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<SEC-DOCUMENT>0000950124-03-002142.txt : 20030624
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<ACCEPTANCE-DATETIME>20030624170837
ACCESSION NUMBER: 0000950124-03-002142
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20030331
FILED AS OF DATE: 20030624
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COMPUWARE CORPORATION
CENTRAL INDEX KEY: 0000859014
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 382007430
STATE OF INCORPORATION: MI
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20900
FILM NUMBER: 03755502
BUSINESS ADDRESS:
STREET 1: 31440 NORTHWESTERN HWY
CITY: FARMINGTON HILLS
STATE: MI
ZIP: 48334-2564
BUSINESS PHONE: 2487377300
MAIL ADDRESS:
STREET 1: 31440 NORTHWESTERN HIGHWAY
CITY: FARMINGTON HILLS
STATE: MI
ZIP: 48334-2564
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>k77829e10vk.txt
<DESCRIPTION>ANNUAL REPORT FOR FISCAL YEAR ENDED 03/31/03
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
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: 0-20900
COMPUWARE CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MI 48334-2564
-----------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (248) 737-7300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
PREFERRED STOCK
PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2002, the last business day of the registrant's
most recently completed second fiscal quarter, was $903,217,194, based upon
the closing sales price of the common stock on that date of $3.05 as reported on
the Nasdaq Stock Market. For purposes of this computation, all officers,
directors and 10% beneficial owners of the registrant are assumed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors and beneficial owners are, in fact, affiliates of the
registrant.
There were 382,561,037 shares of $.01 par value common stock outstanding as of
June 2, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2003 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
1
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Number Page
- ------ ----
<S> <C>
PART I
1. Business 3
Executive Officers of the Registrant 12
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 15
6. Selected Consolidated Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosure about Market Risk 28
8. Consolidated Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 54
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
14. Controls and Procedures 55
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 56
</TABLE>
2
<PAGE>
PART I
ITEM 1
BUSINESS
We provide software products and professional services designed to increase the
productivity of the information technology 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 the distributed
and web systems markets, offering products and professional services in the
application development and integration, quality assurance, production readiness
and production availability areas of the application life cycle.
We were incorporated in Michigan in 1973. Our executive offices are currently
located at 31440 Northwestern Highway, Farmington Hills, Michigan 48334-2564,
and our telephone number is (248) 737-7300. Our executive offices are expected
to move to our new headquarters during the next two months. The new executive
offices will be at One Campus Martius, Detroit, Michigan 48226, and our new
telephone number will be (313) 227-7300.
We operate in two business segments in the software industry: products and
services. See Note 13 of Notes to Consolidated Financial Statements.
The following discussion may contain certain forward-looking statements within
the meaning of the federal securities laws. Numerous important factors,
including those discussed under Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations under the caption Forward-Looking
Statements could cause actual results to differ materially from those indicated
by such forward-looking statements.
Our Internet address is www.compuware.com. We make available, free of charge on
the web site, copies of reports we file with the Securities and Exchange
Commission as soon as reasonably practicable after we electronically file such
reports. The information contained on our web site should not be considered part
of this report.
OUR BUSINESS STRATEGY
Our focus is to provide products and professional services to improve the
productivity of mainframe, distributed and web developers, testers and
operations staff in businesses worldwide. Companies with information technology
departments invest substantial resources to build and maintain large, complex,
mission-critical applications. As a result, this target market can benefit most
from our products and services offerings.
From our perspective, the application life cycle includes four primary phases:
1) the application development phase in which software source code is created,
integrated with existing applications and modified over time; 2) the testing
phase, in which application software is executed, debugged, tested and
maintained in a series of repetitive, ongoing cycles for the life of the
application; 3) the performance testing phase, when an application is tested
under simulated production conditions to ensure it will function well once
implemented; and 4) the production phase in which the performance and
availability of operating systems, databases, servers, applications and networks
is monitored and managed.
3
<PAGE>
On March 31, 2002, we began to operate under a geography-based organizational
structure. Our products and professional services organizations are now combined
under one geographic leadership structure that spans seven regions, three in
North America and four internationally.
PRODUCTS
The following table sets forth, for the periods indicated, a breakdown of
revenue by product line and the percentage of total revenues for each line (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERCENTAGE OF TOTAL REVENUES
------------------------------ ----------------------------
PRODUCT REVENUE 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
File-AID $182,224 $230,820 $259,835 13.2% 13.3% 12.8%
Abend-AID 155,769 186,827 211,375 11.3 10.7 10.4
XPEDITER 110,880 136,848 142,123 8.1 7.9 7.0
QA Center Mainframe 24,527 30,880 45,969 1.8 1.8 2.2
STROBE 80,080 101,911 103,476 5.8 5.8 5.1
-------- -------- -------- ---- ---- ----
Total Mainframe Revenue 553,480 687,286 762,778 40.2 39.5 37.5
-------- -------- -------- ---- ---- ----
UNIFACE and Optimal 42,283 43,353 43,083 3.1 2.5 2.1
File-AID/Client Server 4,400 5,303 8,911 0.3 0.3 0.4
DevPartner 24,290 26,722 35,944 1.8 1.5 1.8
QA Center Distributed 30,291 31,221 37,389 2.2 1.8 1.8
Vantage 53,152 57,497 64,001 3.9 3.3 3.2
-------- -------- -------- ---- ---- ----
Total Distributed Product Revenue 154,416 164,096 189,328 11.3 9.4 9.3
-------- -------- -------- ---- ---- ----
Total Product Revenue $707,896 $851,382 $952,106 51.5% 48.9% 46.8%
======== ======== ======== ==== ==== ====
</TABLE>
COMPUWARE SOFTWARE PRODUCTS AND THE APPLICATION LIFE CYCLE
Our software products enhance every step in the application life cycle, from
application development and quality assurance to production readiness and
availability, for mainframe and distributed platforms.
APPLICATION DEVELOPMENT AND INTEGRATION--Customers use our Abend-AID,
DevPartner, File-AID, Optimal, QACenter, STROBE, UNIFACE, Vantage and XPEDITER
products to achieve productivity gains.
QUALITY ASSURANCE--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
XPEDITER tools are used to automate the multiple, complex steps of thorough
application testing.
PRODUCTION READINESS--The Abend-AID, DevPartner, File-AID, QACenter, STROBE and
Vantage product lines are used to ready applications for production.
PRODUCTION AVAILABILITY--The Abend-AID, File-AID, QACenter, STROBE, Vantage and
XPEDITER product lines are used to find and fix application, server and/or
network performance problems before they affect end users.
4
<PAGE>
MAINFRAME MARKET
We believe that the market for mainframe products is well defined, and that our
mainframe products will continue to be in demand as the drive to extend legacy
applications into distributed environments continues to emphasize the need for
reliable, high-volume servers.
We intend to remain focused on developing, marketing and supporting high quality
software tools both to support traditional uses of the mainframe and to enhance
the efforts of IT staff who are working to web-enable their legacy applications
portfolio. We believe that our longstanding customer relationships and brand
equity in this arena will help us continue to improve the benefits our customers
receive from our mainframe products. In addition, we continue to pursue product
integration opportunities to increase the value that our customers obtain from
the use of our products, to enhance the synergy among the functional groups
working on key application projects and to make the entire process more
streamlined, automated and repeatable.
MAINFRAME SOFTWARE PRODUCTS
Our mainframe products focus on improving the productivity of developers and
analysts in analysis, unit testing, functional testing, performance testing,
defect removal, fault management, file and data management and application
performance management in the OS/390 and z/OS series environments.
Our mainframe products are functionally rich, are focused on user needs and
require minimal user training. We strive to ensure a common look and feel across
our products and emphasize ease of use in all aspects of product design and
functionality. Most products can be used immediately without modification of
customer development practices and standards and can be quickly integrated into
day-to-day testing, debugging and maintenance activities.
Our mainframe products are grouped into the following five product lines:
FILE-AID PRODUCTS
File-AID products provide a consistent, familiar and secure method for IT
professionals to access, analyze, edit, compare, move and transform data across
all strategic environments. File-AID is used to quickly resolve production data
problems and manage ongoing changes to data and databases at any stage of the
application life cycle.
ABEND-AID PRODUCTS
Abend-AID products assist IT professionals to quickly diagnose and resolve
application and system failures. The products automatically collect program and
environmental information, analyze the information and present diagnostic and
supporting data in a way that can be easily understood by all levels of IT
staff.
XPEDITER PRODUCTS
XPEDITER interactive debugging products help developers integrate enterprise
applications, build new applications and web-enable legacy ones, satisfying
corporate scalability, reliability and security requirements. XPEDITER tools
deliver powerful analysis and testing capabilities across multiple environments,
helping developers test more accurately and reliably, in less time.
QACENTER MAINFRAME PRODUCTS
QACenter Mainframe products deliver complete testing functionality for
automating test creation and execution, test results analysis and documentation.
The products simulate the on-line systems environment, allowing programmers to
test these applications under production conditions without requiring actual
users at terminals. Its powerful functions and features enhance unit,
concurrency, integration, migration, capacity and stress testing.
5
<PAGE>
STROBE PRODUCTS
Our STROBE MVS Application Performance Management and iSTROBE Application
Performance Analysis System product lines work together to help clients locate
and eliminate sources of excessive resource demands during every phase of an
application's life cycle. Features in both product lines support an extensive
array of subsystems, databases and languages.
DISTRIBUTED SYSTEMS MARKET
In contrast to the mainframe market, the distributed systems market is
characterized by multiple hardware, software and network configurations.
Combined with the more recent push to web-enable applications, IT organizations
find themselves under increasing pressure to rapidly create reliable,
top-performing applications, despite an exponential increase in environment
complexity. We believe our distributed and web products address these challenges
and that we are well positioned to market distributed development, integration,
functional and performance testing and application management software to our
target markets.
DISTRIBUTED SOFTWARE PRODUCTS
Our distributed products focus on improving the productivity of the entire
development team, including architects, developers, testers and operating
analysts. These products support requirements management, application
development, unit and functional testing and application performance analysis.
Our distributed products also help the development team in application profiling
and rapid new application rollout, as well as in managing server and network
application availability on multiple platforms including Microsoft Windows and
Microsoft .NET, J2EE, AIX, Solaris and DC2000.
Our distributed systems software products are grouped into six product lines:
UNIFACE, Optimal, File-AID/CS, DevPartner, QACenter and Vantage.
UNIFACE AND OPTIMAL PRODUCTS
UNIFACE, our distributed systems application development product, is designed to
assist software developers in the creation, integration, deployment and
maintenance of complex distributed applications. UNIFACE enables software
developers to create applications that are not tied to any specific hardware
platform, operating system, database management system or graphical user
interface. Application objects are captured in a central repository, which
permits their reuse in the development of technology-independent applications
and allows for easier management and maintenance of applications. In addition,
UNIFACE insulates application development and deployment from the individual
technical components that comprise a computing environment. This reduces
development and maintenance costs and allows applications to be developed
rapidly using existing, proven legacy code.
OptimalJ is our Java development product. OptimalJ accelerates application
delivery by simplifying Java development, allowing developers of varying
experience levels to rapidly produce reliable J2EE business applications.
OptimalJ generates complete, working applications directly from a visual model,
using sophisticated patterns to implement accepted best practices for coding to
J2EE specifications.
OptimalView is our business integration portal product. As a packaged, web-based
portal application, OptimalView enables customers to quickly implement an
integrating platform to help bring together the diverse array of custom-built
and packaged applications and web services that many companies have assembled
over a period of time. OptimalView brings these applications together in a
single desktop portal with powerful integration and administrative functions,
making it possible for a customer's IT department to effectively manage the
"home-base" desktop of every employee in its organization.
OptimalFlow is our business process automation and business process modeling
product that automates the execution of business tasks running within and across
an organization. OptimalFlow helps solution architects model and automate
business processes and tasks by aligning and
6
<PAGE>
connecting the process to the application environment for improved workflow
execution. This creates a more efficient and effective organization that
benefits from faster process-cycle times, improved time-to-market, greater cost
effectiveness and better customer service through improved response times.
FILE-AID/CLIENT SERVER
File-AID/Client Server is a comprehensive test data management tool designed to
help developers, QA teams and DBAs work efficiently with data as they develop,
test and support distributed applications. With File-AID/CS application
developers can extract, load, copy, convert, transform, compare and edit all
their data without having to be an expert in each database environment. All data
related tasks are performed through an easy to use interface eliminating the
need to write programs or scripts, code SQL or use multiple utilities.
DEVPARTNER PRODUCTS
DevPartner Studio helps developers build reliable, high-performance applications
and components for Microsoft .NET and for native Windows by quickly solving
problems with .NET migration, legacy integration, locating errors in application
code and memory, tuning runtime performance across distributed applications, and
assuring thorough testing.
DevPartner Studio Enterprise Edition combines powerful error detection,
performance, memory, coverage and requirements management with comprehensive
project tracking, defect management, task management and workflow automation.
DevPartner Studio Enterprise Edition supports development of high-performing
applications and components for Microsoft .NET and for native Windows.
DevPartner Java Edition pinpoints runtime errors, memory problems and
performance bottlenecks and identifies code coverage/stability across all tiers
of a Java application environment. Using DevPartner Java Edition, developers and
testers can quickly prioritize and focus on solving the complexity, quality and
performance problems associated with Java development.
DriverStudio products help developers create code that enables operating systems
to communicate with peripheral devices such as printers, scanners and the
Internet. The DriverStudio product line includes DriverStudio and SoftICE Driver
Suite.
DevPartnerDB simplifies rapid, high-quality development by helping developers
debug stored procedures and tune SQL statements. DevPartnerDB has specific
editions that support Oracle, Microsoft SQL Server and Sybase.
