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Compuware 10-Q 2010 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2010
OR
For the transition period from to .
Commission file number 000-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (313) 227-7300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No T
Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
As of November 1, 2010, there were outstanding 219,028,754 shares of Common Stock, par value $.01, of the registrant.
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
See notes to condensed consolidated financial statements.
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
See notes to condensed consolidated financial statements.
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
See notes to condensed consolidated financial statements.
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the "Company", “Compuware”, “we”, “our” and “us”). All inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at September 30, 2010, final amounts may differ from these estimates.
In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2010 included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet at March 31, 2010 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years.
Basis for Revenue Recognition
The Company derives its revenue from licensing software products, providing maintenance and support for those products and rendering professional, application and web performance services. Revenue recognition begins once the following criteria have been 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.
When our web performance services are sold with our software products, an arrangement containing both a software element (i.e., software license, maintenance and product related services) and a non-software element (i.e., web performance and related services) is created and referred to as a multiple-deliverable arrangement. The revenue associated with the arrangement is allocated to the software and non-software elements using VSOE of fair value, if available; third party evidence is used if VSOE of fair value is not available; and estimated selling price is used if neither VSOE of fair value nor third party evidence is available. Once the revenue is allocated to the software element and the non-software element, revenue recognition occurs as described herein.
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 product related 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 product related services are the only undelivered elements, the license fee revenue is recognized on a ratable basis over the longer of the maintenance term or the period in which the product related services are expected to be performed. Such transactions include term licenses as the Company does not sell maintenance for term licenses separately and therefore cannot establish VSOE of fair value for the undelivered elements in these arrangements. In order 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 product related services fee (which is included in professional services fees) associated with term licenses 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 product related services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and product related 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 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 revenue 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.
Maintenance and subscription 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 fees are recognized ratably over the term of the maintenance arrangements, which may range from one to five years.
The Company’s subscription fees relate to arrangements that permit our customers to access and utilize our web performance services. The subscription arrangements do not provide customers the right to take possession of our software at any time and we do not make it feasible for the customer to run the software on its own hardware. Subscription fees are deferred upon contract execution and are recognized ratably over the term of the subscription.
Professional services fees
The Company provides the following professional services solutions: (1) IT portfolio management services; (2) application delivery management services; (3) application outsourcing services; and (4) enterprise legacy modernization services. The Company also offers implementation, consulting and training services in tandem with the Company’s product solutions offerings, which are referred to as product related services.
In addition, revenue associated with the Company’s application services segment is recorded as professional services fees and consists of fees for customers accessing its application services network and other services.
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, revenues are recognized using the percentage of completion method and if determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent. Certain professional services contracts include a project and on-going operations for the project. Revenue associated with these contracts is recognized over the expected service period as the customer derives value from the services, consistent with the proportional performance method.
Deferred revenue
Deferred revenue consists primarily of billed and unbilled maintenance fees related to the future service period of maintenance agreements in effect at the reporting date. Deferred license, subscription and professional service fees are also included in deferred revenue for those arrangements that are being recognized on a ratable basis. Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “Current” or “Non-current other assets”, as applicable, in the condensed consolidated balance sheets and recognized as “Sales and marketing” expenses in the condensed consolidated statements of operations over the revenue recognition period of the related customer contracts.
Research and development
Research and development (“R&D”) costs for the three months ended September 30, 2010 and 2009 were $18.1 million and $14.4 million, respectively, and for the six months ended September 30, 2010 and 2009 were $35.4 million and $31.0 million, respectively. R&D costs related to our software products and web performance services network are reported as “Technology development and support” in the condensed consolidated statements of operations and for our application services network, the costs are reported as “Cost of professional services”.
Income Taxes
The Company estimates its income taxes in each jurisdiction in which it operates. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
Interest and penalties related to uncertain tax positions are included in the income tax provision.
Recently Issued Accounting Pronouncements
In July 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The ASU requires enhanced disclosures about the credit quality of financing receivables and the allowance for credit losses; including disclosures regarding credit quality indicators, past due information, and modifications of original terms. We will be adopting the disclosure requirements of ASU No. 2010-20 starting with our interim reporting period ending December 31, 2010.
In December 2009, the FASB issued ASU No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU No. 2009-17 amends the guidance for consolidation of VIEs primarily related to the determination of the primary beneficiary of the VIE. This ASU became effective for us on April 1, 2010 and did not have an impact on our condensed consolidated financial statements.
