to compute cash flows from
operating activities as we allow for deferred payment terms on multi-year
products contracts. The decrease in the net change of accounts receivable of
$125.2 million and the increase in the net change of deferred revenue of $103.3
million from 2008 as compared to 2007 are primarily due to an increase in
multi-year products deals.
Other significant changes in our reconciliation of net income to derive net cash
from operating activities were as follows: (1) increase in the net change of
accounts payable and accrued expenses of $45.6 million from 2008 as compared to
2007, primarily due to the reversal of the income tax reserve in fiscal 2007
related to the settlement of previous years open tax issues with the IRS and the
increase in bonus and commission accruals; (2) the gain on sale of ForeSee
Results, Inc. of $11.3 million that was realized in 2007 (the cash proceeds were
included in our investing activities during 2007); and (3) impairment charges
for property and equipment and capitalized software of $6.9 million recorded in
2008.
As of March 31, 2008, $7.5 million was accrued related to restructuring actions
(see Note 7 of the Notes to Consolidated Financial Statements, included in Item
8 of this report). We continue to review the impact of these actions and will,
based on future results of operations, determine if additional actions are
needed. The total amount of any potential future charges for such actions will
depend upon the nature, timing and extent of those actions.
We believe our existing cash resources and cash flow from operations will be
sufficient to meet operating cash needs for the foreseeable future.
Net cash provided by investing activities:
Cash provided by investing activities during 2008 was $77.2 million, an increase
of $23.4 million from 2007. The increase was primarily due to a $47.2 million
decline in the amount of cash used to acquire businesses during 2008 compared to
2007 partially offset by $26.7 million of cash received in 2007 for the sale of
our former headquarters building and the sale of our investment in ForeSee
Results, Inc. (see Notes 2, 4 and 5 of the Notes to Consolidated Financial
Statements, included in Item 8 of this report for more details).
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
Net cash used in financing activities:
Cash used in financing activities during 2008 was $369.7 million, a decrease of
$248.0 million from 2007. The decrease was primarily due to a $235.8 million
reduction in our repurchases of our common stock in 2008 compared to 2007 and an
increase of $12.8 million in net proceeds from the exercise of employee stock
options.
The Company has repurchased common stock under two plans, the "Discretionary
Plan" and the "10b5-1 Plan". Under the Discretionary Plan, the Board of
Directors has authorized the repurchase of up to $1.7 billion of our common
stock since May 2003. Our purchases of stock under the Discretionary Plan may
occur on the open market, through negotiated or block transactions based upon
market and business conditions, subject to applicable legal limitations. During
2008, we repurchased 37.6 million shares of our common stock under the
Discretionary Plan at an average price of $8.61 per share for a total of $324.1
million. As of March 31, 2008, approximately $729.4 million remains authorized
for future purchases. We intend to continue repurchasing shares under the
Discretionary Plan, funded primarily through our operating cash flow and, if
needed, funds from our new credit facility. Our long-term goal is to reduce our
outstanding common share count to approximately 200 million shares. We do not
anticipate any significant changes in our approach to the repurchase program.
The maximum amount of repurchase activity under the Discretionary Plan,
excluding block purchases and negotiated transactions, continues to be limited
on a daily basis to 25% of the average trading volume of our common stock for
the previous four week period. In addition, no purchases are made during our
self-imposed trading black-out periods in which the Company and our insiders are
prohibited from trading in our common shares. Our standard quarterly black-out
period
40
commences fifteen days prior to the end of each quarter and terminates the day
following the public release of our earnings.
Under the 10b5-1 Plan, the Board of Directors authorized the repurchase of up to
a total of 50 million shares of our common stock, subject to price, volume and
timing constraints set forth in the plan pursuant to Rule 10b5-1(c) of the
Securities Exchange Act of 1934 through September 30, 2007. A broker selected by
us had the authority to repurchase shares on our behalf under the terms and
limitations specified in the plan without our discretion, allowing repurchase
activity to continue at times when we might otherwise be prevented from
repurchasing shares under insider trading laws or because of self-imposed
trading black-out periods. During 2008, we repurchased 11.3 million shares for
an aggregate $109.7 million and settled an additional $7.2 million of trades
that occurred during the fourth quarter of 2007 under the 10b5-1 Plan. In August
2007 the 10b5-1 Plan was terminated.
On November 1, 2007, the Company entered into a new credit facility with
Comerica Bank and other lenders to provide additional leverage for the Company.
The new credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The new credit facility also
permits us to increase the facility by $150 million, subject to receiving
additional commitments from lenders and certain other conditions. The new
facility also limits additional borrowing outside of the facility to $250
million. See Note 9 of the Notes to Consolidated Financial Statements, included
in Item 8 of this report, for a description of the material terms of the new
credit facility.
The new credit facility replaces a $100 million revolving credit facility that
matured on October 26, 2007. No borrowings have occurred under the new credit
facility or the previous facility since inception.
Fiscal 2007 compared to fiscal 2006
Net cash provided by operating activities:
Cash provided by operating activities during 2007 was $204.7 million, a decrease
of $25.0 million from 2006. The decrease was primarily a result of higher
payroll related disbursements and higher disbursements to vendors of
approximately $32.0 million partially offset by lower income tax payments of
$7.0 million during 2007 as compared to 2006.
Significant changes in our reconciliation of net income to derive net cash from
operating activities were as follows: (1) increase of $60.6 million in the
change from income taxes primarily relates to the timing of when deductions can
be claimed for tax purposes. In 2006, pursuant to an IRS examination, certain
deductions for the Company and a prior acquisition became realized resulting in
a $26.7 million increase to our income tax receivable. In 2007, the income tax
receivable was reduced by approximately $22.0 million due primarily to the
timing of when legal costs associated with the IBM litigation and settlement
would be deductible. The remaining change was due to timing of income tax
payments; (2) decrease of $39.8 million in the change in accounts payable and
accrued expenses. The decline was primarily the result of the reversal of income
tax reserves of $26.6 million; reductions in deferred rent, bonus and commission
accruals of $6.6 million; the decline in accounts payable of $5.4 million and a
decline in the restructuring accrual of $3.5 million; and (3) decrease of $14.0
million in the net change of prepaid expenses and other current assets due to
the fiscal 2007 IBM unused commitment balance of $10.6 million not being
received until 2008.
41
Net cash provided by investing activities:
Cash provided by investing activities during 2007 was $53.8 million, an increase
of $62.2 million from 2006. The increase was primarily due to the $49.0 million
net reduction in our investments. The proceeds were primarily used to fund the
stock repurchase initiative. We also received $26.7 million in proceeds for the
sale of our former headquarters building and of our investment in ForeSee
Results, Inc. during 2007. The aforementioned increases in proceeds were
partially offset by an additional $13.0 million used to fund business
acquisitions and property and equipment investments in 2007 compared to 2006
(see Notes 2, 4 and 5 of the Notes to Consolidated Financial Statements,
included in Item 8 of this report for more details).
Net cash used in financing activities:
Cash used in financing activities during 2007 was $617.8 million, an increase of
$516.2 million from 2006. The increase was primarily due to $552.8 million of
additional spending to repurchase our common stock in 2007 compared to 2006
partially offset by an increase of $40.8 million in net proceeds from the
exercise of employee stock options.
During 2007, we repurchased 64.3 million shares of our common stock under the
Discretionary Plan at an average price of $8.11 per share for a total of $521.5
million.
During 2007, we repurchased 18.0 million shares of our common stock under the
10b5-1 Plan for an aggregate $162.4 million (including $7.2 million of 2007
trades that were settled in 2008).
Recently Issued Accounting Pronouncements
In May 2008, the FASB issued Statement of Financial Accounting Standards No.
162, "The Hierarchy of Generally Accepted Accounting Principles". This Statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP (the
GAAP hierarchy). This Statement will be adopted for fiscal 2009 and will not
have a material effect on our financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133". This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This Statement is effective for
fiscal years and interim periods beginning after November 15, 2008. We are
currently evaluating the impact this Statement will have on our financial
statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Non-controlling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51". This Statement clarifies the accounting for
non-controlling interests and establishes accounting and reporting standards for
the non-controlling interest in a subsidiary, including classification as a
component of equity. This Statement is effective for fiscal years beginning
after December 15, 2008. We are currently evaluating the impact this Statement
will have on our financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), "Business Combinations", which replaces Statement of
Financial Accounting Standards No. 141, "Business Combinations". This Statement
requires assets and liabilities acquired in a business combination, contingent
consideration and certain acquired contingencies, to be measured at their fair
42
value as of the date of acquisition. This Statement also requires that
acquisition-related costs and restructuring costs be recognized separately from
the business combination. This Statement is effective for fiscal years beginning
after December 15, 2008 and will be effective for business combinations entered
into after January 1, 2009. Its effects on future periods will depend on the
nature and significance of any acquisitions subject to this Statement.
In February 2007, the FASB issued 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
will be adopted in fiscal 2009 and will not have a material effect on our
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value within United States generally
accepted accounting principles and expands disclosures about fair value
measurements. Adoption is required for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. However, the FASB deferred
the effective date of SFAS No. 157, until the beginning of our 2010 fiscal year,
as it relates to fair value measurement requirements for nonfinancial assets and
liabilities that are not remeasured at fair value on a recurring basis. We will
be adopting SFAS No. 157 for financial assets and liabilities at the beginning
of fiscal 2009 and our adoption is not expected to have a material impact on our
financial statements. The adoption of SFAS No. 157 for nonfinancial assets and
liabilities in fiscal 2010 is not expected to have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN
48"). This Interpretation prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. 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. In fiscal 2008, we adopted FIN 48 and recorded a $1.4
million increase in the liability for unrecognized tax benefits, which was
accounted for as a cumulative-effect adjustment to retained earnings.