QACENTER DISTRIBUTED PRODUCTS
QACenter delivers a unique offering of automated testing products and solutions
designed to validate applications running in the full spectrum of environments,
isolate and correct problems and ensure that systems can handle anticipated load
before applications go live. The QACenter products include:
QARun and TestPartner--Functional test automation tools that allow organizations
to validate business-critical applications whether distributed, e-commerce
(web/Java) or CRM/ERP.
QADirector--Provides the framework for managing the entire testing process from
design through execution to analysis.
TrackRecord--A defect management solution that serves as a central repository
and communication hub for all development-related activities and test-related
activities and data.
Reconcile--An enterprise-wide requirements management system. Reconcile allows
project teams to create, change, track, evaluate and report project
requirements.
QALoad--An automated load testing solution for distributed, ERP and e-commerce
applications.
7
<PAGE>
VANTAGE PRODUCTS
Vantage products allow IT professionals to manage, analyze and improve the
performance of distributed applications in a variety of environments. The
Vantage suite also helps IT organizations plan for and manage new distributed
application rollout. Vantage products include:
ClientVantage--Monitors the performance and availability of critical business
applications at the point of delivery--the client user interface.
NetworkVantage--Shows how users and applications consume critical shared network
resources; provides the information necessary to troubleshoot problems related
to unplanned use, unauthorized use, or poor configuration of the network;
supports WAN bandwidth sizing decisions; and provides historical trending data
for use in network growth management.
ServerVantage--Provides monitoring, alerting, troubleshooting and automated
response throughout the server infrastructure.
VantageView--Provides an overall enterprise view of application performance and
availability as well as access to the underlying performance metrics.
Application Vantage--Pinpoints the source of poor transaction performance.
Provides real-time application performance troubleshooting, analyzing the
interaction between the application, the network and the supporting server
infrastructure. Application Vantage is also integrated with the ClientVantage
product for 24-hour a day, seven days a week exception-based performance
analysis.
Application Expert--Helps ensure successful deployment of new applications.
Analyzes transactions before applications are deployed and predicts how they
will perform under production conditions--helping to diagnose where potential
problems will occur. The WAN provisioning module determines the aggregate
network loading from a defined population of users and application workloads to
permit the "rightsizing" of expensive WAN links.
Predictor--Predicts enterprise network behavior based on various scenarios such
as changes in application mix, transaction volume, device outages and deployment
of additional bandwidth.
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
We believe that effective support of our customers and products during both the
trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide high levels of customer
support and product upgrades to assure a continuing high level of customer
satisfaction. In fiscal year 2003, we continued to experience a high customer
maintenance renewal rate.
All customers who subscribe to our maintenance and support services are entitled
to receive technical support and advice, including problem resolution services
and assistance in product installation, error corrections and any product
enhancements released by us during the maintenance period. Maintenance and
support services are provided online, through our FrontLine technical support
web site, by telephone access to technical personnel located in Detroit,
Michigan, Cambridge, Massachusetts, La Jolla, California, Nashua, New Hampshire,
and in the offices of our foreign subsidiaries and distributors.
Licensees have the option of renewing their maintenance agreements each year for
an annual fee based on licensed or list price of the product. They also have the
option of committing to maintenance for longer terms, generally up to five years
on a contractual basis. For fiscal years 2003, 2002 and 2001, maintenance fees
represented approximately 30.0%, 24.9% and 22.4%, respectively, of our total
revenues.
8
<PAGE>
TECHNOLOGY DEVELOPMENT AND SUPPORT
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. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives are also
included here.
We have been successful in developing acquired products and technologies into
marketable software for our distribution channels. We believe that our future
growth lies in part in continuing to identify promising technologies from all
potential sources, including independent software developers, customers, small
startup companies and internal research and development.
Product development is performed primarily at our headquarters in Detroit,
Michigan; and at our offices in Amsterdam, The Netherlands; Cambridge,
Massachusetts; La Jolla, California; and Nashua, New Hampshire.
Total technology development and support costs were $154.7 million, $177.6
million and $200.7 million during fiscal 2003, 2002 and 2001, respectively, of
which $11.4 million, $13.3 million and $13.5 million, respectively, were
capitalized.
Our software products are distributed as object code on standard magnetic
cartridges, diskettes and CDs, together with printed documentation. We also
distribute product electronically. We purchase cartridges, diskettes, CDs and
documentation printing from outside vendors. The product duplication, packaging
and distribution to our customers is currently performed at our production
center in West Bloomfield, Michigan.
PROFESSIONAL SERVICES
We offer a broad range of IT staff supplementation services for distributed
systems and mainframe environments. Our offerings include IT technical staffing
and project assistance, e-business and wireless development, NearShore
development services and ERP implementation. We also provide application life
cycle management assistance for outsourcing customers' application development
and maintenance activities as well as services for Compuware-owned products that
enhance their value.
We believe that the demand for professional services will continue to be driven
by the need to control costs, the significant level of resources necessary to
support complex and rapidly changing hardware, software and communication
technologies and the need for a larger technical staff for ongoing maintenance.
Our business approach to professional services delivery emphasizes hiring
experienced staff, extensive ongoing training, high staff utilization and
immediate, productive deployment of new personnel at client accounts.
Our objective in the professional services division is to create long term
relationships with customers in which our professional staff joins with the
customer's information technology organization to plan, design, program,
implement and maintain technology-based solutions that achieve customer business
goals. Typically, the professional services staff is integrated with the
customer's development team on a specific application or project. Professional
services staff work primarily at customer sites or at our professional services
offices located throughout North America and Europe. We also have professional
services operations in other international locations. In addition, Compuware
offers a NearShore Development Center that serves customers looking for
flexible, cost-effective and high-quality application services delivered
remotely from our facility in Montreal.
9
<PAGE>
COMPUWARE APPLICATION RELIABILITY SOLUTION (CARS)
In June 2003, we announced the availability of CARS. CARS combines our
professional service team testing professionals with a proven methodology and
our software products configured in a unique, industry-leading tools workbench
to produce a complete quality management solution. Our Application Quality
Workbench (AQW) can be used to instill discipline, automate processes and ensure
consistency and repeatability throughout the testing life cycle, resulting in
the delivery of reliable, high quality applications. CARS allows our customers'
IT organizations to leverage their core competency of developing applications.
Data gathered from the AQW can be quickly shared with developers, thereby
improving the effectiveness of their efforts.
CUSTOMERS
Our products and professional services are used by the information technology
departments of a wide variety of commercial and government organizations.
Ford Motor Company accounted for approximately 12% of our total revenues during
fiscal 2003. None of our customers accounted for 10% or more of our total
revenues during fiscal 2002 or 2001.
SALES AND MARKETING
We market software products primarily through a direct sales force in the United
States, Canada, Europe, Japan, Asia/Pacific, Brazil, Mexico and South Africa as
well as through independent distributors giving us a presence in 54 countries.
We market our professional services primarily through account managers located
in offices throughout North America, Europe, Asia/Pacific and Brazil. Senior
professional services executives support branch marketing efforts by identifying
new business opportunities and making joint sales calls. This marketing
structure enables us to keep abreast of, and respond quickly to, the changing
needs of our clients and to call on the actual users of our professional
services on a regular basis.
COMPETITION
The markets for our software products are highly competitive and characterized
by continual change and improvement in technology. We consider more than 40
firms to be directly competitive with one or more of our products. These
competitors include BMC Software, Inc., Borland, Computer Associates
International, Inc., International Business Machines Corporation (IBM) and
Mercury Interactive Corporation. Some of these competitors have substantially
greater financial, marketing, recruiting and training resources than we do. The
principal competitive factors affecting the market for our software products
include: responsiveness to customer needs, functionality, performance,
reliability, ease of use, quality of customer support, vendor reputation and
price.
The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, 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. The principal competitive factors affecting the
market for our professional services include responsiveness to customer needs,
breadth and depth of technical skills offered, availability and productivity of
personnel and the ability to demonstrate achievement of results and price.
10
<PAGE>
We believe, based on our current market position, that we have competed
effectively in the software products and professional services marketplace.
Nevertheless, a variety of external and internal events and circumstances could
adversely affect our competitive capacity. Our ability to remain competitive
will depend, to a great extent, upon our performance in product development and
customer support. To be successful in the future, we must respond promptly and
effectively to the challenges of technological change and our competitors'
innovations by continually enhancing our own product and services offerings.
PROPRIETARY RIGHTS
We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable, perpetual licenses. Under the general
terms and conditions of our standard product license agreement, the licensed
software may be used solely for the licensee's own internal operations on
designated computers at specific sites. Under certain limited circumstances, we
may be required to make source code for our products available to our customers
under an escrow agreement, which restricts access to and use of the source code.
Although we take steps to protect our trade secrets, there can be no assurance
that misappropriation will not occur. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States.
In addition to trade secret protection, we seek to protect our software,
documentation and other written materials under copyright law, which affords
only limited protection. We also assert trademark rights in our product names.
We have been granted 21 patents and have numerous patent applications pending
for certain product technology and have plans to seek additional patents in the
future. However, because the industry is characterized by rapid technological
change, we believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more important to establishing
and maintaining a technology leadership position than the various legal
protections of our technology.
There can be no assurance that 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 which could
require a partial payment to the third party upon sale of the product, or result
in costly litigation. See Item 3, Legal Proceedings, for a description of
certain pending litigation regarding proprietary rights.
11
<PAGE>
EMPLOYEES
As of March 31, 2003, we employed 9,356 people worldwide, with 1,750 in products
sales, sales support and marketing; 1,505 in technology development and support;
5,317 in professional services and 784 in other general and administrative
functions. Only a small number of our international employees are represented by
a labor union. We have experienced no work stoppages and believe that our
relations with our employees are good. Our success will depend in part on our
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software developers,
professional services staff and sales and marketing personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers, who serve at the discretion of our Board of
Directors, are listed below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter Karmanos, Jr. 60 Chairman of the Board and Chief Executive Officer
Joseph A. Nathan 50 President and Chief Strategy Officer
Tommi A. White 52 Chief Operating Officer
Henry A. Jallos 54 Executive Vice President, Global Account Management
Laura L. Fournier 50 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas Costello, Jr. 49 Vice President, General Counsel and Secretary
</TABLE>
Peter Karmanos, Jr., is a founder of the Company and has served as Chairman of
the Board since November 1978, as Chief Executive Officer since July 1987 and as
President from January 1992 through October 1994.
Joseph A. Nathan has served as President since October 1994 and as Chief
Operating Officer from October 1994 through October 2001. Mr. Nathan was
appointed Chief Strategy Officer in April 2003. From December 1990 through
October 1994, Mr. Nathan was Senior Vice President and Chief Operating Officer -
Products Division.
Tommi A. White has served as Chief Operating Officer since October 2001. Ms.
White joined Compuware in August 2001 as Executive Vice President. Before
joining Compuware, Ms. White spent nearly nine years at Kelly Services, Inc.,
most recently as Executive Vice President, Chief Administration and Technology
Officer.
Henry A. Jallos has served as Executive Vice President, Global Account
Management since October 2001 and as Executive Vice President, Products Division
from September 1998 through October 2001. From August 1994 through August 1998,
Mr. Jallos served as Senior Vice President, Worldwide Sales.
Laura L. Fournier has served as Senior Vice President, Chief Financial Officer
and Treasurer since April 1998. Ms. Fournier was Corporate Controller from June
1995 through March 1998. From February 1990 through May 1995, Ms. Fournier was
Director of Internal Audit.
12
<PAGE>
Thomas Costello, Jr., has served as General Counsel since January 1985, Vice
President since January 1995 and Secretary since May 1995. Mr. Costello joined
Compuware in June 1984 as Assistant General Counsel.
SEGMENT INFORMATION; PAYMENT TERMS AND FOREIGN REVENUES
For a description of revenues and operating profit by segment for each of the
last three fiscal years, see Note 13 of Notes to Consolidated Financial
Statements, included in Item 8 of this report. For a description of extended
payment terms offered to some customers, see Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Software Products - Revenue. The Company's foreign operations are
subject to risks related to foreign exchange rates. For a discussion of this
risk, see Item 7A Quantitative and Qualitative Disclosure about Market Risk. For
financial information regarding geographic operations, see Note 13 of Notes to
Consolidated Financial Statements, included in Item 8 of this report.
ITEM 2. PROPERTIES
We are building a new corporate headquarters office building in the city of
Detroit which will consolidate our corporate office functions and Detroit-area
operations. As of June 2, 2003, approximately 40% of the metropolitan
Detroit-based employees have relocated to the new headquarters building. We own
the new building which is approximately 1.1 million square feet, including
approximately 60,000 square feet to be leased to third parties for retail and
related amenities. We also own a Farmington Hills, Michigan facility which is
approximately 225,000 square feet and a building in nearby West Bloomfield which
is approximately 40,000 square feet. In addition, we lease approximately 80,000
square feet in a Farmington Hills office park, as well as approximately 133,000
square feet in nearby Southfield. We intend to sell our Farmington Hills
facility once all employees have been relocated. These metropolitan Detroit
facilities house our executive offices, primary research and development lab,
principal marketing department, a professional services office, customer service
and support teams and our production and distribution facilities.
We lease approximately 80 professional services and sales offices in 25
countries, including four remote product research and development facilities.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 2002, we filed suit in the United States District Court for the
Eastern District of Michigan against 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. We claim that (i) IBM has copied and misappropriated portions of
our mainframe software tools and has wrongfully used our technology to develop
competing products; (ii) IBM made false representations regarding our software
products in violation of the Lanham Act; and (iii) IBM is using its monopoly
power to engage in unlawful tying arrangements and is subverting competition on
the merits by denying critical information to us and others in an effort to
undermine our development efforts. The suit seeks injunctive relief and
unspecified monetary damages, among other things, from IBM. While we currently
believe we ultimately will benefit from this litigation, the impact of this
action on our business relationship with IBM and our liquidity, financial
position and results of operations are not determinable at the present time.
