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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 000-20900
COMPUWARE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS 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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
As of August 2nd, 2004, there were outstanding 386,186,270 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 25 pages
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004 and March 31, 2004 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial
Statements 6
Report of Independent Registered Public Accounting Firm 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, MARCH 31,
2004 2004
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 373,678 $ 454,916
Investments 159,886 149,654
Accounts receivable, net 407,276 452,057
Deferred tax asset, net 28,127 32,460
Income taxes refundable, net 49,756 33,946
Prepaid expenses and other current assets 25,040 19,976
---------- ----------
Total current assets 1,043,763 1,143,009
---------- ----------
INVESTMENTS 161,489 162,484
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 447,237 444,401
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 50,598 45,489
---------- ----------
OTHER:
Accounts receivable 195,207 198,742
Goodwill 289,062 213,359
Other 37,397 26,597
---------- ----------
Total other assets 521,666 438,698
---------- ----------
TOTAL ASSETS $2,224,753 $2,234,081
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 35,436 $ 35,298
Accrued expenses 129,500 154,962
Deferred revenue 328,363 302,804
---------- ----------
Total current liabilities 493,299 493,064
DEFERRED REVENUE 287,143 300,664
ACCRUED EXPENSES 19,283 22,073
DEFERRED TAX LIABILITY, NET 6,153 4,689
---------- ----------
Total liabilities 805,878 820,490
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 3,862 3,853
Additional paid-in capital 729,990 722,206
Retained earnings 681,759 681,115
Foreign currency translation adjustment 3,264 6,417
---------- ----------
Total shareholders' equity 1,418,875 1,413,591
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,224,753 $2,234,081
========== ==========
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
--------- ---------
REVENUES:
Software license fees $ 54,103 $ 55,325
Maintenance fees 103,501 101,576
Professional services fees 129,449 149,111
--------- ---------
Total revenues 287,053 306,012
--------- ---------
OPERATING EXPENSES:
Cost of software license fees 7,809 7,386
Cost of professional services 118,850 139,480
Technology development and support 40,891 40,023
Sales and marketing 70,733 67,385
Administrative and general 52,018 53,232
--------- ---------
Total operating expenses 290,301 307,506
--------- ---------
LOSS FROM OPERATIONS (3,248) (1,494)
OTHER INCOME 4,143 5,109
--------- ---------
INCOME BEFORE INCOME TAXES 895 3,615
INCOME TAX PROVISION 251 1,012
--------- ---------
NET INCOME $ 644 $ 2,603
========= =========
Basic earnings per share $ 0.00 $ 0.01
========= =========
Diluted earnings per share $ 0.00 $ 0.01
========= =========
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 644 $ 2,603
Adjustments to reconcile net income to cash provided
by operations:
Depreciation and amortization 15,199 11,222
Tax benefit from exercise of stock options 227 91
Issuance of common stock to ESOP 4,872
Acquisition tax benefits 1,802 1,758
Deferred income taxes 5,530 (3,759)
Other 545 2,794
Net change in assets and liabilities, net of effects from acquisitions:
Accounts receivable 45,971 47,754
Prepaid expenses and other current assets (3,685) (2,824)
Other assets 497 (3,026)
Accounts payable and accrued expenses (40,098) (28,386)
Deferred revenue 14,253 21,392
Income taxes (15,785) 842
--------- ---------
Net cash provided by operating activities 29,972 50,461
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Business (96,993)
Property and equipment:
Headquarters facility (2,180) (23,633)
Other (1,772) (2,616)
Capitalized software (3,013) (3,162)
Investments:
Proceeds 71,306 111,708
Purchases (81,147) (97,963)
--------- ---------
Net cash used in investing activities (113,799) (15,666)
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 892 870
Contribution to stock purchase plans 2,206 2,365
--------- ---------
Net cash provided by financing activities 3,098 3,235
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (509) 4,150
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (81,238) 42,180
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 454,916 319,466
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 373,678 $ 361,646
========= =========
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") 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 generally accepted accounting principles for complete
financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, contingencies and results of operations. While management
has based their assumptions and estimates on the facts and circumstances
existing at June 30, 2004, final amounts may differ from estimates.