Contractual Obligations
The following table summarizes our payments under contractual obligations and
our other commercial commitments as of March 31, 2008 (in thousands):
Payment Due by Period as of March 31,
---------------------------------------------------------------------
2014 and
Total 2009 2010 2011 2012 2013 Thereafter
-------- ------- ------- ------- ------ ------ ----------
Contractual obligations:
Operating leases $288,379 $30,946 $18,320 $10,818 $5,403 $3,441 $219,451
Other 8,063 3,213 2,550 450 450 450 950
-------- ------- ------- ------- ------ ------ --------
Total $296,442 $34,159 $20,870 $11,268 $5,853 $3,891 $220,401
======== ======= ======= ======= ====== ====== ========
"Other" includes commitments under various advertising and charitable
contribution agreements totaling $6.9 million and $1.2 million, respectively, at
March 31, 2008. There are no long term debt obligations, capital lease
obligations or purchase obligations.
We anticipate settlement of $12.0 million with certain taxing authorities of
which $5.3 million is expected to be settled in the upcoming twelve months (as
discussed in Note 12 to the Condensed Consolidated Financial Statements). We are
not able to
43
reasonably estimate in which future periods the remaining amount of $6.7 million
will ultimately be settled. These settlements are not included in the
contractual obligations table above.
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.
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 manage 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 Fair Value at
March 31, 2009 March 31, 2008
-------------- --------------
Cash Equivalents $215,943 $215,943
Average Interest Rate 2.62%
Average Interest Rate (tax equivalent) 2.67%
Investments $ 70,474 $ 70,758
Average Interest Rate 3.50%
Average Interest Rate (tax equivalent) 5.37%
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, 2008, non-current
accounts receivable amounted to $244.4 million, of which approximately $153.1
million, $66.5 million, $23.5 million, $1.2 million and $62,000 are due in
fiscal 2010 through 2014, 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,
2008, the fair value of such receivables is approximately $239.7 million. Each
100 basis point increase in interest rates would have an associated $1.7 million
and $1.2 million negative impact on the fair value of non-current accounts
receivable based on the balance of such receivables at March 31, 2008 and 2007,
respectively. Each 100 basis point decrease in interest rates would have an
associated $2.7 million and $1.3 million positive impact on the fair value of
non-current accounts receivable based on the balance of such receivables at
March 31, 2008 and 2007, respectively. A
44
change in interest rates will have no impact on cash flows or net income
associated with non-current accounts receivable.
FOREIGN CURRENCY RISK
Approximately 37% 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.
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, 2008, we performed a sensitivity analysis to
assess the potential loss of a 10% positive or negative change in foreign
currency exchange rates would have on our income from operations. Based upon the
analysis 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, 2008. 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, 2008 (dollars in thousands):
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2008 2008 Rate U.S. Dollars March 31, 2008
-------- -------- -------- ------------ -------------
Forward Sales
Pounds Sterling March 31 April 30 0.5057 $ 1,127 $ 1,131
Japanese Yen March 31 April 30 99.8170 2,725 2,728
South African Rand March 31 April 30 8.2475 2,328 2,365
------- -------
6,180 6,224
======= =======
Forward Purchases
Australian Dollar March 31 April 30 1.1003 13,633 13,710
Canadian Dollar March 31 April 30 1.0212 11,457 11,396
Euro Dollar March 31 April 30 0.6338 22,184 22,198
Hong Kong Dollar March 31 April 30 7.7700 7,079 7,067
Singapore Dollar March 31 April 30 1.3739 1,456 1,453
Swedish Kroner March 31 April 30 5.9279 827 825
------- -------
$56,636 $56,649
======= =======
45
ITEM 8. 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, 2008 and 2007, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 2008. 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, 2008 and 2007, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2008, 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, and effective April 1, 2007 the Company adopted
Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of March 31, 2008, 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 28, 2008
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
May 28, 2008
46
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND 2007
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS NOTES 2008 2007
------ ----- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 215,943 $ 260,681
Investments 3 70,474 107,062
Accounts receivable, net 535,094 420,774
Deferred tax asset, net 12 44,374 33,392
Income taxes refundable, net 3,746 58,266
Prepaid expenses and other current assets 49,285 41,019
---------- ----------
Total current assets 918,916 921,194
---------- ----------
INVESTMENTS 3 71,391
----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 2,4 365,691 385,227
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 2,8 61,653 72,276
---------- ----------
OTHER:
Accounts receivable 244,388 172,255
Goodwill 2,8 356,267 353,682
Deferred tax asset, net 12 35,851 15,987
Other assets 5,8 35,791 37,400
---------- ----------
Total other assets 672,297 579,324
---------- ----------
TOTAL ASSETS $2,018,557 $2,029,412
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY NOTES 2008 2007
------------------------------------ ----- ---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 18,772 $ 27,713
Accrued expenses 7 105,152 111,206
Accrued bonuses and commissions 43,116 30,764
Income taxes payable, net 4,976
Deferred revenue 472,864 359,688
---------- ----------
Total current liabilities 644,880 529,371
DEFERRED REVENUE 399,548 321,881
ACCRUED EXPENSES 7 19,513 11,346
DEFERRED TAX LIABILITY, NET 12 27,585 34,666
---------- ----------
Total liabilities 1,091,526 897,264
---------- ----------
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 261,638,483 and
303,031,787 shares in 2008 and 2007,
respectively 10,15 2,616 3,030
Additional paid-in capital 643,544 673,660
Retained earnings 261,754 444,159
Accumulated other comprehensive income 19,117 11,299
---------- ----------
Total shareholders' equity 927,031 1,132,148
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,018,557 $2,029,412
========== ==========
See notes to consolidated financial statements.
47
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES 2008 2007 2006
----- ---------- ---------- ----------
REVENUES:
Software license fees $ 297,506 $ 283,412 $ 296,650
Maintenance fees 476,374 457,594 433,596
Professional services fees 455,731 471,996 475,115
---------- ---------- ----------
Total revenues 1,229,611 1,213,002 1,205,361
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 30,475 28,581 23,262
Cost of maintenance fees 46,300 41,533 41,687
Cost of professional services 413,921 420,729 417,485
Technology development and support 101,132 114,071 96,858
Sales and marketing 267,800 281,730 288,162
Administrative and general 182,488 193,578 190,538
Restructuring costs 7 42,645
---------- ---------- ----------
Total operating expenses 1,084,761 1,080,222 1,057,992
---------- ---------- ----------
INCOME FROM OPERATIONS 144,850 132,780 147,369
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 19,910 39,427 35,705
Settlement 14 16,160 10,598 10,603
Gain on sale of investment in partially
owned company 5 11,250
Other 5 (528) (998) (2,217)
---------- ---------- ----------
Other income, net 35,542 60,277 44,091
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 180,392 193,057 191,460
INCOME TAX PROVISION 12 45,998 34,965 48,500
---------- ---------- ----------
NET INCOME $ 134,394 $ 158,092 $ 142,960
========== ========== ==========
Basic and diluted earnings per share 11 $ 0.47 $ 0.45 $ 0.37
========== ========== ==========
See notes to consolidated financial statements.
48
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
(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, 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 gain 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
Net income 134,394 134,394 $134,394
Foreign currency translation, net
of tax 7,818 7,818 7,818
--------
Comprehensive income $142,212
========
Issuance of common stock and
related tax benefit 476,765 5 4,044 4,049
Repurchase of common stock (48,961,919) (490) (117,910) (315,430) (433,830)
Acquisition tax benefits 5,090 5,090
Exercise of employee stock
options and related tax
benefit (Note 15) 7,091,850 71 67,107 67,178
Stock option compensation 11,553 11,553
Adjustment to initially adopt FIN
48 (Note 1) (1,369) (1,369)
----------- ------ --------- --------- ------- ----------
BALANCE AT MARCH 31, 2008 261,638,483 $2,616 $ 643,544 $ 261,754 $19,117 $ 927,031
=========== ====== ========= ========= ======= ==========
See notes to consolidated financial statements.
49
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
(IN THOUSANDS)
2008 2007 2006
--------- --------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 134,394 $ 158,092 $ 142,960
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 55,167 55,026 50,193
Property and equipment impairment associated with restructuring 2,981
Capitalized software impairment 3,873
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
Acquisition tax benefits 5,090 5,257 20,783
Stock option compensation 11,553 9,432
Deferred income taxes (2,022) 6,953 23,057
Other 1,474 (208) 6,274
Net change in assets and liabilities, net of effects from
acquisitions and currency fluctuations:
Accounts receivable (64,019) 61,202 58,972
Prepaid expenses and other current assets (7,120) (13,857) 187
Other assets 640 (1,211) (1,767)
Accounts payable and accrued expenses (837) (46,483) (6,722)
Deferred revenue 64,875 (38,448) (30,366)
Income taxes 28,641 20,027 (40,548)
--------- --------- ---------
Net cash provided by operating activities 234,690 204,732 229,725
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of:
Businesses, net of cash acquired (4,649) (51,818) (42,896)
Property and equipment (10,498) (18,590) (14,480)
Capitalized software (14,359) (21,457) (20,894)
Proceeds from sale of property 15,466
Proceeds from sale of investment in partially owned company 11,250
Investments:
Proceeds 106,717 495,371 450,865
Purchases (376,387) (380,922)
--------- --------- ---------
Net cash provided by (used in) investing activities 77,211 53,835 (8,327)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits 67,178 54,364 13,590
Employee contribution to common stock purchase plans 4,066 4,635 8,902
Repurchase of common stock (440,988) (676,757) (124,004)
--------- --------- ---------
Net cash used in financing activities (369,744) (617,758) (101,512)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 13,105 7,810 (5,511)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (44,738) (351,381) 114,375
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 260,681 612,062 497,687
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 215,943 $ 260,681 $ 612,062
========= ========= =========
See notes to consolidated financial statements.