On January 21, 2003, the Company filed suit against Moody's Investors Services,
Inc. in the United States District Court in the Eastern District of Michigan
alleging breach of contract, defamation, silent fraud, and violation of the
Investment Advisors Act. The Company claims, among other things, that Moody's
failed to deal fairly and did not operate in good faith when it lowered the
Company's credit
13
<PAGE>
rating two full levels on August 13, 2002. The suit seeks $245,000 in
compensatory damages (the total fees paid to Moody's during the course of the
business relationship), punitive damages, the costs related to the litigation
and reasonable attorney fees.
The Company is a party to a consolidated class action proceeding filed in the
United States District Court for the Eastern District of Michigan. The original
lawsuits were filed on September 20, 2002 and October 10, 2002 respectively. On
May 1, 2003, the cases were consolidated. The matter is now titled In re
Compuware Securities Litigation. The suit was brought on behalf of purchasers of
the Company's common stock from January 1, 1999 to April 3, 2002. Principal
defendants include the Company and Peter Karmanos, Jr., Joseph A. Nathan and
Elizabeth Chappell. The plaintiffs allege that the Company failed to disclose
under the securities laws its problems with the misappropriation of its software
source code by IBM. The plaintiffs further allege that the Company omitted
and/or disseminated materially false and misleading statements concerning its
deteriorating relationship with IBM. The plaintiffs request that the court award
them monetary damages and expenses of litigation, including reasonable attorneys
fees. The Company strongly disagrees with the allegations and intends to
vigorously defend against the lawsuit. At this time, the Company's legal counsel
is preparing a responsive pleading to the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq Stock Market's National Market under
the symbol CPWR. As of June 2, 2003, there were approximately 7,222 shareholders
of record of our common stock. We have not paid any cash dividends on our common
stock since fiscal 1986. The following table sets forth the range of high and
low trading sale prices for our common stock for the periods indicated, all as
reported by Nasdaq.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 2003 HIGH LOW
<S> <C> <C>
Fourth quarter $ 5.06 $ 3.22
Third quarter 5.78 2.75
Second quarter 5.73 2.35
First quarter 12.49 5.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 2002 HIGH LOW
<S> <C> <C>
Fourth quarter $14.00 $10.68
Third quarter 13.68 7.46
Second quarter 14.50 7.68
First quarter 14.00 8.50
</TABLE>
The Company has several stock option plans pursuant to which it grants
performance-based stock options to employees, officers, and directors, as well
as an Employee Stock Ownership Plan (ESOP), an Employee Stock Purchase Plan, and
a Replacement Stock Option Award Program. For more information about our equity
compensation plans, see Note 15 of Notes to Consolidated Financial Statements,
included in Item 8 of this report.
The following table sets forth certain information, with respect to our equity
compensation plans at March 31, 2003 (shares in thousands):
<TABLE>
<CAPTION>
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
--------------------- ------------------- ---------------------
<S> <C> <C> <C>
Equity compensation plans
approved by security holders 39,350 $13.44 7,019
Equity compensation plans not
approved by security holders 24,883 9.07 24,577
</TABLE>
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations and balance sheet data presented below are
derived from our audited consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements and notes thereto
and Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except earnings per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 295,720 $ 417,631 $ 495,572 $ 819,247 $ 683,354
Maintenance fees 412,176 433,751 456,534 432,707 334,371
Professional services fees 667,444 889,162 1,083,050 996,120 636,636
------------ ------------ ------------ ------------ ------------
Total revenues 1,375,340 1,740,544 2,035,156 2,248,074 1,654,361
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of software license fees 30,740 34,102 37,885 28,835 26,578
Cost of professional services 611,644 840,149 973,854 877,453 466,996
Technology development and support 143,289 164,280 187,155 154,086 120,951
Sales and marketing 264,012 294,496 351,214 377,920 344,214
Administrative and general 191,131 207,166 250,324 214,961 185,817
Goodwill amortization and impairment (1 and 2) 426,344 42,092 25,586 4,817
Restructuring costs (2) 46,930
Purchased research and development 17,900 4,350
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,240,816 2,013,467 1,842,524 1,696,741 1,153,723
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 134,524 (272,923) 192,632 551,333 500,638
Interest and investment income (expense), net 21,691 22,076 (563) 10,443 29,403
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 156,215 (250,847) 192,069 561,776 530,041
Income tax provision (benefit) 53,113 (5,592) 72,986 209,800 180,178
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 103,102 $ (245,255) $ 119,083 $ 351,976 $ 349,863
============ ============ ============ ============ ============
Basic earnings (loss) per share (3) $ 0.27 $ (0.66) $ 0.33 $ 0.98 $ 0.95
Diluted earnings (loss) per share (3) 0.27 (0.66) 0.32 0.91 0.87
Shares used in computing net income (loss) per
share:
Basic earnings computation 377,028 371,786 365,192 358,560 366,734
Diluted earnings computation 378,440 371,786 372,809 384,691 402,036
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 581,266 $ 506,692 $ 434,902 $ 391,801 $ 550,586
Total assets 2,122,685 1,993,938 2,279,374 2,415,907 1,676,683
Long term debt - - 140,000 450,000 -
Total shareholders' equity (4) 1,331,691 1,189,851 1,377,372 1,203,872 1,079,522
</TABLE>
(1) Effective April 1, 2002, in accordance with SFAS No. 142, the goodwill
balance is no longer being amortized on a monthly basis. Instead it is
tested at least annually for impairment. Exclusive of amortization of
goodwill, net income (loss) and earnings (loss) per share (diluted
computation) would have been ($212.4 million) and (57 cents), $153.9
million and 41 cents, $375.9 million and 98 cents and $353.9 million and
88 cents, in fiscal 2002, 2001, 2000 and 1999, respectively.
(2) Amortization and impairment of goodwill during 2002 included impairment
charges of $342.9 million associated with restructuring, $35.2 million
associated with a change in technology related to distributed products
and $9.3 million associated with the transfer of the engineering business
discussed in the Professional Services Revenue section in Item 7 of this
report. Restructuring costs in 2002 represent costs incurred with the
reorganization of the operating divisions during the fourth quarter. See
Note 7 of Notes to Consolidated Financial Statements for more details on
these charges.
(3) See Notes 1 and 11 of Notes to Consolidated Financial Statements for the
basis of computing earnings per share.
(4) No dividends were paid during the periods presented.
All prior years have been reclassified to conform to the 2003
presentation.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws 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 and contained elsewhere in this report. These
risks and uncertainties 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.
- - 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 IT industry.
- - Our success depends in part on our ability to develop product enhancements
and new products which keep pace with continuing changes in technology and
customer preferences.
- - Approximately 25% to 30% of our 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.
- - 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. Pursuit of this litigation
will be costly, time-consuming and may divert management's time and
attention. Our legal expenses have increased substantially and our general
and administrative 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 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 our
results of 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.
- - We regard our software as proprietary and attempt to protect it with
copyrights, trademarks, trade secret laws and 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.
17
<PAGE>
- - 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.
- - 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 operating margins may decline. We do not compile margin analysis other
than on a segment basis. However, 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, products 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 BMC Software,
Inc., Borland, Computer Associates International, Inc., International
Business Machines Corporation (IBM) and Mercury Interactive Corporation.
Some of these competitors have substantially greater financial, marketing,
recruiting and training resources than we do.
- - The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include Accenture, 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.
- - The slowdown in the world economy could continue for an extended period and
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.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of income as a percentage of total
revenues and the percentage change in such items compared to the prior period:
<TABLE>
<CAPTION>
Percentage of
Total Revenues Period-to-Period
----------------------------------------- Change
Fiscal Year Ended -------------------------
March 31, 2002 2001
----------------------------------------- to to
2003 2002* 2001* 2003 2002
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE:
Software license fees 21.5% 24.0% 24.4% (29.2)% (15.7)%
Maintenance fees 30.0 24.9 22.4 (5.0) (5.0)
Professional services fees 48.5 51.1 53.2 (24.9) (17.9)
----------- ----------- -----------
Total revenues 100.0 100.0 100.0 (21.0) (14.5)
----------- ----------- -----------
OPERATING EXPENSES:
Cost of software license fees 2.2 2.0 1.9 (9.9) (10.0)
Cost of professional services 44.5 48.3 47.9 (27.2) (13.7)
Technology development and support 10.4 9.4 9.2 (12.8) (12.2)
Sales and marketing 19.2 16.9 17.2 (10.4) (16.1)
Administrative and general 13.9 11.9 12.3 (7.7) (17.2)
Goodwill amortization 24.5 2.1 (100.0) **
Restructuring cost 2.7 (100.0) **
----------- ----------- -----------
Total operating expenses 90.2 115.7 90.6 (38.4) 9.3
----------- ----------- -----------
Income (loss) from operations 9.8 (15.7) 9.4 149.3 (241.7)
----------- ----------- -----------
Other income (expense):
Interest and investment income 2.0 1.7 1.5 (5.8) (3.9)
Interest and other expense (0.4) (0.4) (1.5) 17.9 76.2
----------- ----------- -----------
Total other income 1.6 1.3 0.0 (1.7) **
----------- ----------- -----------
Income (loss) before income taxes 11.4 (14.4) 9.4 162.3 (230.6)
Income tax provision (benefit) 3.9 (0.3) 3.5 ** (107.7)
----------- ----------- -----------
Net income (loss) 7.5% (14.1)% 5.9% 142.0% (306.0)%
=========== =========== ===========
</TABLE>
* Reclassified to conform to the 2003 presentation.
**Not meaningful.
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it will be tested at least
annually for impairment. We evaluated the carrying amount of goodwill at March
31, 2003 and determined there was no impairment in 2003. See Note 8 of Notes to
Consolidated Financial Statements included in Item 8 of this report for a
discussion of net income and earnings per share excluding amortization of
goodwill.
Effective April 1, 2002, we reorganized our operations to better allow the
products and professional services organizations to focus on meeting customer
needs. We have reclassified certain expense items to better reflect our new
operating structure and are no longer allocating costs associated with the
facilities, finance and human resource departments to the various operating
groups. Instead, these costs are now included in administrative and general
expenses. All technology costs, including costs associated with internal
systems, are included in the technology development and support expense line.
This reclassification did not change total operating expenses. In accordance
with EITF No. 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred", we have also reclassified
travel expense reimbursements paid by customers as revenue rather than as a
reduction to the related expense. This reclassification has resulted in a slight
change to professional services fees and cost of professional services without
changing income from operations.
19
<PAGE>
We operate in two business segments in the technology industry: products and
professional services. We evaluate the performance of our segments based
primarily on segment contribution before corporate expenses. References to years
are to fiscal years ended March 31.
SOFTWARE PRODUCTS
REVENUE
Our products are designed to support four key activities within the application
development process: development and integration, quality assurance, production
readiness and performance management of the application to optimize performance
in production. Products revenue consists of software license fees and
maintenance fees and comprised 51.5%, 48.9% and 46.8% of total revenue during
2003, 2002 and 2001, respectively. OS/390 product revenue (mainframe revenue)
decreased $133.8 million or 19.5% during 2003 and decreased $75.5 million or
9.9% during 2002. Revenue from distributed software products decreased $9.7
million or 5.9% during 2003 and decreased $25.2 million or 13.3% during 2002.
The overall declines in product revenue from 2002 to 2003 and from 2001 to 2002
were primarily attributable to decreases in license fees and maintenance fees
associated with an overall decrease in technology spending and a decrease in
customer demand for large enterprise license agreements ("ELAs") which are
multi-year, and often multi-payment contracts. License revenue decreased $121.9
million or 29.2% during 2003 to $295.7 million from $417.6 million during 2002
and decreased $78.0 million or 15.7% from $495.6 million during 2001. Multi-year
contracts greater than $5 million represented approximately 4.5%, 6.9% and 12.8%
of license revenue in 2003, 2002 and 2001, respectively. The decrease in license
revenue for 2003 and 2002 was due to market and competitive pressure on pricing
attributed to the continued softness in the economy as a whole and the IT
industry in particular. Maintenance fees decreased $21.6 million or 5.0% to
$412.2 million during 2003 from $433.8 million during 2002 and decreased $22.8
million or 5.0% from $456.5 million in 2001. The decreases in maintenance fees
were primarily attributable to lower license fees during both 2003 and 2002
resulting in minimal increases to the maintenance base and to market pressure on
pricing.
We license our software to our clients using two types of software licenses,
perpetual and term. Generally, perpetual software licenses allow our customers a
perpetual right to run our software on hardware up to a licensed aggregate MIPS
(Millions of Instructions Per Second) capacity. Term licenses allow our
customers a right to run our software for a limited period of time on hardware
up to a licensed aggregate MIPS capacity. Also, our customers purchase
maintenance services that provide technical support and advice, including
problem resolution services and assistance in product installation, error
corrections and any product enhancements released during the maintenance period.
Furthermore, based on client needs, we allow our clients the option to license
additional software and purchase multiple years of maintenance in a single
transaction (multi-year transactions). In support of these multi-year
transactions, we allow extended payment terms to qualifying customers.
To recognize revenue for these multi-year transactions the contract price is
allocated between maintenance revenue and license revenue. All license revenue
associated with perpetual license agreements is recognized when the customer
commits unconditionally to the transaction, the software products and quantities
are fixed, the software has been shipped to the customer and there are no known
problems with respect to payment. License revenue associated with term
transactions or with transactions that include an option to exchange or select
products in the future is deferred and recognized over the term of the
agreement. When the license portion is paid over a number of years, the license
portion of the payment stream is discounted to its net present value. Interest
income is recognized over the payment term. The maintenance revenue associated
with all sales is deferred and is recognized over the applicable maintenance
period.