Note 2 - Acquisition
Effective September 17, 2010, the Company acquired certain assets and liabilities of DocSite, LLC (“DocSite”), a provider of web-based solutions that give physicians and healthcare organizations the ability to accurately and timely manage, analyze and report healthcare performance and quality, for $15.9 million in cash. The assets and liabilities acquired have been recorded at their estimated fair values as of the purchase date using the acquisition method. The purchase price exceeded the estimated fair value of the acquired assets and liabilities by $13.9 million, which was recorded to goodwill. The estimated fair value of intangible assets subject to amortization totaled $4.0 million, of which $1.9 million, $1.8 million and $260,000 related to developed technology, customer relationships and trademarks with a useful life of five, six and three years, respectively.
The arrangement included a contingent consideration component that increases the DocSite purchase price if pre-determined revenue targets for a specific product line are achieved by March 31, 2011. The contingent consideration arrangement could result in future payments of up to an additional $1.0 million. The estimated fair value of the contingent consideration arrangement of $750,000 was determined by applying the income approach. That measure is based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs (see Note 4 for additional information regarding level of inputs). Key assumptions include the probability of attaining certain levels of revenue ranging from less than $3.5 million to greater than $4.5 million.
The fair value valuation for intangible assets and deferred tax asset and liabilities was incomplete at the time of filing and may result in an adjustment to the recorded fair value.
Factors that contribute to a purchase price that resulted in goodwill include, but are not limited to, the retention of research and development personnel with the skills to develop future web-based quality care and performance management technologies that will enhance our application service offerings, support personnel to provide maintenance services related to the technology acquired and a trained sales force capable of selling current and future acquired solutions. The goodwill resulting from the transaction will be reported within the application services segment and is expected to be deductible for tax purposes.
DocSite’s financial results will be reported within our application services segment. This acquisition was considered immaterial for disclosure of supplemental pro forma information and revenues and earnings of the acquiree since the acquisition date.
Note 3 - Foreign Currency Transactions and Derivatives
The Company is exposed to foreign exchange rate risks related to transactions that are denominated in non-local currency (“anticipated transactions”) and current inter-company balances due to and from the Company’s foreign subsidiaries (“inter-company balances”).
The Company enters into derivative contracts to sell or buy currencies with the intent of mitigating foreign exchange rate risks related to inter-company balances. The Company does not use foreign exchange contracts to hedge anticipated transactions and does not designate its foreign exchange derivatives as hedges. Accordingly, all foreign exchange derivatives are recognized on the condensed consolidated balance sheets at fair value (see Note 4 of the condensed consolidated financial statements).
The foreign currency net loss resulting from anticipated transactions and inter-company balances for the three months ended September 30, 2010 and 2009 was $1.2 million and $163,000, respectively, and for the six months ended September 30, 2010 and 2009 was $666,000 and $596,000, respectively. The hedging transaction net gain (loss) from foreign exchange derivative contracts for the three months ended September 30, 2010 and 2009 was $106,000 and $(140,000), respectively, and for the six months ended September 30, 2010 and 2009 was $19,000 and $(699,000), respectively. These net gain (loss) amounts were recorded to “Administrative and general” in the condensed consolidated statements of operations.
At September 30, 2010, the Company had derivative contracts maturing through October 2010 to sell $3.9 million and purchase $5.9 million in foreign currencies and had derivative contracts maturing through April 2010 to sell $830,000 and purchase $4.1 million in foreign currencies at March 31, 2010.
Note 4 - Fair Value of Assets and Liabilities
The Company reports its money market funds, foreign exchange derivatives and the DocSite contingent consideration liability (see Note 2 for additional information) at fair value on a recurring basis using the following fair value hierarchy: level 1 - quoted prices in active markets for identical assets or liabilities; level 2 – inputs other than level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Non-financial assets such as goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. See Note 8 of the condensed consolidated financial statements for further information.
Note 5 - Computation of Earnings per Common Share
Earnings per common share data were computed as follows (in thousands, except per share amounts):
During the three and six months ended September 30, 2010, stock awards to purchase a total of approximately 19.6 million and 19.9 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. During the three and six months ended September 30, 2009, stock awards to purchase a total of approximately 25.7 million and 26.2 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.