50
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Compuware Corporation (the "Company" or "Compuware") develops,
markets and supports systems software products designed to improve the
performance of information technology ("IT") organizations. The Company's
software products consist of six major families: Mainframe, Vantage,
Changepoint, Quality, Uniface and DevPartner; all of which are primarily
intended for use by IT organizations and IT service providers. In addition, the
Company offers a broad range of professional services and application services.
The Company's professional services provide customers with business systems
analysis, design, communication, programming and implementation as well as
software conversion and systems planning and consulting. The Company's
application services, which are marketed under the brand name "Covisint", use
business-to-business applications to integrate vital business information and
processes between partners, customers and suppliers. The Company's products and
services are offered worldwide across a broad spectrum of technologies,
including mainframe and distributed 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, 2008 and 2007 and the results of operations for the years ended March 31,
2008, 2007 and 2006. While management has based their assumptions and estimates
on the facts and circumstances existing at March 31, 2008, 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 in
accordance with U.S. GAAP, including Statements of Position 97-2 "Software
Revenue Recognition" and 98-9 "Modification of SOP 97-2, 'Software Revenue
Recognition,' With Respect to Certain Transactions", Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 104 and Emerging Issues Task
Force Issue 00-21 "Revenue Arrangements with Multiple Deliverables".
Accordingly, the Company recognizes revenue when all of the following criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the fee is fixed or determinable and collectibility
is reasonably assured.
Software license fees - The Company's software license agreements provide its
customers with a right to use its software perpetually (perpetual licenses) or
during a defined term (term licenses).
Perpetual license fee revenue is recognized using the residual method, under
which the fair value, based on vendor specific objective evidence ("VSOE"), of
all undelivered elements of the agreement (i.e., maintenance and professional
services) is deferred. VSOE is based on rates charged for maintenance and
professional services when sold separately. The remaining portion of the fee is
recognized as license fee revenue upon delivery of the products, provided that
no significant obligations remain and collection of the related receivable is
reasonably assured.
For revenue arrangements where there is a lack of VSOE of fair value for any
undelivered elements, license fee revenue is deferred and recognized upon
delivery of those elements or when VSOE of fair value can be established. When
maintenance or services are the only undelivered elements, the license fee
revenue is recognized on a ratable basis over the longer of the maintenance term
or over the period in which the services are expected to be performed. Such
transactions include term licenses
51
as the Company does not sell maintenance for term licenses separately and
therefore cannot establish VSOE for the undelivered elements in these
arrangements. These arrangements do not qualify for separate recognition of the
software license fees, maintenance fees and as applicable, professional services
fees under SOP 97-2 as amended. However, to comply with SEC Regulation S-X, Rule
5-03(b), which requires product, services and other categories of revenue to be
displayed separately on the income statement, the Company separates the license
fee, maintenance fee and professional services fee revenue based on its
determination of fair value. The Company applies its VSOE of fair value for
maintenance related to perpetual license transactions and stand alone services
arrangements as a reasonable and consistent approximation of fair value to
separate license fee, maintenance fee and professional services fee revenue for
income statement classification purposes.
The Company offers flexibility to customers purchasing licenses for its products
and related maintenance. Terms of these transactions range from standard
perpetual license sales that include one year of maintenance to large multi-year
(generally two to five years), multi-product contracts. The Company allows
deferred payment terms on multi-year contracts, with installments collectible
over the term of the contract. Based on the Company's successful collection
history for deferred payments, license fees (net of any finance fees) are
generally recognized as discussed above. In certain transactions where it cannot
be concluded that the fee is fixed or determinable due to the nature of the
deferred payment terms, the Company recognizes revenue as payments become due.
Financing fees are recognized as interest income over the term of the receivable
and amounted to $3.4 million, $5.2 million and $6.7 million for fiscal 2008,
2007 and 2006, respectively.
At March 31, 2008, current accounts receivable includes installments on
multi-year contracts totaling $245.6 million due in fiscal 2009. Non-current
accounts receivable at March 31, 2008 amounted to $244.4 million, of which
approximately $153.1 million, $66.5 million, $23.5 million, $1.2 million and
$62,000 are due in fiscal 2010 through 2014, 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. The first year of maintenance is included with
all license agreements. Maintenance revenue is recognized ratably over the term
of the maintenance arrangements, which primarily range from one to five years.
Professional services fees - Professional services fees are generally based on
hourly or daily rates. Revenues from professional services are recognized in the
period the services are performed provided that collection of the related
receivable is reasonably assured. For development services rendered under
fixed-price contracts, revenue is recognized using the percentage of completion
method and if determined that costs will exceed revenue, the expected loss is
recorded at the time the loss becomes apparent. Certain professional services
contracts include a project and on-going operations for the project. Revenue
associated with these contracts is recognized over the 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 arrangements that are being recognized on a ratable basis.
Commission costs associated with deferred revenue are also deferred. A portion
of the Company's current deferred maintenance fees, amounting to $84.4 million,
were incorrectly netted against current accounts receivable at March 31, 2007.
Related amounts were properly reflected gross at March 31, 2008. The Company
considered both the qualitative and quantitative effects of this inconsistency
in presentation on the balance sheets and concluded that such change in
presentation was not material. The effect of this inconsistency has been
excluded from the net change in accounts receivable and deferred revenue in the
Consolidated Statements of Cash Flows. Long term deferred revenue at March 31,
2008 amounted to $399.5 million, of which approximately $212.2 million, $123.1
million, $45.1 million, $18.7 million, $294,000 and $63,000 are expected to be
recognized during fiscal 2010 through 2015, respectively.
52
Collection and remittance of taxes - the Company records the collection of taxes
from customers and the remittance of these taxes to governmental authorities on
a net basis in its consolidated statements of operations in accordance with
Emerging Issues Task Force Issue No. 06-03, "How Taxes Collected from Customers
and Remitted to Governmental Authorities Should be Presented in the Income
Statement".
Cash and Cash Equivalents - The Company considers all investments with an
original maturity of three months or less to be cash equivalents.
Investments at March 31, 2008 and 2007 consist of municipal obligations, U.S.
Treasury securities and other obligations of U.S. government agencies. Those
investments that mature within one year from the balance sheet date are
classified as current assets. 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.
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, 2008, 2007 and 2006
(in thousands):
Increase in allowance
---------------------- Accounts
Balance at charged resulting charged Balance at
Allowance for beginning against from against the end of
doubtful accounts: of period income acquisitions allowance (1) period
------------------------- ---------- ------- ------------ ------------- ----------
Year ended March 31, 2008 $ 8,930 $1,412 $(3,913) $ 6,429
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
(1) Write-off of uncollectible accounts and product maintenance cancellations.
The decreases of $2.5 million from March 31, 2007 to March 31, 2008 and $3.3
million from March 31, 2006 to March 31, 2007 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 is stated at cost or fair value for impaired assets.
Depreciation is recorded 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. Asset
impairment charges are recorded for property and equipment when events and
circumstances indicate that such assets may be impaired and the estimated future
undiscounted cash flows are not sufficient to recover the carrying value of the
asset. The impairment charge is the amount by which the present value of future
cash flows is less than the carrying value of these assets.
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
53
purchased software included in capitalized software at March 31, 2008 and 2007
is $15.3 million and $20.9 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, 2008, 2007 and 2006 were as follows
(in thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
Technology development and support costs incurred $113,693 $135,455 $117,124
Capitalized technology development and support costs (12,561) (21,384) (20,266)
-------- -------- --------
Technology development and support costs reported $101,132 $114,071 $ 96,858
======== ======== ========
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio of current gross revenues
compared with the total of current and anticipated future revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product, including the period being reported on. Amortization begins
when the product is available for general release to customers. The amortization
period for capitalized software is generally five years. Capitalized software
amortization amounted to $22.4 million, $22.4 million, and $18.2 million in
fiscal 2008, 2007 and 2006, respectively, which is primarily included in "cost
of software license fees" in the consolidated statements of operations.
Capitalized software is reviewed for impairment each balance sheet date or when
events and circumstances indicate such asset may be impaired. Asset impairment
charges are recorded when estimated future undiscounted cash flows are not
sufficient to recover the carrying value of the capitalized software. The
impairment charge is the amount by which the present value of future cash flows
is less than the carrying value of these assets. During fiscal 2008, the Company
recorded a capitalized software impairment charge of $3.9 million associated
with certain DevPartner and OptimalJ products. See Note 8 to the consolidated
financial statements for a further discussion of the impairment.
Goodwill and Other Intangible Assets - Goodwill for each reporting unit and
those intangible assets with indefinite lives are tested for impairment annually
and/or when events or circumstances indicate that their fair value may have been
reduced below carrying value. The Company evaluated its goodwill and other
intangible assets as of March 31, 2008 and 2007 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, 2008, the fair
value of non-current receivables is approximately $239.7 million compared to the
carrying amount of $244.4 million. At March 31, 2007, the fair value of
non-current receivables was approximately $167.9 million compared to the
carrying amount of $172.3 million. Fair value is estimated by discounting the
future cash flows using the current rate at which the Company would finance a
similar transaction.