In the opinion of management of the Company, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, that are necessary for a fair presentation
of the results for the interim periods presented. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 2004 included in the
Company's Annual Report to Shareholders on Form 10-K filed with the Securities
and Exchange Commission. The consolidated balance sheet at March 31, 2004 has
been derived from the audited financial statements at that date but does not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. The results of operations for
interim periods are not necessarily indicative of actual results achieved for
full fiscal years.
Certain amounts in the first quarter 2004 financial statements have been
reclassified to conform to the first quarter 2005 presentation.
NOTE 2 - ACQUISITIONS
In May 2004, the Company acquired privately held Changepoint Corporation, a
market-leading provider of IT Governance application software for approximately
$100 million in cash. The acquisition has been accounted for as a purchase and,
accordingly, assets and liabilities acquired have been recorded at fair value as
of the acquisition date.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
NOTE 3 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share data were computed as follows (in thousands, except
for per share data):
Three Months Ended
June 30,
-----------------------
2004 2003
-------- --------
BASIC EARNINGS PER SHARE:
Numerator: Net income $ 644 $ 2,603
-------- --------
Denominator:
Weighted-average common shares outstanding 385,584 382,521
-------- --------
Basic earnings per share $ 0.00 $ 0.01
======== ========
DILUTED EARNINGS PER SHARE:
Numerator: Net income $ 644 $ 2,603
-------- --------
Denominator:
Weighted-average common shares outstanding 385,584 382,521
Dilutive effect of stock options 2,842 1,492
-------- --------
Total shares 388,426 384,013
-------- --------
Diluted earnings per share $ 0.00 $ 0.01
======== ========
During the three months ended June 30, 2004 and 2003, stock options and a
warrant to purchase a total of approximately 54,810,000 and 60,884,000 shares,
respectively, were excluded from the diluted earnings per share calculation
because they were anti-dilutive.
Through June 30, 2004, in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applied APB Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans. Stock
options are granted at current market prices at the date of grant, therefore, no
compensation cost has been recognized for its plans. If compensation cost for
the Company's plans had been determined based on the fair value at the grant
dates for the three months ended June 30, 2004 and 2003, consistent with the
method prescribed by SFAS No. 123, "Accounting for Stock Based Compensation,"
net income and earnings per share would have been adjusted to the pro forma
amounts indicated below (in thousands, except for per share data):
Three Months Ended June 30,
----------------------------
2004 2003
---------- ----------
Net income (loss):
As reported $ 644 $ 2,603
Compensation cost, net of tax (7,268) (10,009)
---------- ----------
Pro forma $ (6,624) $ (7,406)
========== ==========
Earnings per share:
As reported:
Basic earnings per share $ -- $ 0.01
Diluted earnings per share -- 0.01
Pro forma:
Basic loss per share (0.02) (0.02)
Diluted loss per share (0.02) (0.02)
The pro forma amounts for compensation cost may not be indicative of the effects
on net income and earnings per share for future years.
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes foreign currency translation gains
and losses that have been excluded from net income and reflected in equity.
Total comprehensive income (loss) is summarized as follows (in thousands):
Three Months Ended
June 30,
----------------------
2004 2003
------- -------
Net income $ 644 $ 2,603
Foreign currency translation
adjustment, net of tax (3,153) 6,230
------- -------
Total comprehensive income (loss) $(2,509) $ 8,833
======= =======
NOTE 5 - SEGMENTS
Compuware operates in two business segments in the technology industry: products
and professional services. The Company provides software products and
professional services to IT organizations that help IT professionals efficiently
develop, implement and support the applications that run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
Three Months Ended
June 30,
--------------------------
2004 2003
--------- ---------
Revenues:
Products:
Mainframe $ 113,736 $ 119,231
Distributed systems 43,868 37,670
--------- ---------
Total products revenue 157,604 156,901
Professional services 129,449 149,111
--------- ---------
Total revenues $ 287,053 $ 306,012
========= =========
Operating expenses:
Products $ 119,433 $ 114,794
Professional services 118,850 139,480
Corporate staff 52,018 53,232
--------- ---------
Total operating expenses $ 290,301 $ 307,506
========= =========
Income (loss) from operations before other income:
Products $ 38,171 $ 42,107
Professional services 10,599 9,631
Corporate staff (52,018) (53,232)
--------- ---------
Loss from operations before other income (3,248) (1,494)
Other income 4,143 5,109
--------- ---------
Income before income taxes $ 895 $ 3,615
========= =========
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
Financial information regarding geographic operations is presented in the table
below (in thousands):
Three Months Ended
June 30,
-----------------------
2004 2003
-------- --------
Revenues:
United States $203,550 $220,888
Europe and Africa 64,144 68,687
Other international operations 19,359 16,437
-------- --------
Total revenues $287,053 $306,012
======== ========
NOTE 6 - RESTRUCTURING CHARGE
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 by better
aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization.