20
<PAGE>
Products revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
<S> <C> <C> <C>
United States $ 409,441 $ 532,772 $ 597,290
Europe and Africa 221,272 223,636 245,431
Other international operations 77,183 94,974 109,385
----------- ----------- -----------
Total products revenue $ 707,896 $ 851,382 $ 952,106
=========== =========== ===========
</TABLE>
* Reclassified to conform to the 2003 presentation.
PRODUCTS CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 707,896 $ 851,382 $ 952,106
Expenses 438,041 492,878 576,254
----------- ----------- -----------
Products contribution $ 269,855 $ 358,504 $ 375,852
=========== =========== ===========
</TABLE>
* Reclassified to conform to the 2003 presentation.
The products segment generated contribution margins of 38.1%, 42.1% and 39.5%
during 2003, 2002 and 2001, respectively. Products expenses include cost of
software license fees, technology development and support costs, and sales and
marketing expenses. The decrease in contribution margin during 2003 was
primarily a result of the decrease in software license revenue offset, in part,
by a decrease in products expenses. The increase in the contribution margin from
2001 to 2002 was a result of cost reductions offset, in part, by a decrease in
license and maintenance revenue.
Cost of license fees includes amortization of capitalized software, the cost of
preparing and disseminating products to customers and the cost of author
royalties. The decrease in these costs in 2003 was due primarily to decreased
amortization of purchased software. The decrease in these costs in 2002 was due
primarily to decreased author royalties, decreased printing and distribution
costs, and decreased salary and benefits associated with lower employee
headcount. As a percentage of software license fees, cost of software license
fees were 10.4%, 8.2% and 7.6% in 2003, 2002 and 2001, 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. Personnel costs
associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives are also
included here. The decrease in these costs in 2003 was primarily attributable to
decreased bonus expense, decreased depreciation of computer equipment, decreased
amortization of purchased software, and reduced travel and communication costs.
The decrease in technology costs from 2001 to 2002 was primarily related to
reduced salaries and benefits and reduced travel expenditures offset, in part,
by increased amortization of purchased software. As a percentage of product
revenue, costs of technology development and support were 20.2%, 19.3% and 19.7%
in 2003, 2002 and 2001, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Before the
capitalization of internally developed software products, total technology
development and support costs for 2003 decreased $22.9 million, or 12.9%, to
$154.7 million from $177.6 million in 2002. In 2002, total technology
development and support costs decreased $23.1 million, or 11.5%, to $177.6
million from $200.7 million in 2001. The major
21
<PAGE>
development projects that achieved technological feasibility during 2003
included 6 new interactive and debugging products, 9 new fault management
products, 11 new file and data management products, 5 new automated testing
products, 21 new systems management products, 53 new application development
products, 1 new licensing product, 2 new application performance management
products, and 69 new windows development tools.
Though we continue to place significant emphasis on direct sales through our own
sales force, we also market our products through indirect channels. Sales and
marketing costs consist primarily of personnel related costs associated with
products direct sales and sales support, marketing for all Company offerings,
and personnel related costs associated with new sales initiatives. The decrease
in sales and marketing costs in 2003 was primarily attributable to decreased
salaries and benefits, decreased travel expenses, and decreased commissions. The
decrease in sales and marketing costs from 2001 to 2002 was primarily
attributable to decreased salaries and benefits, decreased distributor
commissions associated with decreased software license revenue, decreased travel
expenses, and decreased advertising expenditures. As a percentage of license
fees, sales and marketing costs were 89.3%, 70.5% and 70.9% in 2003, 2002 and
2001, respectively.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of information technology professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Revenue from professional services decreased
$221.7 million or 24.9% during 2003 and decreased $193.9 million or 17.9% during
2002. These decreases in revenue were due, primarily, to a reduction in customer
demand for professional services, the January 2002 assignment of our prime
contract with a client to a company in which we have a minority equity
investment, and to a lesser extent, the transfer of our engineering business to
an unrelated third party in December 2001. Professional services revenue was
further negatively impacted by the closing of certain underperforming branch
offices associated with the restructuring discussed below.
Professional services revenue by geographic location is presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
<S> <C> <C> <C>
United States $ 599,913 $ 795,284 $ 988,044
Europe and Africa 64,816 90,536 89,017
Other international operations 2,715 3,342 5,989
----------- ----------- -----------
Total professional services revenue $ 667,444 $ 889,162 $ 1,083,050
=========== =========== ===========
</TABLE>
* Reclassified to conform to the 2003 presentation.
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for our professional services segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
2003 2002* 2001*
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 667,444 $ 889,162 $ 1,083,050
Expenses 611,644 840,149 973,854
----------- ----------- -----------
Professional services contribution $ 55,800 $ 49,013 $ 109,196
=========== =========== ===========
</TABLE>
* Reclassified to conform to the 2003 presentation.
22
<PAGE>
The professional services segment generated contribution margins of 8.4%, 5.5%
and 10.1% during 2003, 2002 and 2001, respectively. The increase in professional
services margin in 2003 is primarily a result of the branch closings and other
changes discussed in the revenue section above. The decrease in professional
services margin in 2002 was primarily due to lower utilization, lower billing
rates, and reduced customer demand for our services associated with the decline
of the economy as a whole and the IT sector specifically.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. The decrease in these costs from 2002 to 2003 is due, primarily, to
reductions in staff associated with the restructuring discussed below, resulting
in lower salaries and benefits, and decreased use of subcontractors for special
services. The decrease in these costs from 2001 to 2002 is due, primarily, to
reductions in staff, resulting in lower salaries and benefits, reduced travel
expenditure and decreased use of subcontractors for special services. The
professional services billable staff decreased 1,861 people to 5,164 people as
of March 31, 2003 from 7,025 people at March 31, 2002. This compares to a
decrease of 1,016 professional billable staff, to 7,025 at March 31, 2002 from
8,041 people at March 31, 2001.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist of all other 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, utilities, etc,
associated with our local sales and professional services offices.
Administrative and general expenses decreased 7.7% during 2003 and decreased
17.2% during 2002. The decrease in administrative and general expenses in 2003
was primarily attributable to decreased building rent, decreased telephone
costs, and decreased salaries and benefits resulting from the restructuring
discussed below offset, in part, by increased legal costs. Legal expenses
associated with the IBM litigation increased significantly during the fourth
quarter of 2003. External legal fees for all litigation and other matters were
$34.6 million, $12.5 million and $9.9 million in 2003, 2002 and 2001,
respectively. These costs are expected to fluctuate in relation to legal
activity. The decrease in administrative and general expenses during 2002 was
primarily attributable to decreased charges against investments in joint
ventures.
Interest and investment income for 2003 was $27.8 million compared to $29.5
million in 2002 and $30.7 million in 2001. The decrease from 2002 to 2003 was
due to lower interest earnings on deferred customer receivables offset, in part,
by an increase in interest on investments due to higher investment balances. The
decrease from 2001 to 2002 was due to lower interest earnings on investments due
to reduced interest rates, offset, in part, by increased interest related to
customers' deferred installments. Interest and other expense includes
amortization of deferred interest associated with future lease obligations
related to facilities no longer used by the Company as well as amortization of
the initial financing fees and fees associated with the unutilized balance of
the prior credit facility discussed in the Liquidity and Capital Resources
section below. Interest and other expense for 2003 was $6.1 million as compared
to $7.4 million in 2002 and $31.3 million in 2001. The decrease in interest and
other expense for 2003 is due to the decrease in amortization of initial
financing fees and fees associated with the unutilized balance of the credit
facility offset, in part, by the increase in amortized interest associated with
lease obligations. The decrease in interest expense from 2001 to 2002 was
primarily attributable to the July 2001 payoff of debts previously outstanding
under the prior credit facility.
We account for income taxes using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax provision was $53.1 million in 2003, which represents an effective tax rate
of 34%. This compares to an income tax benefit of $5.6 million in 2002 and an
income tax provision of $73.0 million in 2001, which represents an effective tax
rate of 38%. Our
23
<PAGE>
effective tax rate for 2002 differed significantly from the US federal income
tax rate of 35% primarily as a result of nondeductible goodwill amortization and
impairment charges. See Note 12 of Notes to Consolidated Financial Statements
included in Item 8 of this report for additional analysis of income taxes.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, the Company adopted a restructuring plan to
reorganize its operating divisions, primarily the professional services segment.
These changes were designed to increase profitability in the future by better
aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization. Payments continue to be made to certain
terminated employees in accordance with their separation agreements.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002 and 2003 (in thousands):
<TABLE>
<CAPTION>
Employee Facilities costs Legal, consulting Total
termination (primarily lease and outplacement restructuring
benefits abandonments)* costs Other charge
------------ ---------------- ----------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Restructuring charge $ 19,012 $ 26,341 $ 1,299 $ 278 $ 46,930
Incurred during year ended
March 31, 2002 (553) (676) (1,229)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2002 18,459 25,665 1,299 278 45,701
Incurred during year ended
March 31, 2003 (16,405) (8,589) (691) (215) (25,900)
Reclassification (1,356) 2,012 (593) (63)
------------ ---------------- ----------------- -------- -------------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
============ ================ ================= ======== =============
</TABLE>
*Lease obligations will end in March of 2009.
During the year ended March 31, 2003, we determined the accruals associated with
employee terminations, legal and outplacement were in excess of actual costs
incurred. These excess accruals have been reclassified to the accrual for
facilities costs, since we have not been as successful in subleasing abandoned
leased space as originally anticipated. Approximately 70% of the accrual related
to facilities costs is included in "long term accrued expenses" in the
consolidated balance sheet at March 31, 2003.
GOODWILL AMORTIZATION AND IMPAIRMENT CHARGES
In fiscal 2002, in conjunction with the development of the restructuring plan,
we evaluated the carrying value of goodwill and other intangible assets related
to the professional services business, and recorded an impairment charge related
to our prior services acquisitions. Certain professional services offices
acquired as part of those acquisitions have not achieved critical mass or a
sustained level of profitability and were closed in April 2002 as part of the
restructuring plan. We utilized discounted cash flow analyses to value the
remaining business, and recognized goodwill impairment based upon current
estimated fair market values.
24
<PAGE>
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Note 1 of the Consolidated Financial Statements contains a summary of our
significant accounting policies.
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. 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. Our assumptions and
estimates were based on the facts and circumstances known at March 31, 2003;
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. These accounting policies discussed below are
considered by management to be the most important to an understanding of our
financial statements, because their application places the most significant
demands on management's judgment and estimates about the effect of matters that
are inherently uncertain.
Revenue Recognition -
We earn revenue from licensing software products, providing maintenance and
support for those products and rendering professional services. Our revenue
recognition policies are based on US GAAP including Statements of Position 97-2
and 98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101.
Accordingly, we recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment has occurred or services
have been rendered, the fee is fixed or determinable, and collectibility is
reasonably assured.
Software license fees - Our software license agreements provide our customers
with a right to use our 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 Compuware-specific
objective evidence (CSOE), of all undelivered elements of the agreement (e.g.,
maintenance and professional services) is deferred. CSOE is based on rates
charged for maintenance and professional services when sold separately. The
remaining portion of the fee, (the residual), net of discretionary discounts, is
recognized as license fee revenue upon shipment of the products, provided that
no significant obligations remain and collection of the related receivable is
deemed probable. For term licenses and for agreements in which the fair value of
the undelivered elements cannot be determined using CSOE (e.g., transactions
that include an option to exchange or select products in the future), we
recognize the license fee revenue on a ratable basis over the term of the
license agreement.
We offer flexibility to customers purchasing products and related maintenance.
Terms vary ranging from the standard perpetual license sale to large multi-year,
multi-product contracts. We allow installment payment terms on multi-year
contracts, with installments collectible over the term of the contract. For
these contracts, the license fee portion of the receivable is discounted to its
net present value. The discount is recognized as interest income over the term
of the receivables.
Generally, revenues from license and maintenance transactions that include
installment payment terms are recognized in the same manner as those requiring
current payment. This is because we have an established business practice of
offering installment payment terms to customers and have a history of
successfully enforcing original payment terms without making concessions.
However, because a significant portion of our license fee revenue is earned in
connection with installment sales, changes in future economic conditions or
technological developments could adversely affect our ability to immediately
record license fees for these types of transaction and/or limit our ability to
collect these receivables.
Based on our interpretation of US GAAP including Statements of Position 97-2 and
98-9 and Securities and Exchange Commission Staff Accounting Bulletin 101 we
believe our revenue has been properly reported. New interpretations or
pronouncements related to software revenue recognition policies could result in
changes to our method of revenue recognition in the future.
25
<PAGE>
Maintenance fees - Our maintenance agreements provide for technical support and
advice, including problem resolution services and assistance in product
installation, error corrections and any product enhancements released during the
maintenance period. Maintenance is included with all mainframe software license
agreements for at least one year, and for most distributed product agreements
for three months. Maintenance is renewable thereafter for an annual fee.
Maintenance fees are deferred and recognized as revenue on a ratable basis over
the maintenance period.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees are also included in deferred revenue for those
contracts that are being recognized on a ratable basis.
Professional services fees - Revenues from professional services are recognized
in the period the services are performed, provided that collection of the
related receivable is deemed probable. Professional services fees are generally
based on hourly or daily rates; however, for services rendered under fixed-price
contracts, revenue is recognized using the percentage of completion method.
Allowance for Doubtful Accounts - The collectibility of accounts receivable is
regularly evaluated and we believe our allowance for doubtful accounts is
appropriate for our accounts receivable balances. In evaluating the allowance,
we consider historical loss experience, including the need to adjust for current
conditions, and the aging of outstanding receivables. Larger accounts are
reviewed on a detail basis, giving consideration to collection experience and
any information on the financial viability of the customer. The allowance is
reviewed and adjusted each quarter based on the best information available at
the time.