54
Income Taxes - The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these
assets will more likely than not be realized. These deferred tax assets are
subject to periodic assessments as to recoverability and if it is determined
that it is more likely than not that the benefits will not be realized,
valuation allowances are recorded which would increase the provision for income
taxes. In making such determination, the Company considers all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations.
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 $(5.0) million, $(5.9) million and $1.0 million for
the years ended March 31, 2008, 2007 and 2006, respectively. These amounts are
included in "administrative and general" in the consolidated statements of
operations.
At March 31, 2008, the Company had contracts maturing through April 2008 to sell
$6.2 million and purchase $56.6 million in foreign currencies. 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.
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 2008 and 2007 includes compensation expense for all stock-based
compensation awards ("awards") granted prior to, but not yet vested as of April
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Stock-based compensation expense for all awards granted after
April 1, 2006 is based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). The Company recognizes these compensation costs
net of an estimated forfeiture rate on a straight-line basis over the requisite
service period of the award, which is generally the vesting term of five years.
See Note 15 to the consolidated financial statements for a further discussion on
stock-based compensation including the impact on net income during the reported
periods.
55
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 business segments are products, professional
services and application services. The Company provides software products,
professional services and application 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 May 2008, Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
162, "The Hierarchy of Generally Accepted Accounting Principles". This Statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP (the
GAAP hierarchy). This Statement will be adopted for fiscal 2009 and will not
have a material effect on the Company's financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133". This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This Statement is effective for
fiscal years and interim periods beginning after November 15, 2008. Management
is currently evaluating the impact this Statement will have on the Company's
financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Non-controlling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51". This Statement clarifies the accounting for
non-controlling interests and establishes accounting and reporting standards for
the non-controlling interest in a subsidiary, including classification as a
component of equity. This Statement is effective for fiscal years beginning
after December 15, 2008. Management is currently evaluating the impact this
Statement will have on the Company's financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), "Business Combinations", which replaces Statement of
Financial Accounting Standards No. 141, "Business Combinations". This Statement
requires assets and liabilities acquired in a business combination, contingent
consideration and certain acquired contingencies, to be measured at their fair
value as of the date of acquisition. This Statement also requires that
acquisition-related costs and restructuring costs be recognized separately from
the business combination. This Statement is effective for fiscal years beginning
after December 15, 2008 and will be effective for business combinations entered
into after January 1, 2009. Its effects on future periods will depend on the
nature and significance of any acquisitions subject to this Statement.
In February 2007, the FASB issued 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
will be adopted in fiscal 2009 and will not have a material effect on the
Company's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair
56
value within United States generally accepted accounting principles and expands
disclosures about fair value measurements. Adoption is required for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. However, the FASB deferred the effective date of SFAS No. 157, until the
beginning of our 2010 fiscal year, as it relates to fair value measurement
requirements for nonfinancial assets and liabilities that are not remeasured at
fair value on a recurring basis. The Company will be adopting SFAS No. 157 for
financial assets and liabilities at the beginning of fiscal 2009 and the
adoption is not expected to have a material impact on the Company's financial
statements. The adoption of SFAS No. 157 for nonfinancial assets and liabilities
in fiscal 2010 is not expected to have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN
48"). This Interpretation prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. 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. In fiscal 2008, the Company adopted FIN 48 and recorded a
$1.4 million increase in the liability for unrecognized tax benefits, which was
accounted for as a cumulative-effect adjustment to retained earnings.
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 February 2008, the Company acquired Hilgraeve, Inc. ("Hilgraeve"), a
privately held company, for approximately $4.6 million in cash. Hilgraeve has
developed an on-demand collaboration platform for lab and prescription data
sharing that allows physician practices to rapidly connect to Covisint and
securely share key patient information, reducing the cost and improving the
quality of healthcare. The purchase price exceeded the fair value of the
acquired assets and liabilities by $3.3 million, which was recorded to goodwill.
Intangible assets subject to amortization totaled $1.5 million, of which $1.1
million and $260,000, respectively, related to purchased software and customer
relationships, each with a useful life of five years. The remaining intangible
asset, a non-compete agreement, has a useful life of two years.
In January 2007, the Company acquired Proxima Technology Group, Inc. ("Proxima")
for approximately $37.3 million in cash. Proxima was a privately held provider
of the Centauri product (renamed Vantage Service Manager) 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
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.
57
In March 2006, the Company acquired ProviderLink Technologies ("ProviderLink"),
a privately held company for approximately $12.0 million in cash. Providerlink
allows Covisint to offer technology that improves efficiency in the sharing of
healthcare information and records. 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 whose technology complements the Vantage product line helping
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.
3. INVESTMENTS
A summary of securities at March 31, 2008 and 2007 is set forth below (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
March 31, 2008
Held-to-maturity securities:
Municipal obligations $ 70,474 $284 $ 70,758
======== ==== ========
March 31, 2007
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
======== ==== ======= ========
The securities at March 31, 2008 are scheduled to mature in fiscal 2009.
58
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
March 31,
-------------------
2008 2007
-------- --------
Buildings and improvements $370,924 $370,052
Leasehold improvements 24,135 24,493
Furniture and fixtures 78,317 77,575
Computer equipment and software 80,346 78,759
-------- --------
553,722 550,879
Less accumulated depreciation and
amortization 188,031 165,652
-------- --------
Net property and equipment $365,691 $385,227
======== ========
During fiscal 2008, the Company incurred a property and equipment impairment
charge of $3.0 million resulting from the consolidation of certain development
facilities associated with the 2008 restructuring plan. The impairment charge
was included in "restructuring costs" in the consolidated results of operations
(see Note 7 - Restructuring Charges for more details).
Buildings held for sale 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 these buildings was included in
"administrative and general" in the consolidated statements of operations.
Depreciation and amortization of property and equipment totaled $29.0 million,
$28.4 million, and $29.3 million for the years ended March 31, 2008, 2007 and
2006, respectively.
59
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2008, 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, 2008 and 2007, the Company's carrying value of its investments in
and advances to CareTech was $14.9 million and $16.4 million, respectively.
Included in the net investment at March 31, 2008 and 2007, is a note receivable
with a basis of $8.4 million and $10.4 million, respectively, and accounts
receivable due from CareTech of $4.9 million and $4.8 million, respectively. The
note is payable in quarterly installments through January 2012 and bears
interest at 5.25%.
The Company reviewed CareTech's financial condition at March 31, 2008 and
concluded that no impairment charge or valuation allowance related to its
investment in CareTech was warranted. For the years ended March 31, 2008, 2007
and 2006, the Company recognized income of $417,000, $646,000 and $679,000,
respectively, from its investment in CareTech.
On March 30, 2007, the Company sold its 49% interest in ForeSee Results, Inc.
("ForeSee") which was incorporated in October 2001 to provide online customer
satisfaction management. 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 are
subordinate in payment rights to certain third party financing obtained by
ForeSee in connection with the transaction. As of March 31, 2008, the carrying
value of the notes was $3.7 million.
Prior to the sale, the investment in ForeSee was 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". For the years ended March 31, 2007 and 2006,
the Company recognized income (loss) of $472,000 and $(638,000), 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, 2008, 2007 and 2006
included approximately $25.6 million, $24.9 million and $23.0 million,
respectively, from services provided to CareTech customers on a subcontractor
basis. Professional services revenue for the years ended March 31, 2007 and 2006
included approximately $334,000 and $698,000, respectively, from services
provided to ForeSee.
60
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.
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, 2008, 2007 and 2006. 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 $420,000,
$627,000 and $376,000 for the years ended March 31, 2008, 2007 and 2006,
respectively. These costs are included in "sales and marketing" in the
consolidated statements of operations.
7. RESTRUCTURING CHARGES
Fiscal 2008 Restructuring Plan
During fiscal 2008 the Company undertook various restructuring activities to
improve the effectiveness and efficiency of a number of the Company's critical
business processes within the products segment. These activities resulted in a
restructuring charge of $42.6 million for fiscal 2008.
During the first half of fiscal 2008, the Company initiated a restructuring plan
that realigned and centralized certain product development activities.
Development activities were transitioned from Merrimack, New Hampshire;
Amsterdam, The Netherlands; Sydney, Australia; Dublin, Ireland and Cambridge,
Massachusetts to the Detroit headquarters facility and Application Vantage
product development was transitioned from the San Diego, California facility to
the Gdansk, Poland facility. The restructuring plan reduced the square footage
required to operate existing facilities and resulted in the termination of
approximately 325 employees, primarily programming personnel, and full or
partial closing of the aforementioned facilities.
The Company also terminated approximately 200 employees during fiscal 2008 from
various other functions of the organization, primarily sales and marketing. As
part of this reorganization, senior sales management positions were eliminated
and the distributed and mainframe sales teams were aligned under one management
structure.
As a result of this reorganization, the Company entered into agreements with
Henry (Hank) Jallos, its former President and Chief Operating Officer of
Products, and Tom Costello, its former Senior Vice President of Human Resources.