Note 6 - Comprehensive Income
Other comprehensive income (loss) relates to foreign currency translation adjustments that have been excluded from net income and reflected in equity. Total comprehensive income is summarized as follows (in thousands):
Note 7 – Stock Benefit Plans and Stock-Based Compensation
The Company has the following stock benefit plans: (1) the 2007 Long Term Incentive Plan (“2007 LTIP”) allows the Company’s Compensation Committee to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase Plan allows participating U.S. and Canadian employees the right to have up to 10% of their compensation withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock Ownership Plan (“ESOP”) and Trust allows the Company to make contributions to the ESOP for the benefit of substantially all U.S. employees.
Covisint Corporation (“Covisint”), a subsidiary of the Company, maintains a stock benefit plan referred to as the 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint the ability to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of Covisint.
Stock award compensation expense was allocated as follows (in thousands):
As of September 30, 2010, $23.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested equity awards is expected to be recognized over a weighted-average period of approximately 2.76 years.
A summary of the Company’s option activity during the six months ended September 30, 2010 is presented below (shares and intrinsic value in thousands):
The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:
The fair value of stock options vested during the six months ending September 30, 2010 was $4.42 per share.
A summary of the Company’s non-vested restricted stock units and performance-based restricted stock unit awards (collectively “Non-vested RSU”) activity during the six months ended September 30, 2010 is summarized as follows (shares and intrinsic value in thousands):
As of September 30, 2010, there were 134,000 stock options outstanding from the 2009 Covisint LTIP. These options will vest only if, prior to August 26, 2015, Covisint completes an initial public offering (“IPO”) or if there is a change of control of Covisint.
The individuals who received stock options from the 2009 Covisint LTIP were also awarded performance-based restricted stock unit awards (“PSAs”) from the Company’s 2007 LTIP. There were 1.5 million PSAs outstanding as of September 30, 2010. These PSAs will vest only if Covisint does not complete an IPO or a change of control transaction by August 25, 2015 and the Covisint business meets a pre-defined revenue target for four consecutive calendar quarters ending prior to August 26, 2015.
As of September 30, 2010, the Company has not recorded compensation expense for the Covisint stock options or the PSAs and these awards are not included in the Company’s diluted shares outstanding. Compensation expense will be accounted for in the period it becomes probable that the underlying conditions of the Covisint stock options or PSAs will be met and will be included in the diluted shares outstanding balance in the period the underlying performance conditions are met.
Note 8 – Goodwill, Capitalized Software and Other Intangible Assets
The change in the carrying amount of goodwill by reportable segment during the six months ended September 30, 2010 is summarized as follows (in thousands):
The components of the Company’s capitalized software and other intangible assets are as follows (in thousands):
Capitalized software includes the costs of internally developed software technology and software technology purchased through acquisitions. Internally developed capitalized costs and capitalized purchased software technology are amortized over periods up to five years.
Customer relationship agreements were acquired as part of recent acquisitions and are being amortized over periods up to ten years.
Other amortized intangible assets include amortizable trademarks and patents associated with recent acquisitions and are being amortized over periods up to three years.
Unamortized trademarks were acquired as part of the Covisint and Changepoint acquisitions in fiscal 2004 and fiscal 2005. These trademarks are deemed to have an indefinite life.
Amortization of intangible assets
Amortization expense of capitalized software, customer relationship and other intangible assets were reported as follows (in thousands):
Based on the capitalized software, customer relationship and other intangible assets recorded through September 30, 2010, the annual amortization expense over the next five fiscal years is expected to be as follows (in thousands):
Impairment evaluations
Capitalized software is reviewed for impairment each balance sheet date or when events and changes in circumstances indicate that the carrying value may not be recoverable.
Goodwill and unamortized intangible assets are tested for impairment at least once a year or more frequently if management believes indicators of impairment exist. Impairment evaluations were performed on goodwill and unamortized intangible assets for all reporting segments as of March 31, 2010.
For all other intangible and long-lived assets, impairment evaluations are performed when events or changes in circumstances indicate that the carrying value may not be recoverable.
Reclassification
As of September 30, 2010, capitalized software, customer relationships, trademarks and other intangible assets are reported as "Capitalized software and other intangible assets, net" in the condensed consolidated balance sheets. In order to conform the March 31, 2010 balance sheet to the current presentation, the Company has reclassified certain intangible assets totaling $42.8 million (reported as non-current "Other assets" in the March 31, 2010 audited financial statements) to "Capitalized software and other intangible assets, net".