Capitalized Software - The cost of purchased and internally developed software
is capitalized and stated at the lower of unamortized cost or expected net
realizable value. Software is subject to rapid technological obsolescence and
estimates of future revenues to be derived from the software could be
significantly affected by future developments. The amortization period for
capitalized software is generally five years, but adverse developments could
result in a shorter life or a write-off based on reduced estimates of net
realizable value.
Impairment of Goodwill - We are required to assess the impairment of goodwill
annually, or more frequently if events or changes in circumstances indicate that
the carrying value may exceed the fair value.
The assessment of goodwill impairment is performed in two steps. First, the
carrying value of each reporting unit (Products and Services) is compared to the
fair value of the reporting unit including the goodwill. If the carrying amount
of the reporting unit is greater than the fair value of the reporting unit, we
move to the second step of the impairment test. The second step of the
impairment test, used to measure the amount of impairment loss, compares the
implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of the goodwill, the impairment loss shall be recognized as
an operating expense in an amount equal to that excess. We measure fair value
using an estimate of the related business's discounted cash flow. The discounted
cash flow approach uses significant assumptions, including projected future cash
flows, the discount rate reflecting the risk inherent in future cash flows, and
a terminal growth rate. These estimates and assumptions, and unknown future
events or circumstances (e.g. economic conditions or technological developments)
could have a significant impact on whether or not an impairment charge is
recognized and the magnitude of any such charge.
Other - Other accounting policies, although not generally subject to the same
level of estimation as those discussed above, are nonetheless important to an
understanding of the financial statements. Many assets, liabilities, revenues
and expenses require some degree of estimation or judgment in determining the
appropriate accounting.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, cash and investments totaled approximately $571.3 million.
During 2003 and 2002, we generated $377.3 million and $386.8 million,
respectively, in operating cash flow. A significant portion of operating cash
flow is generated from the collection of the current portion of prior years'
installment receivables as reflected in the decrease in total accounts
receivable. During these periods, we had capital expenditures that included
property and equipment, capitalized research and software development, and
purchased software of $236.7 million and $103.7 million, respectively.
As of March 31, 2003, we had no long-term debt. The credit facility agreement
which would have expired in August 2003 was terminated effective November 4,
2002. In May 2003, we entered into a $100 million revolving credit agreement
with a bank. See Note 17 of Notes to Consolidated Financial Statements for a
discussion of this revolving credit agreement. There is currently no outstanding
balance under the new credit agreement.
We believe available cash resources together with cash flow from operations,
will be sufficient to meet our cash needs for the foreseeable future.
Although there were no acquisitions during 2003, we continue to evaluate
business acquisition opportunities that fit our strategic plans.
We are building a new corporate headquarters building with a current estimated
cost of $350 million for the building and an estimated $50 million for
furniture, fixtures and equipment. Future annual depreciation expense will be
approximately $17 million. This will be partially offset by the savings realized
by the consolidation of offices. Capital expenditures to date total $325.9
million. Remaining cash outlays are expected to be completed in calendar 2003.
Currently, we intend to fund the building using cash on hand and cash flow from
operations.
On May 6, 2003, the Board of Directors authorized a stock repurchase plan of up
to $125 million. We intend to purchase our common stock on the open market
through negotiated or block transactions, periodically, based upon market and
business conditions. As of June 13, 2003, no repurchases have been made under
this plan.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. We believe that we take the necessary
steps to appropriately reduce the potential impact of interest rate and foreign
exchange exposures on our financial position and operating performance. We do
not use derivative financial instruments or forward foreign exchange contracts
for investment, speculative or trading purposes. Immediate changes in interest
rates and foreign currency rates discussed in the following paragraphs are
hypothetical rate scenarios used to calibrate risk and do not currently
represent management's view of future market developments. A discussion of our
accounting policies for derivative instruments is included in the Notes to
Consolidated Financial Statements in Item 8 of this report.
INTEREST RATE RISK
Exposure to market risk for changes in interest rates relates primarily to our
cash investments and installment receivables. Derivative financial instruments
are not a part of our investment strategy. Investments are placed with high
quality issuers to preserve invested funds by limiting default and market risk.
In addition, marketable debt securities and long term debt investments are
classified as "held to maturity" which does not expose the consolidated
statement of operations or balance sheet to fluctuations in interest rates.
The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates (in thousands, except
interest rates):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------- Fair Value at
2004 2005 2006 Total March 31, 2003
-------- -------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Cash Equivalents $319,466 $319,466 $319,466
Average Interest Rate 1.38% 1.38%
Average Interest Rate (tax equivalent) 1.39% 1.39%
Investments $156,737 $ 88,921 $ 6,174 $251,832 $252,527
Average Interest Rate 1.78% 1.90% 1.42% 1.81%
Average Interest Rate (tax equivalent) 2.56% 2.72% 2.19% 2.61%
</TABLE>
We offer financing arrangements with installment payment terms in connection
with our multi-year software sales. Installment accounts are generally
receivable over a three to five year period. As of March 31, 2003, non-current
receivables amount to $260.7 million and are due approximately $164.0 million,
$59.3 million, $29.3 million, $5.8 million and $2.3 million in each of the years
ended March 31, 2005 through 2009, respectively. The fair value of non-current
accounts receivable is estimated by discounting the future cash flows using the
current rate at which the Company would finance a similar transaction. At March
31, 2003, the fair value of such receivables is approximately $262.3 million.
Each 25 basis point increase in interest rates would have an associated $900,000
negative impact on the fair value of non-current accounts receivable based on
the balance of such receivables at March 31, 2003. A change in interest rates
will have no impact on cash flows or net income associated with non-current
accounts receivable.
FOREIGN CURRENCY RISK
We have entered into forward foreign exchange contracts primarily to hedge
amounts due to or from select subsidiaries denominated in foreign currencies
(mainly in Europe and Asia/Pacific) against fluctuations in exchange rates. Our
accounting policies for these contracts are based on our designation of the
contracts as hedging transactions. The criteria we use for designating a
contract as a hedge include the contract's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. Gains
and losses on forward foreign exchange contracts are
28
<PAGE>
recognized in income, offsetting foreign exchange gains or losses on the foreign
balances being hedged. If the underlying hedged transaction is terminated
earlier than initially anticipated, the offsetting gain or loss on the related
forward foreign exchange contract would be recognized in income in the same
period. In addition, since we enter into forward contracts only as a hedge, any
change in currency rates would not result in any material net gain or loss, as
any gain or loss on the underlying foreign currency denominated balance would be
offset by the gain or loss on the forward contract. We operate in certain
countries in Latin America and Asia/Pacific where there are limited forward
currency exchange markets and thus we have unhedged transaction exposures in
these currencies.
The table below provides information about our foreign exchange forward
contracts at March 31, 2003. The table presents the value of the contracts in
U.S. dollars at the contract maturity date and the fair value of the contracts
at March 31, 2003 (in thousands, except contract rates):
<TABLE>
<CAPTION>
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2003 2003 Rate U.S. Dollars March 31, 2003
-------- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Forward Sales
Canadian Dollar March 31 April 30 1.4778 $ 812 $ 816
Japanese Yen March 31 April 30 118.7980 741 744
Norwegian Krone March 31 April 30 7.2965 809 810
Singapore Dollar March 31 April 30 1.7620 1,022 1,020
Swiss Franc March 31 April 30 1.3498 963 960
---------- -----------
$ 4,347 $ 4,350
========== ===========
Forward Purchases
Australian Dollar March 31 April 30 1.6587 $ 4,522 $ 4,525
Danish Krone March 31 April 30 6.7706 871 866
Euro Dollar March 31 April 30 1.0875 9,951 9,973
Swedish Krona March 31 April 30 8.4400 1,540 1,535
---------- -----------
$ 16,884 $ 16,899
========== ===========
</TABLE>
Approximately 25% to 30% of our revenue is derived from foreign sources. This
exposes us to exchange rate risks on foreign currencies related to the fair
value of foreign assets and liabilities, net income and cash flows.
29
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Compuware Corporation:
We have audited the accompanying consolidated balance sheets of Compuware
Corporation and subsidiaries (the "Company") as of March 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Compuware Corporation and its
subsidiaries as of March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, effective April 1, 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to SFAS No. 142, "Goodwill and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2003
30
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS NOTES 2003 2002
------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 319,466 $ 233,305
Investments 3 156,737 133,503
Accounts receivable, less allowance for doubtful
accounts of $26,543 and $23,190 515,819 609,579
Deferred tax asset, net 12 30,605 41,811
Income taxes refundable, net 10,853 27,687
Prepaid expenses and other current assets 16,951 16,954
---------- ----------
Total current assets 1,050,431 1,062,839
---------- ----------
INVESTMENTS 3 95,095 55,566
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 386,678 199,365
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $195,464 AND $169,611 8 54,514 68,998
---------- ----------
OTHER:
Accounts receivable 260,735 306,751
Goodwill, less accumulated amortization 2,8 212,288 211,792
Deferred tax asset, net 12 20,174 44,884
Other assets 5 42,770 43,743
---------- ----------
Total other assets 535,967 607,170
---------- ----------
TOTAL ASSETS $2,122,685 $1,993,938
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 37,588 $ 28,646
Accrued expenses 7 101,196 141,825
Accrued bonuses and commissions 33,383 44,652
Deferred revenue 296,998 341,024
---------- ----------
Total current liabilities 469,165 556,147
DEFERRED REVENUE 299,079 218,624
ACCRUED EXPENSES 7 22,750 29,316
---------- ----------
Total liabilities 790,994 804,087
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized
5,000,000 shares 10
Common stock, $.01 par value - authorized
1,600,000,000 shares; issued and outstanding
382,367,156 and 375,820,254 shares in 2003
and 2002, respectively 10,15 3,824 3,758
Additional paid-in capital 704,190 676,617
Retained earnings 631,906 528,804
Accumulated other comprehensive loss (8,229) (19,328)
---------- ----------
Total shareholders' equity 1,331,691 1,189,851
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,122,685 $1,993,938
========== ==========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 2003 2002 2001
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 295,720 $ 417,631 $ 495,572
Maintenance fees 412,176 433,751 456,534
Professional services fees 667,444 889,162 1,083,050
---------- ---------- ----------
Total revenues 1,375,340 1,740,544 2,035,156
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 30,740 34,102 37,885
Cost of professional services 611,644 840,149 973,854
Technology development and support 143,289 164,280 187,155
Sales and marketing 264,012 294,496 351,214
Administrative and general 5 191,131 207,166 250,324
Goodwill amortization and impairment 8 426,344 42,092
Restructuring costs 7 46,930
---------- ---------- ----------
Total operating expenses 1,240,816 2,013,467 1,842,524
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 134,524 (272,923) 192,632
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and investment income 3 27,791 29,504 30,692
Interest and other expense (6,100) (7,428) (31,255)
---------- ---------- ----------
Total other income (expense) 21,691 22,076 (563)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 156,215 (250,847) 192,069
INCOME TAX PROVISION (BENEFIT) 12 53,113 (5,592) 72,986
---------- ---------- ----------
NET INCOME (LOSS) $ 103,102 $ (245,255) $ 119,083
========== ========== ==========
Basic earnings (loss) per share 11 $ 0.27 $ (0.66) $ 0.33
========== ========== ==========
Diluted earnings (loss) per share 11 $ 0.27 $ (0.66) $ 0.32
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
----------------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Gain (Loss)
----------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 2000 361,621,234 $ 3,616 $ 556,150 $ 654,976 $ (10,870)
Net income 119,083
Foreign currency translation, net of tax (10,258)
Comprehensive income
Issuance of common stock 5,735,834 57 40,301
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 15) 2,459,364 25 16,838
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2001 369,816,432 3,698 620,743 774,059 (21,128)
Net loss (245,255)
Foreign currency translation, net of tax 1,800
Comprehensive loss
Issuance of common stock 1,981,659 20 17,636
Issuance of warrant (Note 10) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 15) 4,022,163 40 24,492
Other 4,067
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2002 375,820,254 3,758 676,617 528,804 (19,328)
Net income 103,102
Foreign currency translation, net of tax 11,099
Comprehensive income
Issuance of common stock 6,010,067 60 18,868
Acquisition tax benefits 7,056
Exercise of employee stock options
and related tax benefit (Note 15) 536,835 6 1,649
----------- --------- ----------- ---------- -------------
BALANCE AT MARCH 31, 2003 382,367,156 $ 3,824 $ 704,190 $ 631,906 $ (8,229)
=========== ========= =========== ========== =============
<CAPTION>
Total
Shareholders' Comprehensive
Equity Income (Loss)
------------- -------------
<S> <C> <C>
BALANCE AT APRIL 1, 2000 $ 1,203,872
Net income 119,083 $ 119,083
Foreign currency translation, net of tax (10,258) (10,258)
-------------
Comprehensive income $ 108,825
=============
Issuance of common stock 40,358
Acquisition tax benefits 7,454
Exercise of employee stock options
and related tax benefit (Note 15) 16,863
-------------
BALANCE AT MARCH 31, 2001 1,377,372
Net loss (245,255) $ (245,255)
Foreign currency translation, net of tax 1,800 1,800
-------------
Comprehensive loss $ (243,455)
=============
Issuance of common stock 17,656
Issuance of warrant (Note 10) 2,825
Acquisition tax benefits 6,854
Exercise of employee stock options
and related tax benefit (Note 15) 24,532
Other 4,067
-------------
BALANCE AT MARCH 31, 2002 1,189,851
Net income 103,102 $ 103,102
Foreign currency translation, net of tax 11,099 11,099
-------------
Comprehensive income $ 114,201
=============
Issuance of common stock 18,928
Acquisition tax benefits 7,056
Exercise of employee stock options
and related tax benefit (Note 15) 1,655
-------------
BALANCE AT MARCH 31, 2003 $ 1,331,691
=============
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
<TABLE>
<CAPTION>
2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 103,102 $ (245,255) $ 119,083
Adjustments to reconcile net income (loss) to cash provided by
operations:
Goodwill amortization and impairment 426,344 42,092
Depreciation and amortization 53,808 63,619 61,571
Tax benefit from exercise of stock options 152 8,384 10,283
Issuance of common stock to Employee Stock Ownership Trust 9,425 10,657 10,685
Acquisition tax benefits 7,056 6,854 7,454
Deferred income taxes 35,916 (75,485) 105
Other 14,780 3,589 (4,080)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 139,776 145,647 67,799
Prepaid expenses and other current assets (2,106) 681 8,298
Other assets (32) 2,595 13,199
Accounts payable and accrued expenses (37,819) 20,578 (51,012)
Deferred revenue 36,429 36,240 39,034
Income taxes 16,834 (17,659) 12,084
------------ ------------ ------------
Net cash provided by operating activities 377,321 386,789 336,595
------------ ------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (17,576)
Property and equipment:
Headquarters facility (219,071) (81,644) (25,166)
Other (6,222) (8,784) (14,637)
Capitalized software (11,369) (13,300) (13,881)
Investments:
Proceeds from maturity 201,938 221,716 175,787
Purchases (267,502) (210,784) (144,515)
------------ ------------ ------------
Net cash used in investing activities (302,226) (92,796) (39,988)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 1,503 16,148 6,580
Contribution to stock purchase plans 9,563 6,999 29,673
Proceeds from sale of warrant 2,825
Proceeds from long term debt 18,000
Payment of long term debt (140,000) (328,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 11,066 (114,028) (273,747)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 86,161 179,965 22,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 233,305 53,340 30,480
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 319,466 $ 233,305 $ 53,340
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Compuware Corporation develops, markets and supports an integrated
set of systems software products designed to improve the productivity of data
processing professionals in application development, implementation and
maintenance. In addition, the Company's professional services include business
systems analysis, design, programming and implementation as well as software
conversion and systems planning and consulting. The Company's products and
services are offered worldwide across a broad spectrum of technologies,
including mainframe and distributed systems platforms.