Mr. Jallos' employment with the Company ended on July 10, 2007. His separation
agreement stipulated that he receive his salary in effect on his retirement date
($600,000 per year) through June 30, 2009. Mr. Jallos received the first six
months of salary on January 15, 2008 and going forward Mr. Jallos has or will
receive his remaining salary paid in semi-monthly installments through June 30,
2009. Mr. Jallos will also receive bonuses earned under the Company's executive
incentive plan for fiscal 2006 in the amount of $345,000, which was paid in
April 2008, and for fiscal 2007 in the amount of $240,000, which is payable in
April 2009. Unvested stock options held by Mr. Jallos will continue to vest and
all options may be exercised by Mr. Jallos pursuant to the terms and conditions
set forth in the applicable
61
stock option agreements as if his employment with the Company continued. Mr.
Jallos must refrain from making disparaging statements regarding the Company and
its directors and employees, and will remain obligated through June 30, 2009 to
continue to comply with the provisions of our standard employee agreement, which
requires that he keep the Company's confidential information confidential and
that he comply with the Company's employee code of conduct. Under the standard
employee agreement, he will also be prohibited until June 30, 2010 from
competing with the Company, soliciting the Company's clients and soliciting or
recruiting the Company's employees. The Company recorded a charge of
approximately $5.6 million during fiscal 2008 related to this matter, including
a non-cash charge of $4.2 million related to the continued vesting of Mr.
Jallos' outstanding stock options.
Mr. Costello resigned from his position as Senior Vice President of Human
Resources on March 7, 2008. He agreed to provide services to the Company through
March 31, 2012 in return for an annual salary of $50,000 and his Long-Term
Incentive Cash Award that was earned in fiscal 2006 in the amount of $240,000,
which will be paid in September 2008. In addition, all of the unvested stock
options held by Mr. Costello will continue to vest and all options may be
exercised by Mr. Costello pursuant to the terms and conditions set forth in the
applicable stock option agreements as if his employment with the Company
continued. The Company recorded a non-cash charge of approximately $448,000
during the fourth quarter of fiscal 2008 related to this matter.
Substantially all costs related to the fiscal 2008 restructuring initiatives
have been expensed as of March 31, 2008. The Company continues to review the
impact of these actions and will, based on future results of operations,
determine if additional actions are needed. The total amount of any potential
future charges for such actions will depend upon the nature, timing and extent
of those actions.
Fiscal 2002 Restructuring Plan
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.
62
Restructuring Summary
The following table summarizes the restructuring accrual and charges against the
accrual during fiscal 2006, 2007 and 2008 (in thousands):
Employee Facilities Costs Total
Termination (Primarily Lease Restructuring
Benefits Abandonments) Other Charge
----------- ---------------- ------- -------------
Accrual at April 1, 2005 $ 25 $10,793 $ 10 $10,828
Paid during fiscal 2006 (21) (2,529) (2,550)
Adjustments during fiscal 2006 (1) (4) (2,314) (10) (2,328)
-------- ------- ------- -------
Accrual at March 31, 2006 5,950 5,950
Paid during fiscal 2007 (1,748) (1,748)
Adjustments during fiscal 2007 (1) (1,783) (1,783)
------- -------
Accrual at March 31, 2007 2,419 2,419
Expenses incurred during
fiscal 2008 33,295 8,199 1,151 42,645
Paid during fiscal 2008 (25,881) (2,921) (1,066) (29,868)
Non-cash charges during
fiscal 2008 (4,759) (2,981) (7,740)
-------- ------- ------- -------
Accrual at March 31, 2008 (2) $ 2,655 $ 4,716 $ 85 $ 7,456
======== ======= ======= =======
(1) 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 primarily 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.
(2) As of March 31, 2008, $5.7 million of the restructuring accrual is recorded
in current "accrued expenses" with the remaining balance of $1.8 million
recorded in long-term "accrued expenses" in the consolidated balance
sheets.
The accruals for employee termination benefits at March 31, 2008 primarily
represent the amounts to be paid to employees that have been terminated as
a result of initiatives described above.
The accruals for facilities costs at March 31, 2008 represent the remaining
fair value of lease obligations for exited and demised locations, as
determined at the cease-use dates of those facilities, net of estimated
sublease income that could be reasonably obtained in the future, and will
be paid out over the remaining lease terms, the last of which ends in
fiscal 2012. Projected sublease income is based on management's estimates,
which are subject to change.
63
8. GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
March 31, 2008
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,984 $ 5,984
======== =======
Amortized intangible assets:
Capitalized software (2) $341,127 $(279,474) $61,653
Customer relationship agreements (3) 14,270 (8,482) 5,788
Non-compete agreements (3) 2,948 (2,660) 288
Other (4) 6,891 (6,396) 495
-------- --------- -------
Total amortized intangible assets $365,236 $(297,012) $68,224
======== ========= =======
March 31, 2007
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Unamortized intangible assets:
Trademarks (1) $ 5,865 $ 5,865
======== =======
Amortized intangible assets:
Capitalized software (2) $328,957 $(256,681) $72,276
Customer relationship agreements (3) 13,827 (5,571) 8,256
Non-compete agreements (3) 2,794 (2,222) 572
Other (4) 6,883 (5,900) 983
-------- --------- -------
Total amortized intangible assets $352,461 $(270,374) $82,087
======== ========= =======
(1) Certain trademarks were acquired as part of the Covisint 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. During fiscal
2008, the Company recorded a capitalized software impairment charge of $3.9
million associated with certain of its DevPartner and OptimalJ products due
to declining demand for these products.
(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.
64
Amortization expense of intangible assets for the years ended March 31, 2008,
2007 and 2006 was $26.1 million, $26.6 million, and $20.9 million, respectively.
Estimated future amortization expense, based on identified intangible assets at
March 31, 2008, is expected to be as follows (in thousands):
Year Ended March 31,
----------------------------------------------------------
2009 2010 2011 2012 2013 Thereafter
------- ------- ------- ------ ------ ----------
Capitalized software $21,773 $17,051 $12,732 $7,295 $2,679 $123
Customer relationships 2,870 1,366 1,002 507 43
Non-compete agreements 244 44
Other 330 165
------- ------- ------- ------ ------ ----
Total $25,217 $18,626 $13,734 $7,802 $2,722 $123
======= ======= ======= ====== ====== ====
Changes in the carrying amounts of goodwill for the years ended March 31, 2008
and 2007 are as follows (in thousands):
Goodwill:
Professional Application
Products Services Services Total
-------- ------------ ----------- --------
Balance at April 1, 2006, net $170,711 $141,172 $ 8,199 $320,082
Acquisitions 34,087 34,087
Adjustments to previously recorded
purchase price (1) (1,063) 68 (995)
Effect of foreign currency translation 13 495 508
-------- -------- ------- --------
Balance at March 31, 2007, net 203,748 141,735 8,199 353,682
Acquisitions 3,272 3,272
Adjustments to previously recorded
purchase price (1) (1,270) 59 (1,211)
Effect of foreign currency translation 24 500 524
-------- -------- ------- --------
Balance at March 31, 2008, net $202,502 $142,294 $11,471 $356,267
======== ======== ======= ========
(1) The adjustment to goodwill in fiscal 2008 and 2007 primarily relates to
pre-acquisition tax contingency adjustments.
65
9. DEBT
The Company has no long term debt.
On November 1, 2007, the Company entered into a new, unsecured revolving credit
agreement (the "new credit facility") with Comerica Bank and other lenders. The
new credit facility provides for a revolving line of credit in the amount of
$150 million and expires on November 1, 2012. The credit facility also permits
the Company to increase the revolving line of credit by up to $150 million
subject to receiving additional commitments from lenders and certain other
conditions and limits additional borrowing outside of the facility to $250
million.
The new credit facility contains various covenant requirements, including
limitations on liens, investments, loans and advances, indebtedness, mergers,
consolidations and acquisitions, asset sales, dividends and transactions with
affiliates. The new credit facility is also subject to maximum total debt to
EBITDA and minimum fixed charge coverage financial covenants. The Company is in
compliance with the covenants under the new credit facility.
Any borrowings under the new credit facility bear interest at the greater of the
prime rate or the Eurodollar rate plus the applicable margin (based on the level
of maximum total debt to EBITDA ratio), at the Company's option. The Company
will also pay a quarterly facility fee on the new credit facility based on the
applicable margin grid. The Company has not borrowed under the new credit
facility.
Previously, the Company held a $100 million revolving credit facility which
matured on October 26, 2007. No borrowings occurred under this prior facility.
The Company incurs interest expense primarily related to the accrual for certain
abandoned leases. Cash paid for interest totaled approximately $1.1 million,
$1.9 million and $2.0 million for the years ended March 31, 2008, 2007 and 2006,
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.
66
Stock Repurchase Plans - The Company's Board of Directors approved the
repurchase of the Company's common stock under two plans, the "Discretionary
Plan" and the "10b5-1 Plan" which was terminated in August 2007.
The Discretionary Plan authorizes 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):
Common Shares Balance Remaining
Acquired During Fiscal for Future
Date Amount ------------------------ Purchases at
Authorized Authorized 2006 2007 2008 March 31, 2008
------------- ---------- ------ ------ ------ -----------------
May 2003 $125,000 14,941
April 2006 125,000 17,631
August 2006 300,000 36,169
December 2006 200,000 10,504 11,673
August 2007 200,000 23,285
February 2008 750,000 2,687 $729,433
The 10b5-1 Plan authorized management to repurchase up to 50.0 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 allowed 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 had
the authority under the terms and limitations specified in the plan to
repurchase shares on behalf of the Company. During fiscal 2008 (prior to the
August 2007 termination date) and 2007, the Company repurchased 11.3 million and
18.0 million common shares, respectively, for an aggregate committed amount of
$109.7 million and $162.4 million, respectively, under the 10b5-1 Plan ($7.2
million of the fiscal 2007 committed amount was paid in fiscal 2008).