The following table summarizes the restructuring accrual as of March 31, 2004,
and charges against the accrual during the first quarter of fiscal 2005 (in
thousands):
Charges against
Balance at the accrual during Balance at
March 31, the quarter ended June 30,
2004 June 30,2004 2004
---------- ------------------ ----------
Employee termination benefits $ 107 $ -- $ 107
Facilities costs (primarily lease
abandonments) 13,488 826 12,662
Legal, consulting and
outplacement costs 11 1 10
---------- ------------------ ----------
Total restructuring accrual $ 13,606 $ 827 $ 12,779
========== ================== ==========
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
NOTE 7 - INVESTMENTS IN PARTIALLY OWNED COMPANIES
At June 30, 2004, the Company held a 33.3% interest in CareTech Solutions, Inc.
(CareTech) and a 49% interest in ForeSee Results, Inc. (ForeSee).
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 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."
At June 30, 2004 and March 31, 2004, the Company's carrying value of its
investments in and advances to CareTech was $23.7 million and $22.0 million,
respectively. Included in the net investment at June 30, 2004 and March 31,
2004, are a note receivable with an adjusted basis of $14.9 million and $14.7
million, respectively, and accounts receivable due from CareTech of $8.9 million
and $7.3 million, respectively. The note is payable in quarterly installments
through January 2012 and bears interest at 5.25%. At June 30, 2004, CareTech was
current with the terms of the note.
Since 1999, the Company has guaranteed lease obligations of CareTech up to $12.5
million. The Company has not recorded any liability related to these guarantees
since it believes that CareTech will continue to meet its obligations. At June
30, 2004 and March 31, 2004, CareTech's outstanding lease obligations were
approximately $2.4 million and $3.2 million, respectively.
CareTech's most significant customer is the Detroit Medical Center and
Subsidiaries (DMC). The DMC has publicly announced that it is having financial
difficulties. The Company considered the financial situation of the DMC at June
30, 2004 (and at March 31, 2004) and concluded that no impairment charge or
valuation allowance related to our investment in and receivables due from
CareTech was warranted. The DMC has requested, and CareTech has agreed, to
provide the DMC with extended payment terms up to 90 days. The Company therefore
agreed to extend 90 day payment terms to CareTech.
During the third quarter of fiscal 2004, the other shareholders of CareTech
expressed an inability or unwillingness to provide additional funding to meet
CareTech's cash flow requirements. Therefore, the Company will record 100
percent of any future losses incurred by CareTech as a reduction to the
Company's outstanding advances to CareTech.
ForeSee was incorporated in October 2001 to provide online customer satisfaction
management. This investment is also accounted for under the equity method
including EITF 98-13.
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
At June 30, 2004 and March 31, 2004, the Company's carrying value of its
investments in and advances to ForeSee was $3.5 million and $3.9 million,
respectively. Included in the net investment at June 30, 2004 and March 31,
2004, are notes receivable from ForeSee with an adjusted basis of $3.3 million
and $3.7 million, respectively. The ForeSee notes bear interest at the prime
rate (4.25% at June 30, 2004) and are due between June 2007 and December 2008.
The Company has pledged $667,000 in additional loans to ForeSee, if needed,
subject to approval by the ForeSee shareholders. During the second quarter of
fiscal 2004, the Company's equity investment in ForeSee was reduced to zero. At
that point, the Company began recording 100 percent of the losses sustained by
ForeSee as a reduction to the Company's outstanding advances to ForeSee since
the Company is uncertain whether the other shareholders are willing or able to
sustain their share of the losses. The Company continues to monitor the
financial situation of ForeSee on a regular basis and has concluded that no
impairment reserve was warranted at June 30, 2004 (or at March 31, 2004).