Note 9 – Segment Information
Compuware has four business segments in the technology industry: products, web performance services, professional services and application services. The Company’s products and services are offered worldwide to the largest IT organizations across a broad spectrum of technologies, including mainframe, distributed and Internet platforms and provide the following capabilities:
Financial information for the Company’s business segments is as follows (in thousands):
Financial information regarding geographic operations is presented in the table below (in thousands):
Note 10 - Restructuring Accrual
In recent years, the Company has incurred restructuring charges associated with the following initiatives: (1) aligning the professional services segment headcount and operating expenses after initiating a plan during the second half of fiscal 2009 to exit low-margin engagements and (2) management’s evaluation of the products segment and administrative and general business processes to identify operating efficiencies with the goal of reducing operating expenses.
The following table summarizes the restructuring accrual as of March 31, 2010, and changes to the accrual during the six months ended September 30, 2010 (in thousands):
As of September 30, 2010, $497,000 of the restructuring accrual is recorded in current “accrued expenses”. The remaining balance of $196,000 is recorded to long-term “accrued expenses” in the condensed consolidated balance sheets and primarily relates to facility costs.
The accruals for facilities costs at September 30, 2010 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 2014. Projected sublease income is based on management’s estimates, which are subject to change.
Note 11 - Debt
The Company had no long term debt at September 30, 2010 and March 31, 2010.
The Company has an unsecured revolving credit agreement (the “credit facility”) with Comerica Bank and other lenders. The credit facility provides for a revolving line of credit in the amount of $150 million and expires on November 1, 2012. The credit facility also permits the Company to increase the revolving line of credit by up to an additional $150 million subject to receiving further commitments from lenders and certain other conditions.
The credit facility contains various covenant requirements, including limitations on liens; indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans and advances from the Company; transactions with affiliates; and limits additional borrowing outside of the facility to $250 million. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. The Company was in compliance with the covenants under the credit facility at September 30, 2010.
Any borrowings under the credit facility bear interest at the prime rate or the Eurodollar rate plus the applicable margin (based on the level of maximum total debt to EBITDA ratio), at the Company’s option. The Company pays a quarterly facility fee on the credit facility based on the applicable margin grid.
Note 12 – Contingencies
The Company is subject to various legal actions and claims incidental to its business. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. After discussion with counsel, it is the opinion of management that the outcome of such matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Compuware Corporation
Detroit, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and subsidiaries (the "Company") as of September 30, 2010, and the related condensed consolidated statements of operations for the three-month and six-month periods ended September 30, 2010 and 2009, and of cash flows for the six-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and subsidiaries as of March 31, 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 27, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
November 4, 2010
COMPUWARE CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements within the meaning of the federal securities laws. When we use words such as “may”, “might”, “will”, “should”, “believe”, “expect”, “anticipate”, “estimate”, “continue”, “predict”, “forecast”, “projected”, “intend” or similar expressions, or make statements regarding our future plans, objectives or expectations, we are making forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results and could cause actual results to differ materially from the results implied by these or any other forward-looking statements made by us, or on our behalf.
The material risks and uncertainties that we believe affect us are summarized below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in the reports we file with the Securities and Exchange Commission (see Item 1A Risk Factors in our 2010 Form 10-K), as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.
There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by applicable law, we do not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
COMPUWARE CORPORATION AND SUBSIDIARIES
COMPUWARE CORPORATION AND SUBSIDIARIES
OVERVIEW
In this section, we discuss our results of operations on a segment basis. We operate in four business segments in the technology industry: products, web performance services, professional services and application services. We evaluate segment performance based primarily on segment contribution before corporate expenses. References to years are to fiscal years ended March 31. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year ended March 31, 2010, particularly “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
We deliver value to businesses by providing software and web performance solutions; 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. We began to offer productivity tools for the distributed platform during the 1990’s and web-based productivity tools during the 2000’s.
The Company’s products and services are offered worldwide to the largest IT organizations across a broad spectrum of technologies, including mainframe, distributed and Internet platforms and provide the following capabilities:
COMPUWARE CORPORATION AND SUBSIDIARIES
Quarterly Update
The following occurred during the second quarter of 2011:
The ability to achieve our strategies and objectives is subject to a number of risks and uncertainties, some of which we may not be able to control. See "Forward-Looking Statements".
COMPUWARE CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational data from the condensed consolidated statements of operations as a percentage of total revenues and the percentage change in such items compared to the prior period:
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