67
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,
------------------------------
2008 2007 2006
-------- -------- --------
Basic earnings per share:
Numerator: Net income $134,394 $158,092 $142,960
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 286,402 350,213 385,147
-------- -------- --------
Basic earnings per share $ 0.47 $ 0.45 $ 0.37
======== ======== ========
Diluted earnings per share:
Numerator: Net income $134,394 $158,092 $142,960
-------- -------- --------
Denominator:
Weighted-average common shares outstanding 286,402 350,213 385,147
Dilutive effect of stock options 1,226 754 2,422
-------- -------- --------
Total shares 287,628 350,967 387,569
-------- -------- --------
Diluted earnings per share $ 0.47 $ 0.45 $ 0.37
======== ======== ========
During the years ended March 31, 2008, 2007 and 2006, stock options to purchase
approximately 25,421,000, 33,608,000 and 38,231,000 shares, respectively, were
excluded from the diluted EPS calculation because they were anti-dilutive.
68
12. INCOME TAXES
Income before income taxes and the income tax provision include the following
(in thousands):
Year Ended March 31,
------------------------------
2008 2007 2006
-------- -------- --------
Income before income taxes:
U.S $154,349 $172,819 $159,028
Foreign 26,043 20,238 32,432
-------- -------- --------
Total income before income taxes $180,392 $193,057 $191,460
======== ======== ========
Income tax provision
Current:
U.S. Federal $ 33,330 $ 16,967 $ 8,117
Foreign 19,118 11,265 14,934
U.S. State 2,829 2,434 2,055
-------- -------- --------
Total current tax provision 55,277 30,666 25,106
-------- -------- --------
Deferred:
U.S. Federal 19,005 6,165 22,763
Foreign (3,548) (3,024) 1,540
U.S. State (24,736) 1,158 (909)
-------- -------- --------
Total deferred tax provision (benefit) (9,279) 4,299 23,394
-------- -------- --------
Total income tax provision $ 45,998 $ 34,965 $ 48,500
======== ======== ========
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,
------------------------------
2008 2007 2006
-------- -------- --------
Federal income tax at statutory rates $ 63,137 $ 67,570 $ 67,011
Increase (decrease) in taxes:
State income taxes, net 1,718 2,215 1,326
Export sales benefit (2,954) (3,088)
Settlement of prior year tax matters (1) (26,550) (11,126)
Taxes relating to foreign operations 891 992 6,948
Tax credits (2) (21,507) (5,060) (4,698)
Valuation allowance (3) 2,859 (3,768) (12,400)
Other, net (1,100) 2,520 4,527
-------- -------- --------
Provision for income taxes $ 45,998 $ 34,965 $ 48,500
======== ======== ========
(1) During fiscal 2007, the Company reduced its income tax provision by $26.6
million for certain items related to settlements of prior year tax matters
with the Internal Revenue Service ("IRS"). The benefit consisted of the
following: (1) settlement of special deductions associated with foreign
sales commissions under the former foreign sales corporation rules and the
extraterritorial income exclusion rules of $8.7 million; (2) settlement of
credits afforded to U.S. based taxpayers that generate income from sales to
foreign customers of $10.2 million; (3) settlement of the proper character
and timing of certain deductions of $3.3 million; (4) the remaining items
consist primarily of interest income and reduction in state taxes totaling
$4.4 million.
69
During fiscal 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) On July 12, 2007, the State of Michigan enacted the Michigan Business Tax
(MBT) as a replacement for the Single Business Tax (SBT), which expired at
December 31, 2007. The MBT took effect on January 1, 2008 and is comprised
of two components: an income tax and a modified gross receipts tax. The two
components of the MBT are considered income taxes subject to the accounting
provisions of FASB Statement No. 109, "Accounting for Income Taxes".
As a result of the MBT enactment, the Company recorded an income tax
benefit of approximately $15.0 million during fiscal 2008. This benefit
related primarily to the recognition of a deferred tax asset for Brownfield
Redevelopment credits that are available to offset MBT liabilities through
the Company's fiscal year 2022. The Brownfield Redevelopment credits were
previously available to reduce the Company's SBT liabilities. These credits
were not historically recorded as a deferred tax asset since the Company
did not account for the SBT as an income tax.
(3) During fiscal 2008, the Company assessed the ability to utilize its tax
credits prior to expiration and recorded a valuation allowance of $2.9
million for the amount that did not meet the "more likely than not to be
realized" standard.
During fiscal 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 believed were more likely
than not to be realized.
During fiscal 2006, additional positive evidence became available to allow
the Company to decrease its valuation allowance by $12.4 million. The
decrease related 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.
70
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows (in thousands):
March 31,
-------------------
2008 2007
-------- --------
Deferred tax assets:
Deferred revenue $ 20,883 $ 21,907
Amortization of intangible assets 35,403 42,121
Accrued expenses 25,810 22,987
Tax credit carryforwards 28,918 20,025
Net operating loss carryforwards 10,804 12,150
Other 15,520 14,880
-------- --------
137,338 134,070
Less valuation allowance 2,859 4,029
-------- --------
Net deferred tax assets 134,479 130,041
Current portion 48,247 36,430
-------- --------
Long term portion $ 86,232 $ 93,611
======== ========
Deferred tax liabilities:
Amortization of intangible assets $ 27,657 $ 21,420
Capitalized research and development costs 16,846 18,357
Depreciation 28,635 66,924
Other 8,701 8,627
-------- --------
Total deferred tax liabilities 81,839 115,328
Current portion 3,873 3,038
-------- --------
Long term portion $ 77,966 $112,290
======== ========
At March 31, 2008, the Company has foreign net operating loss carryforwards for
income tax purposes of $9.0 million that expire as follows (in thousands):
Year ending March 31:
2015 $1,411
2016 109
2017 251
2018 3
Unlimited carryforward 7,255
For U.S. tax purposes, $1.7 million (expiring in fiscal 2009 through 2026) of
net operating losses are available to reduce U.S. federal income taxes. In
addition, $10.1 million (expiring in fiscal 2014 through 2015) of foreign tax
credits are available to offset future U.S. federal income tax liabilities.
The Company also has $18.8 million related to Michigan Brownfield Redevelopment
tax credits that will expire in fiscal 2013 through 2022.
Upon adoption of FIN 48 as of April 1, 2007, the Company recorded a $1.4 million
increase in the liability for unrecognized tax benefits, which was accounted for
as a cumulative-effect adjustment to retained earnings. At April 1, 2007, the
Company had $12.8 million of total gross unrecognized tax benefits of which
$10.3 million, net of federal benefit, would favorably affect the Company's
effective tax rate if recognized in future periods. At March 31, 2008, the
amount of gross unrecognized tax benefits is $15.0 million of which $11.8
million, net of federal benefit, would favorably affect the Company's effective
tax rate if recognized in future periods. At March 31, 2008, $523,000 of the
liability for uncertain tax positions is netted against deferred tax assets
relating to the same jurisdiction, and $5.3 million and $6.7 million are
recorded as current and non-current accrued expenses, respectively.
71
The following is a tabular reconciliation of the total amounts of unrecognized
tax benefits for the year (in thousands):
Unrecognized tax benefit as of April 1, 2007 $12,757
Gross increases to tax positions for prior periods 337
Gross decreases to tax positions for prior periods (203)
Gross increases to tax positions for current period 2,389
Settlements (39)
Lapse of statute of limitations (285)
-------
Unrecognized tax benefit as of March 31, 2008 $14,956
=======
In accordance with the Company's accounting policy, interest and penalties
related to income tax liabilities are included in income tax expense. At April
1, 2007, the Company accrued $3.3 million for the payment of interest and
penalties and accrued $5.8 million for the receipt of interest. At March 31,
2008, the Company accrued $2.9 million for the payment of interest and penalties
and accrued $1.2 million for the receipt of interest. The Company recorded an
income tax benefit of $1.1 million during fiscal 2008 for net interest and
penalties.
The Company has open tax years, from tax periods 1999 and forward, with various
taxing jurisdictions, including the U.S., Brazil and Canada. 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 anticipates a decrease in net unrecognized tax benefits
of $5.3 million with the taxing authorities in the upcoming twelve months.
Cash paid for income taxes totaled $12.1 million, $28.0 million and $35.0
million for the years ended March 31, 2008, 2007 and 2006, respectively.
72
13. SEGMENT INFORMATION
Compuware has three business segments in the software industry: products,
professional services and application services. The Company provides software
products, professional services and application services to the world's largest
IT organizations that help IT professionals increase the effectiveness of their
organizations. During fiscal 2008, as a result of increased internal focus on
the application services business, the services segment has been separated into
a professional services segment and an application services segment.
Accordingly, prior period information has been revised to conform to the current
period segment presentation.
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; and application services which uses business-to-business
applications to integrate vital business information and processes between
partners, customers and vendors.
No single customer accounted for greater than 10% of total revenue during the
years ended March 31, 2008, 2007 or 2006, or greater than 10% of accounts
receivable at March 31, 2008 or 2007.