Basis of Presentation - The consolidated financial statements include the
accounts of Compuware Corporation and its wholly owned subsidiaries after
elimination of all significant intercompany balances and transactions. The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (US GAAP), which require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and the disclosure of contingencies at March 31, 2003 and
2002 and the results of operations for the years ended March 31, 2003, 2002 and
2001. While management has based their assumptions and estimates on the facts
and circumstances known at March 31, 2003, final amounts may differ from
estimates.
Certain amounts in the fiscal 2002 and 2001 financial statements have been
reclassified to conform to the fiscal 2003 presentation.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services. The Company's revenue recognition policies are based on
US GAAP including Statements of Position 97-2 and 98-9 and Securities and
Exchange Commission Staff Accounting Bulletin 101. Accordingly, the Company
recognizes revenue when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the fee is fixed or determinable, and collectibility is reasonably
assured.
Software license fees - The Company's software license agreements provide their
customers with a right to use their 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
Compuware-specific objective evidence (CSOE), of all undelivered elements of the
agreement (e.g., maintenance and professional services) is deferred. CSOE is
based on rates charged for maintenance and professional services when sold
separately. The remaining portion of the fee, net of discretionary discounts,
(the residual) is recognized as license fee revenue upon shipment of the
products, provided that no significant obligations remain and collection of the
related receivable is deemed probable. For term licenses and for agreements in
which the fair value of the undelivered elements cannot be determined using CSOE
(e.g., transactions that include an option to exchange or select products in the
future), the Company recognizes the license fee revenue on a ratable basis over
the term of the license agreement.
The Company offers flexibility to customers purchasing their products and
related maintenance. Terms vary ranging from the standard perpetual license sale
to large multi-year, multi-product contracts. For fiscal years 2003, 2002 and
2001, contracts greater than $5 million represented approximately 4.5%, 6.9% and
12.8%, respectively, of license fee revenue. The Company allows deferred payment
terms on multi-year contracts, with installments collectible over the term of
the contract. For these contracts, the license fee portion of the receivable is
discounted to its net present value. The discount is recognized as interest
income over the term of the receivables, and amounted to $15,455,000,
35
<PAGE>
$19,562,000 and $18,219,000 for fiscal 2003, 2002 and 2001, respectively. At
March 31, 2003, current accounts receivable includes installments on multi-year
contracts totaling $273,798,000 due within the year ending March 31, 2004.
Non-current accounts receivable at March 31, 2003 amounted to $260,735,000, and
are due approximately $164,032,000, $59,282,000, $29,284,000, $5,837,000 and
$2,300,000 in each of the years ending March 31, 2005 through 2009,
respectively.
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all mainframe
software license agreements for at least one year, and for most distributed
product agreements for three months. Maintenance is renewable thereafter for an
annual fee. Maintenance fees are deferred and recognized as revenue on a ratable
basis over the maintenance period.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees are also included in deferred revenue for those
contracts that are being recognized on a ratable basis.
Professional services fees - Revenues from professional services are recognized
in the period the services are performed, provided that collection of the
related receivable is deemed probable. Professional services fees are generally
based on hourly or daily rates; however, for services rendered under fixed-price
contracts, revenue is recognized using the percentage of completion method.
Cash and Cash Equivalents - For the purpose of the statement of cash flows, the
Company considers all investments with an original maturity of three months or
less to be cash equivalents.
Investments consist of municipal obligations, tax-free zero coupon bonds, U.S.
Treasury notes, tax-free and tax advantage auction rate securities. Investments
are classified as held-to-maturity and carried at amortized cost. Those
investments that mature within one year from the balance sheet date are
classified as current assets. The amortization of bond premiums and discounts is
included in interest and investment income.
Property and Equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
which are generally estimated to be 39 years for buildings and three to ten
years for furniture and fixtures, computer equipment and software. Leasehold
improvements are amortized over the term of the lease, or the estimated life of
the improvement, whichever is less. Depreciation and amortization of property
and equipment totaled $24,841,000, $26,993,000 and $28,031,000 for the years
ended March 31, 2003, 2002 and 2001, respectively.
Capitalized Software includes the costs of purchased and internally developed
software products and is stated at the lower of unamortized cost or net
realizable value. Net purchased software included in capitalized software at
March 31, 2003 and 2002 is $17,971,000 and $29,723,000, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Technology development
and support includes primarily the costs of programming personnel associated
with product development and support net of amounts capitalized. Total
technology development and support costs incurred internally by the Company were
$154,665,000, $177,573,000 and $200,685,000 in fiscal 2003, 2002 and 2001,
respectively, of which $11,376,000, $13,293,000 and $13,530,000, respectively,
were capitalized.
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, including the period being reported on.
Amortization begins when the product is available for general release to
customers. The amortization period for capitalized software is generally five
years. Capitalized software amortization amounted to $25,853,000, $32,081,000
and $28,126,000 in fiscal 2003, 2002 and
36
<PAGE>
2001, respectively, which is included in "cost of software license fees" in the
consolidated statements of operations. Included in the fiscal 2002 total is
additional amortization of $4,328,000 related to acquired technology that is no
longer utilized in the Company's products.
Goodwill - Effective April 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets". Under this pronouncement, goodwill and those
intangible assets with indefinite lives will no longer be amortized, but rather
will be tested for impairment annually and/or when events or circumstances
indicate that their fair value has been reduced below carrying value. The
Company evaluated its remaining goodwill as of April 1, 2002 and March 31, 2003,
and determined there was no impairment this fiscal year.
Prior to the adoption of SFAS No. 142, goodwill was amortized over periods
ranging from ten to twenty years using the straight-line method. Goodwill
amortization expense was $38,926,000 and $42,092,000, for the years ended March
31, 2002 and 2001, respectively. During fiscal 2002, the Company recorded an
aggregate charge of $387,418,000 to recognize impairment of goodwill resulting
from the restructuring announced on March 31, 2002 ($342,922,000), the transfer
of the professional services engineering division to an unrelated third party in
December 2001 ($9,298,000) and a change in technology related to its distributed
products ($35,198,000).
Fair Value of Financial Instruments - The carrying value of cash equivalents,
current accounts receivable and accounts payable approximated fair values due to
the short-term maturities of these instruments. At March 31, 2003, the fair
value of non-current receivables is approximately $262,338,000 compared to the
carrying amount of $260,735,000. At March 31, 2002, the fair value of
non-current receivables was approximately $304,043,000 compared to the carrying
amount of $306,751,000. Fair value is estimated by discounting the future cash
flows using the current rate at which the Company would finance a similar
transaction.
Legal expenses are included in "administrative and general" in the consolidated
statements of operations. Legal expenses for the years ended March 31, 2003,
2002 and 2001 were $34,649,000, $12,529,000 and $9,898,000, respectively.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. Deferred income taxes are provided for the differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements.
Foreign Currency Translation - The Company's foreign subsidiaries use their
respective local currency as their functional currency. Accordingly, assets and
liabilities in the consolidated balance sheets have been translated at the rate
of exchange at the respective balance sheet dates, and revenues and expenses
have been translated at average exchange rates prevailing during the year the
transactions occurred. Translation adjustments have been excluded from the
results of operations and are reported as accumulated other comprehensive loss.
Foreign Currency Transactions and Derivatives - Gains and losses from foreign
currency transactions are included in the determination of net income. To
partially offset the risk of future currency fluctuations on balances due to or
from foreign subsidiaries, the Company enters into foreign exchange contracts to
sell or buy currencies at specified rates on specific dates. Market value gains
and losses on these contracts are recognized, offsetting foreign exchange gains
or losses on foreign receivables or payables. The Company does not use foreign
exchange contracts to hedge anticipated transactions. The net foreign currency
transaction loss was $1,716,000, $1,321,000 and $2,487,000 for the years ended
March 31, 2003, 2002 and 2001, respectively. These amounts are included in
"administrative and general" in the consolidated statements of operations.
At March 31, 2003, the Company had contracts maturing through April 2003 to sell
$4,347,000 and purchase $16,884,000 in foreign currencies. At March 31, 2002,
the Company had contracts maturing through April 2002 to sell $12,415,000 and
purchase $6,896,000 in foreign currencies.
37
<PAGE>
Stock-Based Compensation - Through March 31, 2003, 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 plans. Stock options
are granted at current market prices at the date of grant, therefore, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for fiscal 2003, 2002 and
2001 consistent with the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation", Compuware's net income (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2003 2002 2001
------------- ------------ -------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 103,102 $ (245,255) $ 119,083
Pro forma 51,221 (307,170) 62,154
Earnings (loss) per share:
As reported:
Basic earnings (loss) per share 0.27 (0.66) 0.33
Diluted earnings (loss) per share 0.27 (0.66) 0.32
Pro forma:
Basic earnings (loss) per share 0.14 (0.83) 0.17
Diluted earnings (loss) per share 0.14 (0.83) 0.17
</TABLE>
The pro forma amounts for compensation cost may not be indicative of the effects
on net income and earnings per share for future years.
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in fiscal 2003, 2002 and 2001,
respectively: expected volatility of 94.46%, 64.55% and 95.55%; risk-free
interest rates of 2.9%, 4.7% and 4.6%; and expected lives at date of grant of
5.0, 4.1 and 5.0 years. Dividend yields were not a factor as the Company has
never issued cash dividends.
Under SFAS No. 123, the fair value of the employees' stock purchase rights
acquired by participation in the Employee Stock Purchase Plan were estimated
using the Black-Scholes model with assumptions comparable to the stock option
plans above. The weighted-average fair value of the purchase rights granted in
fiscal 2003, 2002 and 2001 were $1.11, $2.13 and $3.12, respectively.
Earnings Per Share - Basic EPS is computed by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS assumes the issuance of common stock for all
potentially dilutive equivalent shares outstanding.
Business Segments - The Company's two principal operating segments are products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
Recently Issued Accounting Pronouncements - In November 2002, the Financial
Accounting Standards Board (FASB) issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the
38
<PAGE>
guarantor's obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the provisions of the Interpretation
as of January 1, 2003. Adoption of Interpretation 45 did not result in any
changes to the financial statements.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock Based Compensation" to
provide alternative methods of voluntarily transitioning to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirements to require disclosure of the method used to
account for stock-based employee compensation and the effect of the method on
reported results in both annual and interim financial statements. The Company
adopted this statement as of March 31, 2003.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities." In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. See Note 5 for a discussion of variable
interest entities. The Company is currently evaluating all the provisions of the
Interpretation, but believes its adoption will not have a material impact on its
financial statements.
2. ACQUISITIONS
During fiscal 2001, the Company completed the acquisitions of Optimal Networks
Corporation, a developer of e-business performance measurement tools, for
$5,000,000 in cash and assumed liabilities and Nomex, Inc., a privately-held
provider of web design and development services located in Montreal, Canada, for
approximately $8,900,000 in cash. These acquisitions have been accounted for as
purchases, and, accordingly, assets and liabilities acquired have been recorded
at fair value as of their respective acquisition dates. The aggregate amount by
which the acquisition cost exceeded the fair value of the net assets acquired
was approximately $10,500,000.