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Compuware Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Compuware Corporation and subsidiaries (the "Company") as of June 30, 2004, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended June 30, 2004 and 2003. These consolidated interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with 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 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 standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company and subsidiaries as of March 31, 2004, 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 26, 2004, 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, 2004 is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
August 3, 2004
12
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates," "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect our operating results, including, without
limitation, those discussed below, contained elsewhere in this report, and in
our 2004 Form 10-K filed with the Securities and Exchange Commission 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.
- - In 2002, we filed a lawsuit against IBM alleging, among other things,
copyright infringement, misappropriation of trade secrets, intentional
interference with contractual relations and economic expectancy, false
advertising and various violations of the Lanham Act, as well as various
anti-trust law violations. We claim that IBM has misappropriated portions
of our software tools, used our technology to develop competing products,
used its monopoly power to engage in unlawful tying arrangements and
subverted competition on the merits. IBM has filed a counterclaim against
us alleging violation of six of their patents and in 2004 filed a separate
complaint against us alleging violation of seven different IBM patents.
Pursuing and defending these matters will be costly, time-consuming and may
divert management's time and attention. Due to these matters, our legal
expenses have increased substantially and our administrative and general
expenses could further increase as a result of these factors. In addition,
IBM may seek to influence our customers and potential customers to reduce
or eliminate the amount of our products and services that they purchase, or
our lawsuit against IBM and IBM's lawsuit against us may otherwise be
viewed negatively by our customers and potential customers and cause them
to refrain from buying our products and services. Any of the foregoing
developments could adversely affect our position in the marketplace and the
results of our operations.
- - While we are expanding our focus on distributed software products, a
majority of our revenue from software products is dependent on our
customers' continued use of IBM and IBM-compatible mainframe products and
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.
- - In addition to the IBM claims discussed above, there can be no assurance
that other third parties will not assert infringement claims against us in
the future with respect to current and future products or that any such
assertion may not require us to enter into royalty arrangements or result
in costly litigation.
- - Our operating margins may decline. We are aware that operating expenses
associated with our distributed systems products are higher than those
associated with our traditional mainframe products. Since we believe the
best opportunities for revenue growth are in the distributed systems
market, product operating margins could experience more pressure. In
addition, operating margins in the professional services business are
significantly impacted by small fluctuations in revenue since most costs
are fixed during any short term period.
- - Our results could be adversely affected by increased competition and
pricing pressures. We consider over 40 firms to be directly competitive
with one or more of our products. These competitors include but are not
limited to BMC Software, Inc., Borland Software Corp., Computer Associates
International, Inc., IBM, Mercury Interactive Corporation and Niku
Corporation. Some of these competitors have substantially greater
financial, marketing, recruiting and training resources than we do.
13
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
- - The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include but are not limited to Accenture Ltd.,
Computer Sciences Corporation, Electronic Data Systems Corporation, IBM
Global Services, Analysts International Corporation, Keane, 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.
- - Our success depends in part on our ability to develop product enhancements
and to purchase or develop new products that keep pace with continuing
changes in technology and customer preferences.
- - Approximately 30% of our total revenue is derived from foreign sources.
This exposes us to exchange rate risks on foreign currencies and to other
international risks such as the need to comply with foreign and U.S. export
laws, and the uncertainty of certain foreign economies.
- - 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. 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.
- - We depend on key employees and technical 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
certain relatively fixed costs. Our product revenues vary from quarter to
quarter. Net income may be disproportionately affected by a fluctuation in
revenues because only a small portion of our expenses varies with revenues.
- - Historical seasonality in license revenue cannot be relied on as an
indicator of future performance due to the current economic conditions
affecting the Information Technology ("IT") industry.
- - Changes in world economies could cause customers to further delay or forego
decisions to license new products or upgrades to their existing
environments or to reduce their requirements for professional services, and
this could adversely affect our operating results.
- - Acts of terrorism, acts of war and other unforeseen events may cause damage
or disruption to our properties, employees, suppliers, distributors,
resellers and customers which could adversely affect our business and
operating results.