The Company evaluates the performance of its segments based primarily on
operating profit before administrative and general 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,
------------------------------------
2008 2007 2006
---------- ---------- ----------
Revenues:
Products:
Mainframe $ 486,687 $ 484,807 $ 502,931
Distributed 287,193 256,199 227,315
---------- ---------- ----------
Total products revenue 773,880 741,006 730,246
Professional services 418,559 442,082 456,645
Application services 37,172 29,914 18,470
---------- ---------- ----------
Total revenues $1,229,611 $1,213,002 $1,205,361
========== ========== ==========
Income (loss) from operations:
Products $ 328,173 $ 275,091 $ 280,277
Professional services 43,933 57,893 64,650
Application services (2,123) (6,626) (7,020)
---------- ---------- ----------
Subtotal 369,983 326,358 337,907
Administrative and general (182,488) (193,578) (190,538)
Restructuring costs (42,645)
---------- ---------- ----------
Income from operations 144,850 132,780 147,369
Other income, net 35,542 60,277 44,091
---------- ---------- ----------
Income before income taxes $ 180,392 $ 193,057 $ 191,460
========== ========== ==========
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided.
73
Financial information regarding geographic operations is presented in the table
below (in thousands):
Year Ended March 31,
------------------------------------
2008 2007 2006
---------- ---------- ----------
Revenues:
United States $ 769,995 $ 800,585 $ 797,059
Europe and Africa 329,470 301,556 308,730
Other international operations 130,146 110,861 99,572
---------- ---------- ----------
Total revenues $1,229,611 $1,213,002 $1,205,361
========== ========== ==========
March 31,
-------------------
2008 2007
-------- --------
Long-lived assets:
United States $661,356 $681,128
Europe and Africa 38,601 44,274
Other international operations 83,654 85,783
-------- --------
Total long-lived assets $783,611 $811,185
======== ========
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 $37.6 million, $36.9 million and $35.0 million,
respectively, for the years ended March 31, 2008, 2007 and 2006. 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 $6.9 million and $1.2 million, respectively, at
March 31, 2008. Total expense related to these agreements was approximately $3.4
million, $3.5 million and $3.3 million, respectively, for the years ended March
31, 2008, 2007 and 2006. The following is a schedule of future minimum
commitments (in thousands):
Payment Due by Period as of March 31,
---------------------------------------------------------------------
2014 and
Total 2009 2010 2011 2012 2013 Thereafter
-------- ------- ------- ------- ------ ------ ----------
Contractual obligations:
Operating leases $288,379 $30,946 $18,320 $10,818 $5,403 $3,441 $219,451
Other 8,063 3,213 2,550 450 450 450 950
-------- ------- ------- ------- ------ ------ --------
Total $296,442 $34,159 $20,870 $11,268 $5,853 $3,891 $220,401
======== ======= ======= ======= ====== ====== ========
The Company also leases space within the Company's 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,
------------------------------------------------------
2014 and
Total 2009 2010 2011 2012 2013 Thereafter
------ ---- ---- ---- ---- ---- ----------
Lease income commitments:
Operating lease income $6,167 $860 $768 $680 $629 $610 $2,620
74
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, 2008, approximately 580,000 phantom shares were outstanding. The income
(expense) incurred related to this program was approximately $114,000, $(1.9)
million and $(1.5) million, respectively, for the years ended March 31, 2008,
2007 and 2006 and is included in "administrative and general" in the
consolidated statements of operations. Any fluctuation in the Company's common
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, 2008, approximately 21,000 units were outstanding.
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 four years). During fiscal
2008, 2007 and 2006, IBM utilized $13.8 million, $19.4 million and $9.4 million,
respectively, of their license and maintenance commitment, resulting in an
unused commitment balance of $16.2 million, $10.6 million and $10.6 million,
respectively, for fiscal 2008, 2007 and 2006. Unused commitment amounts are
reported as "settlement" in the consolidated statements of operations.
Legal Matters - The Company was 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 claimed that the Company and
the other defendants supplied, distributed or offered for sale products that
infringed U.S. Patent No. 6,314,574 entitled "Information Distribution System".
The Plaintiff was seeking unspecified compensatory damages, trebling of damages
for willful infringement, and fees and costs. We denied the allegations and the
Plaintiff agreed to dismiss Compuware from the lawsuit on August 23, 2007.
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, plus interest. 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 satisfied the judgment in
April 2007 with a payment of $5.4 million. The matter is now closed.
From time to time, in addition to the matters identified above, the Company is
subject to legal proceedings, claims, investigations and proceedings in the
ordinary course of business. In accordance with U.S. generally accepted
accounting principles, the Company 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 the Company. It is
possible, nevertheless, that our
75
consolidated financial position, cash flows or results of operations could be
materially 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 may elect to make annual contributions to the Plan for the benefit
of substantially all U.S. employees. The contribution may be in the form of cash
or Company common stock. The Board of Directors authorizes contributions between
a maximum of 25% of eligible annual compensation and a minimum sufficient to
cover current obligations of the Plan. There was no contribution made during
fiscal 2008. Contributions totaled $200,000 and $76,000, respectively, in fiscal
2007 and 2006. This is a non-leveraged ESOP plan.
Employee Stock Purchase Plan - During fiscal 2002, the shareholders approved
international and domestic employee common 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 common stock at the
close of the offering period. The value of the common stock purchased in any
calendar year cannot exceed $25,000 per employee. The purchase price is 95% of
the closing market sales price on the market date immediately preceding the last
day of the offering period. Effective December 1, 2007, the Company discontinued
the plan for employees outside the U.S. and Canada. During fiscal 2008, 2007 and
2006, the Company sold approximately 477,000, 570,000 and 1,369,000 shares,
respectively, to eligible employees under the plan.
In fiscal 2006, the plan's purchase rights had an option component as the
purchase price was the lower of 85% of the first or last day's average high and
low price for each offering period. The weighted-average fair value of the
option component of the purchase rights granted in fiscal 2006 was $1.47 per
common share and was estimated using the Black-Scholes model with assumptions
comparable to those used in the Company's employee stock option plans.
Employee Equity Incentive Plans - The Company's Board of Directors adopted the
2007 Long Term Incentive Plan (the "LTIP") in June 2007 that was approved by the
Company's Shareholders in August 2007. The Company has reserved an aggregate of
28.0 million common shares to be awarded under the LTIP. The Compensation
committee may grant stock options, stock appreciation rights, restricted stock,
restricted stock units, performance-based cash or stock awards and annual cash
incentive awards under the LTIP. During fiscal 2008, the Company granted
approximately 1.4 million options under the LTIP.
Prior to the LTIP, the Company had seven stock option plans ("Plans") dating
back to 1991. All but one of the plans, the 2001 Broad Based Stock Option Plan
("BBSO"), were approved by the Company's shareholders. The BBSO was approved by
the Board of Directors in March 2001, but was not submitted to the shareholders
for approval, as shareholder approval was not required at the time. As a result
of the LTIP adoption, these Plans have been terminated as to future grants.
During fiscal 2008, the Company granted approximately 410,000 options under the
Plans prior to the adoption of the LTIP.
The Company's options typically have the following vesting schedule: fifty
percent of the option shares granted 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.
76
A summary of option activity under the Company's stock-based compensation plans
as of March 31, 2008, 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, 2007 43,710 $12.23
Granted 1,821 9.75
Exercised (7,092) 8.77
Forfeited (856) 7.18
Cancelled/expired (3,294) 14.81
------ ------
Outstanding as of March 31, 2008 34,289 $12.69 3.99 $3,807
====== ======
Ending vested and expected to vest 32,560 $12.93 3.07 $3,586
Exercisable as of March 31, 2008 27,895 $13.79 2.86 $2,438
The total fair value of shares vested and the total intrinsic value of options
exercised during the years end March 31, 2008, 2007 and 2006 were as follows
(intrinsic values in thousands):
Year Ended March 31,
--------------------------
2008 2007 2006
------- ------ -------
Fair value of shares vested $ 5.11 $ 5.58 $ 5.45
Intrinsic value of options exercised 16,713 9,986 12,866
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 either historical exercise data if available or the simplified
method as described in SAB No. 107 and SAB No. 110. The risk-free interest rate
assumption is based upon observed interest rates appropriate for the expected
term of our awards. The dividend yield assumption is based on the Company's
history and expectation regarding dividend payouts.
The weighted average fair value of stock options granted in the years ended
March 31, 2008, 2007 and 2006 and the assumptions used to estimate those values
using a Black-Scholes option pricing model were as follows:
Year Ended March 31,
------------------------
2008 2007 2006
------ ------ ------
Expected volatility 59.34% 68.75% 73.90%
Risk-free interest rate 4.15% 4.82% 3.70%
Expected lives at date of grant (in years) 6.8 6.9 5.1
Weighted average fair value of the options granted $ 6.07 $ 5.04 $ 4.47
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.
77
For the years ended March 31, 2008 and 2007, stock-based compensation expense
was allocated as follows (dollars in thousands):
Year Ended
March 31,
-----------------
2008 2007
------- -------
Stock-based compensation classified as:
Cost of software license fees $ 1 4
Cost of maintenance fees 303 283
Cost of professional services 1,320 1,508
Technology development and support 663 777
Sales and marketing 2,203 3,910
Administrative and general 1,705 2,950
Restructuring Costs 5,358
------- -------
Total stock-based compensation expense
before income taxes 11,553 9,432
Income tax benefit (4,047) (3,270)
------- -------
Total stock-based compensation expense
after income taxes $ 7,506 $ 6,162
======= =======
As of March 31, 2008 and 2007, $16.7 million and $16.0 million, respectively, 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 2.91 years and 2.65 years, respectively.