39
<PAGE>
3. INVESTMENTS
A summary of securities at March 31, 2003 and 2002 is set forth below (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
March 31, 2003:
Municipal Obligations $ 122,679 $ 474 $ 9 $ 123,144
Tax Advantage Auction Rate Securities 39,000 39,000
Tax Free Auction Rate Securities 58,100 58,100
US Treasury Securities 19,987 235 20,222
Zero Coupon Bonds 12,066 5 12,061
----------- ---------- ---------- ----------
Securities classified as held to maturity $ 251,832 $ 709 $ 14 $ 252,527
=========== ========== ========== ==========
March 31, 2002:
Municipal Obligations $ 94,987 $ 286 $ 207 $ 95,066
Tax Advantage Auction Rate Securities 13,200 13,200
Tax Free Auction Rate Securities 71,176 1 71,175
US Treasury Notes 4,956 17 4,939
Zero Coupon Bonds 4,750 20 4,730
----------- ---------- ---------- ----------
Securities classified as held to maturity $ 189,069 $ 286 $ 245 $ 189,110
=========== ========== ========== ==========
</TABLE>
Scheduled maturities of securities classified as held to maturity at March 31,
2003 were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in:
2004 $ 156,737 $ 157,174
2005 88,921 89,182
2006 6,174 6,171
--------- ---------
Total $ 251,832 $ 252,527
========= =========
</TABLE>
40
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------
2003 2002
---------- ----------
<S> <C> <C>
Land $ 1,776 $ 1,776
Construction in progress 325,881 117,160
Buildings 28,792 28,788
Leasehold improvements 20,744 26,099
Furniture and fixtures 41,947 52,621
Computer equipment and software 77,519 86,438
---------- ----------
496,659 312,882
Less accumulated depreciation and
amortization 109,981 113,517
---------- ----------
Total $ 386,678 $ 199,365
========== ==========
</TABLE>
On October 23, 2000, the Company entered into a Restated Development Agreement
with the city of Detroit and the City of Detroit Downtown Development Authority
to construct an office building with retail and related amenities for a current
estimated cost of $350 million for the building and an estimated $50 million for
furniture and fixtures. All amounts included in construction in progress relate
to this building and its furnishings.
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2003, the Company held a 33.3% interest in CareTech Solutions, Inc.
(CareTech) and a 49% interest in ForeSee Results, Inc. (ForeSee). CareTech
provides outsourcing for healthcare information technology organizations
including data, voice, applications and data center operations. ForeSee was
incorporated in October 2001 to provide online customer satisfaction management.
For the year ended March 31, 2001, the Company held investments in two other
software companies. These two companies were closed in fiscal 2001. The
investments in these companies are accounted for under the equity method. The
Company records its share of income or loss against its net investment in the
company. For the years ended March 31, 2003, 2002 and 2001, the Company
recognized net losses of $2,317,000, $819,000 and $21,693,000, respectively,
from these investments. These losses are included in "administrative and
general" in the consolidated statements of operations.
At March 31, 2003 and 2002, the Company's carrying value of its investments in
and advances to these two companies was $20,359,000 and $20,079,000,
respectively. Included in the net investment at March 31, 2003 are notes
receivable from ForeSee in the amount of $3,500,000 and from CareTech in the
amount of $17,283,000 ($18,800,000 at March 31, 2002.) The ForeSee notes bear
interest at the prime rate (4.25% at March 31, 2003) and are due between June
2007 and March 2008. The CareTech note is payable in quarterly installments
through January 2012 and bears interest at 5.25%. The net investment balance is
included in "other assets" in the consolidated balance sheets.
Professional services revenue for the years ended March 31, 2003, 2002 and 2001
included approximately $27,517,000, $20,593,000 and $15,442,000, respectively,
from services provided to CareTech customers on a subcontractor basis. Cost of
professional services for the years ended March 31, 2003, 2002 and 2001 included
approximately $16,000, $37,548,000 and $66,408,000, respectively, related to
services provided by CareTech to Compuware on a subcontractor basis.
41
<PAGE>
Professional services revenue for the years ended March 31, 2003 and 2002
included approximately $1,229,000 and $580,000, respectively, from services
provided to ForeSee.
The Company has guaranteed lease obligations of CareTech up to $12,500,000. At
March 31, 2003, outstanding lease obligations were approximately $5,000,000. The
Company has not recorded any liability related to these guarantees since it
believes that CareTech will continue to meet its obligations. The Company has
pledged $2,500,000 in additional loans to ForeSee, provided that ForeSee meets
certain milestones in their development process.
6. RELATED PARTY TRANSACTIONS
The Company purchases products and services from companies associated with
certain officers or directors of the Company.
G. Scott Romney, Director of the Company, is a partner in the law firm of
Honigman Miller Schwartz and Cohn LLP (Honigman). Honigman provides legal
services to the Company. For the years ended March 31, 2003, 2002 and 2001,
approximately $4,578,000, $271,000 and $1,083,000 was included in
"administrative and general" in the consolidated statements of operations for
services provided to the Company by Honigman.
Dennis W. Archer, Director of the Company, is a partner in the law firm of
Dickinson Wright PLLC (Dickinson). Dickinson provides legal services to the
Company. For the year ended March 31, 2003, approximately $259,000 was included
in "administrative and general" in the consolidated statements of operations for
services provided to the Company by Dickinson. The Company did not utilize this
firm in fiscal 2002 or 2001.
Peter Karmanos, Jr., Chairman of the Board and Chief Executive Officer of the
Company, and Thomas Thewes, Vice-Chairman of the Board through September 2002,
are the sole shareholders of Compuware Sports Corporation (CSC). CSC operates an
amateur hockey program in Southeastern Michigan. On September 8, 1992, the
Company entered into a one-year Promotion Agreement with CSC to promote and
sponsor business. The promotion agreement automatically renews for successive
one-year terms, unless terminated with 60 days prior notice by either party. For
the years ended March 31, 2003, 2002 and 2001, approximately $858,000, $845,000
and $843,000 was included in "sales and marketing" in the consolidated
statements of operations for advertising through CSC.
Peter Karmanos, Jr. and Thomas Thewes control the entities that own and manage
the Compuware Arena. The Company entered into an advertising agreement with the
arena to promote and sponsor business, including the right to name the arena
"Compuware Arena" and the right to place advertising in and around the arena.
For the years ended March 31, 2003, 2002 and 2001, approximately $269,000,
$266,000 and $268,000 was included in "sales and marketing" in the consolidated
statements of operations for each of the years ended March 31, 2003, 2002 and
2001 associated with this advertising.
The Company utilizes Karmanos Printing and Graphics, Inc. for certain printing
services. Karmanos Printing and Graphics, Inc. is owned by the brother and
sister-in-law of Peter Karmanos, Jr. For the years ended March 31, 2003, 2002
and 2001, printing charges from Karmanos Printing and Graphics, Inc. totaled
approximately $625,000, $1,055,000 and $1,312,000. These costs are primarily
included in "sales and marketing" in the consolidated statements of operations.
42
<PAGE>
7. RESTRUCTURING CHARGES
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
to reorganize its operating divisions, primarily the professional services
segment. These changes were designed to increase profitability in the future by
better aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization. Payments continue to be made to certain
terminated employees in accordance with their separation agreements.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002 and 2003 (in thousands):
<TABLE>
<CAPTION>
Employee Facilities costs Legal, consulting Total
termination (primarily lease and outplacement restructuring
benefits abandonments) costs Other charge
----------- ---------------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Restructuring charge $ 19,012 $ 26,341 $ 1,299 $ 278 $ 46,930
Incurred during year ended
March 31, 2002 (553) (676) (1,229)
---------- ---------- ---------------- ---------- -------------
Accrual at March 31, 2002 18,459 25,665 1,299 278 45,701
Incurred during year ended
March 31, 2003 (16,405) (8,589) (691) (215) (25,900)
Reclassification (1,356) 2,012 (593) (63)
---------- ---------- ---------------- ---------- -------------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
========== ========== ================ ========== =============
</TABLE>
During the year ended March 31, 2003, the Company determined the accruals
associated with employee terminations, legal and outplacement were in excess of
actual costs incurred. These excess accruals have been reclassified to the
accrual for facilities costs, since the Company has not been as successful in
subleasing abandoned leased space as originally anticipated. Approximately 70%
of the accrual related to facilities costs is included in "long term accrued
expenses" in the consolidated balance sheet at March 31, 2003.
43
<PAGE>
8. GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 2003
---------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
---------------- ----------------- -------------
<S> <C> <C> <C>
Amortized intangible assets:
Capitalized software (1) $ 221,603 $ (167,089) $ 54,514
Other (2) 6,200 (4,055) 2,145
--------- ---------- --------
Total $ 227,803 $ (171,144) $ 56,659
========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 2002
---------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
---------------- ----------------- -------------
<S> <C> <C> <C>
Amortized intangible assets:
Capitalized software (1) $ 209,017 $ (140,019) $ 68,998
Other (2) 6,200 (3,725) 2,475
--------- ---------- --------
Total $ 215,217 $ (143,744) $ 71,473
========= ========== ========
</TABLE>
1) Amortization of capitalized software is included in "cost of software
license fees" in the consolidated statements of operations.
2) Other amortized intangible assets include trademarks associated with
past product acquisitions. This amortization expense is included in
"administrative and general" in the consolidated statements of
operations.
Amortization expense on intangible assets for the years ended March 31,
2003, 2002 and 2001 was $26,183,000, $34,286,000 and $30,956,000,
respectively. Annual amortization expense, based on identified intangible
assets at March 31, 2003, is expected to be as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capitalized software $24,733 $16,531 $ 7,211 $ 4,348 $ 1,691
Other 330 330 330 330 330 495
------- ------- ------- ------- ------- -------
Total $25,063 $16,861 $ 7,541 $ 4,678 $ 2,021 $ 495
======= ======= ======= ======= ======= =======
</TABLE>
44
<PAGE>
Effective April 1, 2002, in accordance with FASB 142, the goodwill balance is no
longer being amortized on a monthly basis. Instead, it is tested at least
annually for impairment. The Company evaluated its remaining goodwill at March
31, 2003, and determined there was no impairment this fiscal year. Changes in
the carrying amounts of goodwill for the year ended March 31, 2003 were as
follows (in thousands):
<TABLE>
<CAPTION>
Products Services Total
-------- -------- --------
<S> <C> <C> <C>
Goodwill:
Balance at March 31, 2002, net $ 72,182 $139,610 $211,792
Effect of foreign currency translation 496 496
-------- -------- --------
Balance at March 31, 2003, net $ 72,182 $140,106 $212,288
======== ======== ========
</TABLE>
The Company's reported net income (loss) and diluted earnings (loss) per share
exclusive of amortization of goodwill in the prior years on an after-tax basis
were as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Reported net income (loss) $ 103,102 $(245,255) $ 119,083
Add goodwill amortization, net of tax 32,825 34,783
--------- --------- ---------
Adjusted net income (loss) $ 103,102 $(212,430) $ 153,866
========= ========= =========
Adjusted basic earnings (loss) per share $ 0.27 $ (0.57) $ 0.42
========= ========= =========
Adjusted diluted earnings (loss) per share $ 0.27 $ (0.57) $ 0.41
========= ========= =========
</TABLE>
9. LONG TERM DEBT
The Company has no long term debt.
In August 1999, the Company entered into a $900 million unsecured Senior Credit
Facility (credit facility) maturing in August 2003. All borrowings under the
credit facility were repaid as of August 2001. The Company did not anticipate
additional utilization of this credit facility prior to its expiration, and
therefore the agreement was terminated effective November 4, 2002.
Cash paid for interest totaled approximately $2,202,000, $3,622,000 and
$28,627,000 for the years ended March 31, 2003, 2002 and 2001, respectively.
45
<PAGE>
10. CAPITAL STOCK
Preferred Stock Purchase Rights - Under the Company's shareholder rights plan,
each shareholder receives one right to purchase one two-thousandth of a share of
Series A Junior Participating Preferred Stock (a right) for each share of common
stock owned by the shareholder. Holders of the rights are entitled to purchase
for $40.00 one two-thousandth of one share of the Company's Series A Junior
Participating Preferred Stock in certain limited circumstances involving
acquisitions of, or offers for, 15% or more of the Company's common stock. After
any such acquisition is completed, each right entitles its holder to purchase
for $40.00 an amount of common stock of the Company, or in certain circumstances
securities of the acquirer, having a then current market value of two times the
exercise price of the right. In connection with the shareholder rights plan, the
Company has designated 800,000 shares of its 5,000,000 shares of authorized but
unissued Preferred Stock as "Series A Junior Participating Preferred Stock."
Each one two-thousandth of each share of Series A Junior Participating Preferred
Stock will generally be afforded economic rights similar to one share of the
Company's common stock. The rights are redeemable for a specified period at a
price of $0.001 per right and expire on November 9, 2010 unless extended or
earlier redeemed by the Board of Directors.
Common Stock Warrant - In November 2001, the Company issued a non-transferrable
warrant entitling a customer to purchase one million shares of common stock at
$10.51 per share in exchange for approximately $2,800,000 in cash, which was the
warrant's fair value at the date of issue. The warrant expires on November 16,
2004 or on the fifth day after the Company's common stock trades at an average
price of $20.00 per share for five consecutive days, whichever is earlier.
11. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share data were computed as follows (in thousands,
except for per share data):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Numerator: Net income (loss) $ 103,102 $(245,255) $ 119,083
--------- --------- ---------
Denominator:
Weighted-average common shares outstanding 377,028 371,786 365,192
--------- --------- ---------
Basic earnings (loss) per share $ 0.27 $ (0.66) $ 0.33
========= ========= =========
Diluted earnings (loss) per share:
Numerator: Net income (loss) $ 103,102 $(245,255) $ 119,083
--------- --------- ---------
Denominator:
Weighted-average common shares outstanding 377,028 371,786 365,192
Dilutive effect of stock options and warrant 1,412 7,617
--------- --------- ---------
Total shares 378,440 371,786 372,809
--------- --------- ---------
Diluted earnings (loss) per share $ 0.27 $ (0.66) $ 0.32
========= ========= =========
</TABLE>
During the years ended March 31, 2003, 2002 and 2001, stock options and a
warrant to purchase approximately 61,917,000, 66,864,000 and 23,077,000 shares,
respectively, were excluded from the diluted EPS calculation because they were
anti-dilutive.