14
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW
In this section, we discuss our results of operations on a segment basis for
each of our financial reporting segments. We operate in two business segments in
the technology industry: products and professional services. We evaluate segment
performance based primarily on segment contribution before corporate expenses.
References to years are to fiscal years ended March 31. This discussion and
analysis should be read in conjunction with the unaudited 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, 2004, particularly "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the annual report on Form 10-K.
We provide software products and professional services designed to increase the
productivity of the IT departments of businesses worldwide. In the early years
of our Company, we focused on offering professional services and mainframe
products in the testing and implementation environment where we gained extensive
experience and established long-term customer relationships. Over the past
several years, we have expanded our presence into products and professional
services in the IT governance, development, quality assurance, management and
support areas of the application life cycle.
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines, expanding our product and service offerings through key
acquisitions, developing strategic partnerships in order to provide clients with
our product solutions and managing our costs.
We achieved the following during the first quarter of 2005:
- - Acquired Changepoint Corporation (referred to as "Changepoint" or "IT
Governance") in May 2004. Changepoint offerings provide Chief Information
Officers (CIO's) with insight and visibility into their people, projects,
resources and applications, helping CIO's align IT investments with
business priorities.
- - Released 5 mainframe and 6 distributed product updates designed to increase
the productivity of the IT departments of our customers.
- - Achieved increases in distributed product revenue compared to the first
quarter of 2004 which is a reflection of our continued focus on promoting
our distributed products.
- - Improved the professional services margin from 6.5% in the first quarter of
2004 to 8.2% in the first quarter of 2005 through improved utilization of
professional services personnel and, to a lesser extent, a concerted effort
to reduce low margin subcontractor projects.
Our product revenue did not meet expectations in the first quarter of 2005
primarily due to an elongated sales cycle and lower demand seen throughout the
software industry.
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".
15
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of
Total Revenues
------------------------
Three Months Ended
June 30, Period-
------------------------ to-Period
2004 2003 Change
--------- ---------- -----------
REVENUE:
Software license fees 18.8% 18.1% (2.2)%
Maintenance fees 36.1 33.2 1.9
Professional services fees 45.1 48.7 (13.2)
----- -----
Total revenues 100.0 100.0 (6.2)
----- -----
OPERATING EXPENSES:
Cost of software license fees 2.7 2.4 5.7
Cost of professional services 41.5 45.6 (14.8)
Technology development and support 14.2 13.1 2.2
Sales and marketing 24.6 22.0 5.0
Administrative and general 18.1 17.4 (2.3)
----- -----
Total operating expenses 101.1 100.5 (5.6)
----- -----
Loss from operations (1.1) (0.5) (117.4)
Other income 1.4 1.7 (18.9)
----- -----
Income before income taxes 0.3 1.2 (75.2)
Income tax provision 0.1 0.3 (75.2)
----- -----
Net income 0.2% 0.9% (75.3)%
===== =====
SOFTWARE PRODUCTS
REVENUE
Our products are designed to support the complete application lifecycle:
development and integration, quality assurance, production readiness,
performance management and IT governance of the application to optimize
performance in production. Product revenue, which consists of software license
fees and maintenance fees, comprised 54.9% and 51.3% of total revenue during the
first quarter of 2005 and 2004, respectively. Distributed software product
revenue increased $6.2 million or 16.5% during the first quarter of 2005 to
$43.9 million from $37.7 million during the first quarter of 2004. The increase
in distributed software product revenue was primarily due to the addition of
$2.7 million related to IT Governance which was acquired during the first
quarter of 2005 and a $2.9 million increase in maintenance revenue primarily
related to our Numega and Vantage product lines. The increase was partially
offset by a $5.5 million or 4.6% decrease in revenue from OS/390 products
(mainframe revenue) during the first quarter of 2005 to $113.7 million from
$119.2 million during the first quarter of 2004.
License revenue decreased $1.2 million or 2.2% during the first quarter of 2005
to $54.1 million from $55.3 million during the first quarter of 2004. License
revenue was positively impacted by fluctuations in foreign currencies compared
to the first quarter of 2004. Excluding the favorable
16
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
effect of such foreign currency fluctuations, license revenue would have been
approximately $52.3 million during the first quarter of 2005, compared to $55.3
million during the first quarter of 2004, a decrease of 5.4%.