We adopted SFAS 123(R) on April 1, 2006. 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 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
--------------
Net income:
As reported $142,960
Compensation cost, net of tax (8,990)
--------
Pro forma $133,970
========
Earnings per share:
As reported:
Basic and diluted earnings per share $ 0.37
========
Pro forma:
Basic and diluted earnings per share $ 0.35
========
78
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2008 and 2007 is
as follows (in thousands, except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- -------- -------- -------- ----------
Fiscal 2008:
Revenues $ 279,389 $301,971 $309,335 $338,916 $1,229,611
Gross profit 153,494 183,186 187,493 214,742 738,915
Operating income (loss) (1,966) 31,955 46,413 68,448 144,850
Pre-tax income 3,693 37,382 51,063 88,254 180,392
Net income 189 37,416 35,614 61,175 134,394
Basic and diluted earnings per share 0.00 0.13 0.13 0.23 0.47
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
79
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 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 and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
financial disclosure.
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
80
- 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 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, 2008, 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, 2008, 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 the Company's
internal control over financial reporting as of March 31, 2008. The report,
which expresses an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting as of March 31, 2008, 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, 2008 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 the internal control over financial reporting of Compuware
Corporation and subsidiaries (the "Company") as of March 31, 2008, 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, included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
81
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 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, the Company maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2008, 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, 2008 of the Company and our
report dated May 2X, 2008, 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, and
Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
May 28, 2008
ITEM 9B. OTHER INFORMATION
None
82
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.
The Company's Board of Directors adopted the 2007 Long Term Incentive Plan
("LTIP") in June 2007 and the Company's shareholders approved the LTIP in August
2007. The Compensation committee may grant stock options, stock appreciation
rights, restricted stock, restricted stock units, performance-based cash or
stock awards and annual cash incentive awards under the LTIP. Prior to the LTIP,
the Company had seven stock option plans ("Prior Plans") dating back to 1991.
All but one of the Prior Plans, the 2001 Broad Based Stock Option Plan ("BBSO"),
were approved by the Company's shareholders. The BBSO was approved by the Board
of Directors in March 2001, but was not submitted to the shareholders for
approval, as shareholder approval was not required at the time. Under the terms
of the BBSO, the Company was authorized to grant nonqualified stock options with
a maximum term of ten years to any employee or director of the Company at an
exercise price and with vesting and other terms determined by the Compensation
Committee of the Company's Board. Options granted under the BBSO either vested
every six months over a four year period or 50% of the option became vested on
the third year anniversary of the date of grant, and 25% of the option vested on
each of the fourth year and fifth year anniversaries of the date of grant. All
options were granted at fair market value and expired ten years from the date of
grant.
As a result of the LTIP adoption, the Prior Plans have been terminated as to
future grants.
The Company also has an Employee Stock Ownership Plan ("ESOP") and an Employee
Stock Purchase Plan ("ESPP"). The information about our equity compensation
plans, in Note 15 of the Notes to Consolidated Financial Statements, included
in Item 8 of this report, is incorporated herein by reference.
83
The following table sets forth certain information with respect to our equity
compensation plans at March 31, 2008 (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 17,455 $16.54 26,593
Equity compensation plans not
approved by security holders 16,834 $ 8.70
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.
84
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 46
Consolidated Balance Sheets as of March 31, 2008 and 2007 47
Consolidated Statements of Operations for each of the years ended
March 31, 2008, 2007, and 2006 48
Consolidated Statements of Shareholders' Equity for each of the years
ended March 31, 2008, 2007, and 2006 49
Consolidated Statements of Cash Flows for each of the years ended
March 31, 2008, 2007, and 2006 50
Notes to Consolidated Financial Statements 51-79
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.
85
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 27, 2008.
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 Executive May 27, 2008
----------------------------------- Officer And Director (Principal
Peter Karmanos, Jr. Executive Officer)
/S/ LAURA L. FOURNIER Executive Vice President, Chief May 27, 2008
----------------------------------- Financial Officer and Treasurer
Laura L. Fournier (Principal Financial Officer)
/S/ DENNIS W. ARCHER Director May 27, 2008
-----------------------------------
Dennis W. Archer
/S/ GURMINDER S. BEDI Director May 27, 2008
-----------------------------------
Gurminder S. Bedi
/S/ WILLIAM O. GRABE Director May 27, 2008
-----------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director May 27, 2008
-----------------------------------
William R. Halling
/S/ FAYE A. NELSON Director May 27, 2008
-----------------------------------
Faye A. Nelson
/S/ GLENDA D. PRICE Director May 27, 2008
-----------------------------------
Glenda D. Price
/S/ W. JAMES PROWSE Director May 27, 2008
-----------------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director May 27, 2008
-----------------------------------
G. Scott Romney
86
EXHIBITS
The following exhibits are filed herewith or incorporated by reference to the
filing indicated with which it was previously filed. 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
(Company's Form 8-K filed on May 9, 2005)
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 (Company's Form
8-K filed on January 8, 2007)
3(i).1 Restated Articles of Incorporation of Compuware Corporation, as
amended, as of October 25, 2000 (Company's Form 10-K for fiscal
2001)
3(i).1 Amended and Restated Bylaws of Compuware Corporation, as of January
3, 2002. (Company's Form 10-Q for the quarterly period ended June 30,
2004)
4.0 Rights Agreement dated as of October 25, 2000 between Compuware
Corporation and Equiserve Trust Company, N.A., as Rights Agent
(Company's Registration Statement on Form 8-A filed October 26, 2000)
4.6 Amendment To Rights Agreement, dated as of October 29, 2001
(Company's first Form 8-K filed on May 11, 2006)
4.7 Amendment No. 2 To Rights Agreement, dated as of May 9, 2006
(Company's first Form 8-K filed on May 11, 2006)
4.8 Amended and Restated Credit Agreement dated May 2, 2003 as of July
27, 2006 (Company's Form 10-Q for the quarterly period ended June 30,
2006)
4.9 Amendment No. 1, dated as of July 26, 2007, to the Amended and
Restated Credit Agreement dated May 2, 2003 as of July 27, 2006
(Company's Form 10-Q for the quarterly period ended on June 30, 2007)
4.10 Compuware Corporation Revolving Credit Agreement dated as of November
1, 2007 (Company's Form 10-Q for the quarterly period ended on
September 30, 2007)
10.24 Promotion Agreement, dated September 8, 1992, between Compuware
Sports Corporation and the Company (Company's Registration Statement
on Form S-1, as amended (Registration No. 33-53652))
*10.37 Fiscal 1998 Stock Option Plan (Company's Registration Statement on
Form S-8 (Registration Statement No. 333-37873))
*10.51 Fiscal 1996 Stock Option Plan (Company's Form 10-K for fiscal 2000)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (Company's Form 10-K for fiscal
2000)
*10.83 Fiscal 1999 Stock Option Plan (Company's Form 10-Q for the quarterly
period ended December 31, 2000)
*10.85 2001 Broad Based Stock Option Plan (Company's Registration Statement
on Form S-8 (Registration Statement No. 333-57984))
*10.88 First Amendment to 1996 Stock Option Plan (Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997)
*10.90 Phantom Stock Plan (Company's Form 10-K for fiscal 2003)
*10.91 Nonqualified Stock Option Agreement for Executive Officers (Company's
Form 10-Q for the quarterly period ended September 30, 2004)
*10.92 Nonqualified Stock Option Agreement for Outside Directors (Company's
Form 10-Q for the quarterly period ended September 30, 2004)
*10.93 Phantom Share Award Agreement (Company's Form 10-Q for the quarterly
period ended September 30, 2004)
*10.95 Settlement Agreement dated March 21, 2005 by and among Compuware
Corporation and International Business Machines Corporation
(Company's Form 8-K filed on March 21, 2005)
*10.96 First Amendment to the Compuware Corporation 2002 Directors Phantom
Stock Plan (Company's Form 8-K/A filed on May 17, 2005)
*10.97 Amendment Number 1 to Settlement Agreement dated November 29, 2005 by
and among Compuware Corporation and International Business Machines
Corporation (Company's Form 8-K filed on November 29, 2005)
*10.98 2005 Non-Employee Directors' Deferred Compensation Plan (Company's
second Form 8-K filed on May 11, 2006)
*10.99 Executive Incentive Plan - Corporate (Company's Form 8-K filed on
June 6, 2006)
*10.100 Parallel Nonqualified Stock Purchase Plan Arrangement (Company's Form
10-K for fiscal 2006)
*10.101 Fifth Amendment to the Compuware Corporation ESOP/401(k) Plan
(Company's Form 10-Q for the quarterly period ended June 30, 2006)
*10.102 Post-Retirement Consulting Agreement, dated March 1, 2007, between
Compuware Corporation and Peter Karmanos, Jr. (Company's Form 8-K
filed on March 2, 2007)
*10.103 Settlement Agreement, dated July 18, 2007, by and between Compuware
Corporation and Hank Jallos (Company's Form 10-Q for the quarterly
period ended on June 30, 2007)
*10.104 Amendment No. 1, dated August 7, 2007, to the Settlement Agreement
dated July 18, 2007 by and between Compuware Corporation and Hank
Jallos (Company's Form 10-Q for the quarterly period ended on June
30, 2007)
*10.105 2007 Long Term Incentive Plan (Appendix A to Company's definitive
proxy statement for 2007 annual shareholders meeting filed on July
24, 2007)
*10.106 Form of Stock Option Agreement (3-Year Version) (Company's Form 8-K
filed on April 25, 2008)
*10.107 Form of Stock Option Agreement (5-Year Version) (Company's Form 8-K
filed on April 25, 2008)
*10.108 Agreement, dated March 7, 2008, by and between Compuware Corporation
and Thomas M. Costello
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002