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ComputerWire: IT Industry Intelligence

Compuware Corp has added weight to its argument that Moody's Investment Services in August 2002 unfairly downgraded its debt, by publishing figures for its third quarter 2003 that said cash flow from operations was almost $85m.

The software development, testing and management vendor filed suit on Wednesday against Moody's over the analyst firm's downgrading of Compuware's debt status by two notches from "Baa2" to "Ba1", a reduction from investment grade to junk status. Compuware's allegations of a conflict of interest at Moody's center on the question of whether an analyst providing debt-rating services to one company should also be allowed to offer debt-rating services to a company that has a link to that company.

In March and June 2002, Compuware initiated legal proceedings against IBM Corp, seeking damages based on a variety of claims including copyright infringement. Compuware claims in its suit against Moody's that at the time that Compuware was taking action against IBM, Moody's was involved in performing credit ratings for IBM.

"Given the litigation between Compuware and IBM, no analyst or employee of Moody's performing credit rating services for IBM should have been in any way involved in developing a credit rating for Compuware," Compuware's suit states.

But the legal suit also claims that regardless of any alleged conflict of interest, the downgrade was not justified. "Given the fact that Compuware at the time of the downgrade had over $475m in cash equivalents and liquid investments, that Compuware was expected to generate free cash flow for fiscal 2003, that the credit facility matured in August of 2003 and that Compuware had borrowed no amounts against the credit facility, Moody's downgrade of Compuware's credit rating with respect to the bank facility had no factual basis," it said.

In its results announcement yesterday Compuware showed cash and cash equivalents of $301.7m, up from $81m, in the same period a year ago, while investments came to $127.8m, down slightly from investments of $138.4m in the year-ago period. Total current assets came in just over $1bn, while total current liabilities came to $468m.

It was not all good news for the company, however. Third-quarter revenue came to $333.1m, compared to $453.8m in the third quarter of the previous fiscal year. Net income was $25.4m compared to $29.8m in the same quarter of fiscal 2002.

"While it's not the greatest market for technology, we believe that Compuware will begin to grow again in the coming fiscal year," said Compuware chairman and CEO Peter Karmanos. "We experienced some growth in our distributed products revenue and good cash flow from operations during the quarter. Distributed products license revenue grew nearly 27% from the second to the third quarter and cash flow from operations was almost $85m," he said. "In spite of market conditions, we remain focused on the growth of our distributed products like OptimalJ and Vantage, and other key initiatives such as our Near Shore Development Center and our CARS offering."

Karmanos added: "We believe we remain well-positioned to grow the company. Our ability to stay profitable and debt-free enhances our ability to produce competitive offerings that deliver the productivity and value customers are demanding."

On Wednesday a Moody's spokesperson said that the company hadn't seen the lawsuit from Compuware and would reserve comment until it did. Yesterday a Moody's spokesperson said that the company had "no further comments at this point."

© ComputerWire

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