Maintenance fees increased $1.9 million or 1.9% to $103.5 million during the
first quarter of 2005 from $101.6 million during the first quarter of 2004.
Maintenance fees were positively impacted by fluctuations in foreign currencies
compared to the first quarter of 2004. Excluding the effect of foreign currency
fluctuations, maintenance fees would have been approximately $100.4 million
during the first quarter of 2005, compared to $101.6 million during the first
quarter of 2004, a decrease of 1.2%. The decrease in maintenance fees on a
constant currency basis was primarily attributable to lower license fees during
both 2005 and 2004, resulting in minimal increases to the maintenance base and
to market pressure on pricing.
Product revenue by geographic location is presented in the table below (in
thousands):
Three Months Ended
June 30,
-----------------------
2004 2003
-------- --------
United States $ 88,915 $ 86,205
Europe and Africa 50,353 54,955
Other international operations 18,336 15,741
-------- --------
Total product revenue $157,604 $156,901
======== ========
PRODUCT CONTRIBUTION AND EXPENSES
Financial information for the product segment is as follows (in thousands):
Three Months Ended
June 30,
-----------------------
2004 2003
-------- --------
Revenue $157,604 $156,901
Expenses 119,433 114,794
-------- --------
Product contribution $ 38,171 $ 42,107
======== ========
The product segment generated contribution margins of 24.2% and 26.8% during the
first quarter of 2005 and 2004, respectively. Product expenses include cost of
software license fees, technology development and support costs, and sales and
marketing expenses. These factors are discussed below.
Cost of software license fees includes amortization of capitalized software, the
cost of duplicating and disseminating products to customers and the cost of
author royalties. As a percentage of software license fees, cost of software
license fees were 14.4% and 13.4% in the first quarter of 2005 and 2004,
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 here are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support
17
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
technology initiatives. As a percentage of product revenue, costs of technology
development and support were 25.9% and 25.5% in the first quarter of 2005 and
2004, respectively.
Capitalization of internally developed software products begins when the
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total research and
development expenditures for the first quarter of 2005 increased $0.7 million,
or 1.6%, to $43.9 million from $43.2 million in the first quarter of 2004.
Sales and marketing costs consist primarily of personnel related costs
associated with product direct sales and sales support, marketing for all our
offerings, and personnel costs associated with new sales initiatives. For the
first quarter of 2005, sales and marketing costs increased $3.3 million, or
5.0%, to $70.7 million from $67.4 million in the first quarter of 2004. The
change was primarily attributable to annual pay increases that went into effect
after the first quarter of 2004. As a percentage of product revenue, sales and
marketing costs were 44.9% and 42.9% in the first quarter of 2005 and 2004,
respectively.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of IT professional services, including business systems
analysis, design and programming, software conversion and system planning and
consulting. Revenue from professional services decreased $19.7 million or 13.2%
during the first quarter of 2005 to $129.4 million compared to $149.1 million in
the first quarter of 2004. The decrease in revenue for 2005 was primarily due to
a reduction in customer demand for professional services.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended
June 30,
-----------------------
2005 2004
-------- --------
United States $114,635 $134,683
Europe and Africa 13,791 13,732
Other international operations 1,023 696
-------- --------
Total professional services revenue $129,449 $149,111
======== ========
18
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for the professional services segment is as follows (in
thousands):
Three Months Ended
June 30,
-----------------------
2005 2004
-------- --------
Revenue $129,449 $149,111
Expenses 118,850 139,480
-------- --------
Professional services contribution $ 10,599 $ 9,631
======== ========
During the first quarter of 2005, the professional services segment generated a
contribution margin of 8.2%, compared to 6.5% during the first quarter of 2004.
The increase in professional services margin is primarily due to improved
utilization of professional services personnel and, to a lesser extent, a
concerted effort to reduce low margin subcontractor projects.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services decreased $20.6 million or 14.8% during
the first quarter of 2005 to $118.9 million compared to $139.5 million in the
first quarter of 2004. The decrease was primarily attributable to lower
compensation, benefit, bonus and travel costs of approximately $19.2 million and
a decrease in subcontractor costs of approximately $2.3 million. Compensation,
benefit, bonus and travel costs were lower due to a reduction in average
employee headcount in this area from the first quarter of 2004 to the first
quarter of 2005.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist of costs associated with the
operations and administration of the Company. These costs include the corporate
executive, finance, human resources, legal and corporate communications
departments. In addition, administrative and general costs include all
facility-related costs, such as rent, maintenance, depreciation expense,
utilities, etc., associated with our local sales and professional services
offices. Administrative and general expenses decreased $1.2 million, or 2.3%
during the first quarter of 2005 to $52.0 million from $53.2 million during the
first quarter of 2004. External legal fees for all litigation, including IBM and
other matters were $9.2 million and $12.4 million in the first quarter of 2005
and 2004, respectively.
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 $0.3 million and $1.0 million in the first quarter of 2005 and
2004, respectively, which represents an effective tax rate of 28%.
19
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESTRUCTURING CHARGE
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability in the future by better aligning cost
structures with current market conditions. See Note 6 to the Condensed
Consolidated Financial Statements for changes to the
restructuring accrual.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Assumptions and estimates
were based on the facts and circumstances known at June 30, 2004. However,
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. The accounting policies discussed in Item 7 of our
Annual Report on Form 10-K are considered by management to be the most important
to an understanding of the financial statements, because their application
places the most significant demands on management's judgment and estimates about
the effect of matters that are inherently uncertain. These policies are also
discussed in Note 1 of the Notes to Consolidated Financial Statements included
in Item 8 of that report. There have been no material changes to that
information during the first three months of 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, cash and investments totaled approximately $695.1 million.
During the first quarter of 2005 and the first quarter of 2004, cash flow from
operations was $30.0 million and $50.5 million, respectively. The decrease was
primarily due to lower collections on customer receivables due to the general
decline in revenue over the last two years. During the first quarter of fiscal
2005 and the first quarter of fiscal 2004, capital expenditures including
property and equipment and capitalized research and software development totaled
$7.0 million and $29.4 million, respectively.
On May 2, 2003, we entered into a $100 million revolving credit facility that
matured on July 29, 2004 (see Note 9 to the Consolidated Financial Statements
contained in our Annual Report on Form 10-K for the year ended March 31, 2004).
The credit facility has been extended through July 28, 2005. No borrowings have
occurred under this facility since inception.
In July 2003, we entered into an option and purchase agreement for our vacated
building in Farmington Hills, Michigan. The option agreement allowed the holder
to commit to purchase the building for one year after the execution of this
agreement. The option selling price of the building approximated the current net
book value of $20 million for the building. This option expired in July 2004 and
was not exercised by the holder. We continue to seek opportunities to obtain
maximum value for this facility.
On May 6, 2003, the Board of Directors authorized the repurchase of up to $125
million of our common stock. Our purchases of stock may occur on the open
market, through negotiated or block transactions based upon market and business
conditions. We regularly evaluate market
20
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
conditions for an opportunity to repurchase our stock. There were no purchases
under this program during the first quarter of 2005. Approximately $124 million
remains for future purchases under this program.
As discussed in Note 7 to the Condensed Consolidated Financial Statements, we
regularly review the financial condition of our partially owned companies,
inclusive of considering the companies' relationships with their major
customers, to determine that the recorded amounts in our financial statements
are appropriate and the investments (inclusive of the debt obligations) are not
impaired. CareTech Solutions, Inc.'s (Caretech) most significant customer is the
Detroit Medical Center and Subsidiaries (DMC). The DMC has publicly announced
that it is having financial difficulties. After consideration of all relevant
factors, we concluded that no impairment charge or valuation allowance related
to our investment in and receivables due from CareTech should be recorded at
June 30, 2004. The DMC has requested, and CareTech has agreed, to provide the
DMC with extended payment terms up to 90 days. In turn, we have also agreed to
extend 90 day payment terms to CareTech. The other shareholders of CareTech
expressed an inability or unwillingness to provide additional funding to meet
any short falls in CareTech's cash flow requirements. Therefore, we will record
100 percent of any future losses incurred by CareTech as a reduction to our
outstanding advances to CareTech. At June 30, 2004, the carrying value of
investments in and advances to Caretech was $23.7 million.
In May 2004, the Company acquired privately held Changepoint Corporation, a
market-leading provider of IT Governance application software for approximately
$100 million in cash. The acquisition has been accounted for as a purchase and,
accordingly, assets and liabilities acquired have been recorded at fair value as
of the acquisition date.
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
We believe available cash resources, together with cash flow from operations,
will be sufficient to meet cash needs for the foreseeable future.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in our
Annual Report on Form 10-K for the year ended March 31, 2004. Except as
described elsewhere in this report on Form 10-Q, there have been no material
changes to those obligations or arrangements outside of the ordinary course of
business during the most recent quarter.
21
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. There have been no material changes
to our foreign exchange risk management strategy or our investment standards
subsequent to March 31, 2004, therefore the market risks remain substantially
unchanged since we filed the Annual Report on Form 10-K for the fiscal year
ending March 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to cause the
material information we are required to disclose in the reports that we file or
submit under the Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms. There was no change in our internal controls over financial
reporting during the quarter ended June 30, 2004 that materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
22
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As disclosed in our Annual Report on Form 10-K for the fiscal year ending March
31, 2004, on March 12, 2002, we filed suit in the United States District Court
for the Eastern District of Michigan against International Business Machines
Corporation ("IBM") alleging, among other things, infringement of our copyrights
and misappropriation of our trade secrets with respect to our mainframe software
tools, intentional interference with contractual relations with our employees
and former employees, anti-trust law violations, tortious interference with our
economic expectancy and various state law violations. Trial of the case was
previously set to begin September 29, 2004. The court recently reset the
commencement date for the trial to November 8, 2004. While we currently believe
we ultimately will benefit from this litigation, the impact of this action on
our liquidity, financial position and results of operations are not determinable
at the present time.
23
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description of Document
2.4 Amended and Restated Share Purchase Agreement among
3087769 Nova Scotia Company and Compuware
Corporation and Changepoint Corporation and Each of
the Sellers, dated as of April 27, 2004. (1)
3(i).1 Amended and Restated Bylaws of Compuware Corporation
effective as of January 3, 2002.
4.3 Amendment No. 1, dated as of April 30, 2004,
Revolving Credit Agreement dated as of May 2, 2003,
between Compuware Corporation and Comerica Bank. (1)
15 Independent Registered Public Accounting Firm's
Awareness Letter
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act.
32 Certification pursuant to 18 U.S.C. Section 1350 and
Rule 13a-14(b) of the Securities Exchange Act.
(1) Incorporated by reference to exhibit 2.4 and 4.3 to the 2004
Annual Report on Form 10-K.
(b) Reports on Form 8-K.
A Current Report on Form 8-K pursuant to Items 7, 9 and 12 was
filed on April 20, 2004 reporting that on April 15, 2004 the
Company hosted a conference call to discuss its business
projections for fiscal year 2005, as well as to provide initial
financial results for its quarter ended March 31, 2004 and
certain other information.
A Current Report on Form 8-K pursuant to Item 9 was filed on
April 30, 2004 reporting that on April 28, 2004, Compuware
Corporation issued a press release announcing that the Company
entered into a definitive agreement to acquire Changepoint
Corporation for $100 million in cash.
A Current Report on Form 8-K pursuant to Items 9 was filed on May
5, 2004 reporting that on May 4, 2004, Compuware closed the
transaction to acquire Changepoint.
A Current Report on Form 8-K pursuant to Items 7 and 12 was filed
on May 14, 2004 reporting that on May 12, 2004, Compuware
Corporation issued a press release announcing financial results
for its fourth quarter and fiscal year ended March 31, 2004 and
certain other information.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: August 4, 2004 By: /s/ Peter Karmanos, Jr.
----------------------------
Peter Karmanos, Jr.
Chief Executive Officer
(duly authorized officer)
Date: August 4, 2004 By: /s/ Laura L. Fournier
----------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
Treasurer
25
EXHIBIT INDEX
Exhibit No. Description
3(i).1 Amended and Restated Bylaws of Compuware Corporation
effective as of January 3, 2002.
15 Independent Registered Public Accounting Firm's
Awareness Letter
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act.
32 Certification pursuant to 18 U.S.C. Section 1350 and
Rule 13a-14(b) of the Securities Exchange Act.