46
<PAGE>
12. INCOME TAXES
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------
2003 2002
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred maintenance $ 10,661 $ 11,915
Amortization of intangible assets 60,319 69,774
Restructuring accrual 6,823 15,702
Allowance for doubtful accounts 7,028 5,307
Net operating loss carryforwards 21,706 24,201
Other 37,470 34,399
-------- --------
144,007 161,298
Less valuation allowance 6,915 1,686
-------- --------
Net deferred tax assets 137,092 159,612
Current portion 30,850 41,995
-------- --------
Long term portion $106,242 $117,617
======== ========
Deferred tax liabilities:
Capitalized research and development costs $ 12,790 $ 13,746
Depreciation 16,633 10,892
Other 56,890 48,279
-------- --------
Total deferred tax liabilities 86,313 72,917
Current portion 245 184
-------- --------
Long term portion $ 86,068 $ 72,733
======== ========
</TABLE>
The income tax provision (benefit) includes the following (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 6,946 $ 56,794 $ 50,711
Foreign 9,785 8,673 16,370
State 466 4,426 5,800
-------- -------- --------
Total current tax provision 17,197 69,893 72,881
-------- -------- --------
Deferred:
Federal 30,934 (71,435) (3,297)
Foreign 2,642 1,081 3,402
State 2,340 (5,131)
-------- -------- --------
Total deferred tax expense (benefit) 35,916 (75,485) 105
-------- -------- --------
Total income tax provision (benefit) $ 53,113 $ (5,592) $ 72,986
======== ======== ========
</TABLE>
47
<PAGE>
The Company's income tax expense (benefit) differed from the amount computed on
pre-tax income (loss) at the U.S. federal income tax rate of 35% for the
following reasons (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Federal income tax (benefit) at
statutory rates $ 54,675 $(87,796) $ 67,224
Increase (decrease) in taxes:
Export sales benefit (4,065) (4,290) (8,024)
State income taxes, net 1,824 (458) 3,770
Goodwill amortization and impairment 88,600 8,831
Other 679 (1,648) 1,185
-------- -------- --------
Provision (benefit) for income taxes $ 53,113 $ (5,592) $ 72,986
======== ======== ========
</TABLE>
At March 31, 2003 the Company has net operating loss carryforwards for income
tax purposes of approximately $75,592,000 which expire as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2004 $ 3,206
2005 5,696
2006 6,257
2008 863
2010 1,594
2011 3,011
2012 77
2018 441
2019 31
Unlimited carryforward 54,416
</TABLE>
Of this amount, approximately $1,965,000 is available to offset U.S. federal
income taxes and approximately $73,627,000 relates to various foreign
jurisdictions. The deferred tax asset for the foreign loss carryforwards has
been offset by a valuation allowance of approximately $2,100,000. In addition,
approximately $5,768,000 of tax credits expiring in 2008 are available to offset
future U.S. federal income tax liabilities. The tax credit has been offset by a
valuation allowance of approximately $2,900,000. A capital loss carryforward is
available to offset future U.S. federal capital gains of approximately $900,000
(expiring in 2006); such deferred tax asset has been offset entirely by a
valuation allowance.
Cash (received) paid for income taxes totaled approximately ($7,905,000),
$65,935,000 and $41,538,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.
13. SEGMENT INFORMATION
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help IT professionals efficiently
develop, implement and support the applications that run their businesses.
The Company's products are designed to support four key activities within the
application development process: development and integration, quality assurance,
production readiness and performance management of the application to optimize
performance in production. The Company also offers a broad range of data
processing professional services including business systems analysis, design and
programming, software conversion and system planning and consulting.
48
<PAGE>
Ford Motor Company accounted for approximately 12% of total revenue during
fiscal 2003. This revenue was primarily associated with the professional
services segment of the business. No single customer accounted for greater than
10% of total revenue during fiscal 2002 or 2001. No single customer accounted
for greater than 10% of accounts receivable at March 31, 2003 and 2002.
The Company evaluates the performance of its segments based primarily on
operating profit (loss) before corporate expenses, other income (expense),
restructuring charges, and goodwill amortization and impairment. The allocation
of income taxes is not evaluated at the segment level. Financial information for
the Company's business segments is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
2003 2002 2001
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Products:
Mainframe $ 553,480 $ 687,286 $ 762,778
Distributed systems 154,416 164,096 189,328
----------- ----------- -----------
Total products revenue 707,896 851,382 952,106
Services 667,444 889,162 1,083,050
----------- ----------- -----------
Total revenues $ 1,375,340 $ 1,740,544 $ 2,035,156
=========== =========== ===========
Income (loss) from operations:
Products $ 269,855 $ 358,504 $ 375,852
Services 55,800 49,013 109,196
Corporate expenses (191,131) (207,166) (250,324)
Goodwill amortization (38,926) (42,092)
----------- ----------- -----------
Income from operations before goodwill
impairment and other charges 134,524 161,425 192,632
Goodwill impairment charge (387,418)
Restructuring charge (46,930)
Other income (expense) 21,691 22,076 (563)
----------- ----------- -----------
Income (loss) before income taxes $ 156,215 $ (250,847) $ 192,069
=========== =========== ===========
</TABLE>
Financial information regarding geographic operations are presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States $1,009,354 $1,328,056 $1,585,326
Europe and Africa 286,088 314,172 334,448
Other international operations 79,898 98,316 115,382
---------- ---------- ----------
Total revenue $1,375,340 $1,740,544 $2,035,156
========== ========== ==========
</TABLE>
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly such information is not provided. Less than ten percent
of the Company's long lived assets, other than financial instruments, are
located outside of the United States.
49
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
The Company leases land, office space and equipment under various operating
lease agreements extending through fiscal 2100. Certain of these leases contain
provisions for renewal options and escalation clauses. The Company also has
commitments under various advertising agreements. The following is a schedule of
future minimum commitments for the next five years and in total (in thousands):
<TABLE>
<CAPTION>
Year ending Total
March 31: Commitment
----------------- ------------
<S> <C>
2004 39,698
2005 28,574
2006 21,314
2007 18,343
2008 13,354
Thereafter 237,717
-----------
Total $ 359,000
===========
</TABLE>
In connection with the new headquarters facility, the Company has entered into a
lease agreement for the land associated with the facility. Currently, rent is
being capitalized in conjunction with the construction project. When the
facility is placed into service in fiscal 2004, monthly rent will be charged to
expense. Total rent payments under this agreement were approximately $717,000
for the year ended March 31, 2003. The agreement includes provisions for annual
rent increases based on increases in the Consumer Price Index with a maximum of
5% per year. The lease expires in fiscal 2100.
The new headquarters facility will include retail and restaurant space. At March
31, 2003, leases had been finalized for approximately 20% of the available space
and the Company is currently negotiating with various potential tenants for the
remaining space.
Director Compensation - Effective April 1, 2002, the Board of Directors approved
the 2002 Directors Phantom Stock Plan (the Plan) for external Board members to
provide increased incentive to make contributions to the long term growth of the
Company, to align the interests of directors with the interests of shareholders,
and to facilitate attracting and retaining directors of exceptional ability. The
Plan provides for issuance of rights to receive the value of a share of the
Company's common stock in cash upon vesting which occurs upon the retirement of
the director from the Board. Phantom shares are granted automatically at the
beginning of each fiscal year and at the discretion of the Board. As of March
31, 2003, approximately 75,000 phantom shares had been issued. The expense
incurred related to this program was approximately $275,000 for fiscal 2003 and
is included in "administrative and general" in the consolidated statements of
operations. Any fluctuation in the Company's stock price as quoted on the NASDAQ
will result in a change to the expected payments under the Plan.
50
<PAGE>
15. BENEFIT PLANS
Employee Stock Ownership Plan - In July 1986, the Company established an
Employee Stock Ownership Plan (ESOP) and Trust. Under the terms of the ESOP, the
Company makes annual contributions to the Plan for the benefit of substantially
all US employees of the Company. The contribution may be in the form of cash or
common shares of the Company. The Board of Directors may authorize contributions
between a maximum of 25% of eligible compensation and a minimum sufficient to
cover current obligations of the Plan. The Company made contributions of
$9,425,000, $10,657,000 and $10,685,000 in fiscal 2003, 2002 and 2001,
respectively. This is a non-leveraged ESOP plan.
Employee Stock Purchase Plan - During fiscal 1996, the Company adopted and the
shareholders approved the global Employee Stock Purchase Plan under which the
Company was authorized to issue up to eight million shares of common stock to
eligible employees, all of which were distributed as of March 2001. During
fiscal 2002, the shareholders approved international and domestic employee stock
purchase plans authorizing 15 million shares for issuance to eligible employees.
Currently, the offering periods commence on April 1st and October 1st each year.
Under the terms of the plan, employees can elect to have up to ten percent of
their compensation withheld to purchase Company stock at the close of the
offering period. The value of the stock purchased in any calendar year cannot
exceed $25,000. The purchase price is 85% of the first or last day's average
high and low price for each offering period, whichever is lower. During fiscal
2003, 2002 and 2001, the Company sold approximately 3,482,000, 1,007,000 and
4,515,000 shares, respectively, to eligible employees under the plan.
Employee Stock Option Plans - The Company adopted five employee stock option
plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees and directors
of the Company, of which approximately 38,028,000 options were outstanding at
March 31, 2003. Under the terms of the plans, the Company may grant nonqualified
options at the fair market value of the stock on the date of grant. During
fiscal 2003, the Company granted approximately 2,408,000 options under the five
different Employee Stock Option Plans. Options granted under these plans vest in
cumulative annual installments over a three to five year period. All options
were granted at fair market value and expire ten years from the date of grant.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval. The plan provides for grants of options to purchase
up to 50,000,000 shares of the Company's common stock to employees or directors
of the Company. Under the terms of the plan, the Company may grant nonqualified
stock options at the fair market value of the stock on the date of grant. During
fiscal 2003, the Company granted approximately 3,567,000 options under the Broad
Based Stock Option Plan. Approximately 24,882,000 options were outstanding at
March 31, 2003. Options granted under the Broad Based Stock Option Plan either
vest every six months over a four year period or in cumulative annual
installments over a three to five year period. All options were granted at fair
market value and expire ten years from the date of grant.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming
director. During fiscal 2003, no options were granted under the Non-Employee
Director Stock Option Plan. Approximately 1,247,000 options were outstanding at
March 31, 2003.
Prior to March 31, 2002, each non-employee director received an annual grant of
20,000 options with additional grants for board and committee meeting
attendance. Non-employee directors were granted stock options out of the
Non-Employee Director Stock Option Plan or the Fiscal 1999 Stock Option Plan.
51
<PAGE>
At March 31, 2003, approximately 76,000 options were outstanding under plans
that were terminated by the Company, of which virtually all are fully vested.
All outstanding options under the terminated plans remain in effect in
accordance with the terms under which they were granted.
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction. During
fiscal 2003, approximately 38,000 options were exercised under the Replacement
Stock Option Award program for which approximately 11,000 replacement options
were granted.
The Company applied the intrinsic value method of recognition and measurement
under APB Opinion No. 25 to its stock-based compensation plans. Accordingly, no
compensation expense related to employee stock options is reflected in net
income, as all options granted had an exercise price equal to the market value
of the underlying common stock on the date of the grant. See Note 1 for the
Company's pro forma net income and earnings per share in accordance with SFAS
No. 123.
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2003, 2002 and 2001, and changes
during the years ending on those dates is as follows (shares in thousands):
<TABLE>
<CAPTION>
2003 2002 2001
------------------------- ------------------------- -------------------------
Shares Shares Shares
Under Weighted-Avg. Under Weighted-Avg. Under Weighted-Avg.
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 65,864 $ 12.30 46,272 $ 13.53 44,965 $ 13.93
Granted 5,975 7.17 31,380 9.46 11,482 9.80
Exercised (552) 2.82 (4,022) 5.02 (2,459) 5.52
Exchanged (12) 8.35 (878) 12.07 (1,973) 11.43
Forfeited (7,042) 13.79 (6,888) 12.62 (5,743) 15.45
------ ------ ------
Outstanding at
year end 64,233 $ 11.75 65,864 $ 12.30 46,272 $ 13.53
====== ====== ======
Options exercisable
at year end 34,510 $ 12.78 27,581 $ 12.42 20,140 $ 9.77
====== ====== ======
Weighted-average
fair value of options
granted during the
year $ 5.24 $ 5.09 $ 7.30
====== ====== ======
</TABLE>
52
<PAGE>
The following table summarizes information about stock options outstanding
at March 31, 2003 (shares in thousands):
<TABLE>
<CAPTION>
------------------------------------------------ --------------------------
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Shares Shares
Under Weighted-Avg. Weighted-Avg. Under Weighted-Avg.
Option Remaining Life Exercise Price Option Exercise Price
------ -------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
$ 0.01 to $10.00 43,624 6.96 $ 8.20 18,927 $ 7.51
10.01 to 20.00 11,734 5.44 14.87 8,729 14.60
20.01 to 30.00 8,149 4.98 24.40 6,303 24.35
30.01 to 42.00 726 5.26 32.20 551 32.36
------ ------
64,233 6.41 11.75 34,510 12.78
====== ======
</TABLE>
<TABLE>
<CAPTION>
Number of securities
Number of securities remaining available
to be issued Weighted-average for future issuance
upon exercise of exercise price of under equity
outstanding options outstanding options compensation plans
------------------------ ----------------------- -------------------------
<S> <C> <C> <C>
Equity compensation plans
approved by security holders 39,350 $13.44 7,019
Equity compensation plans not
approved by security holders 24,883 9.07 24,577
</TABLE>
The maximum number of shares for which additional options may be granted was
31,596,483 at March 31, 2003, 32,058,441 at March 31, 2002 and 55,672,142 at
March 31, 2001. At March 31, 2003, a total of 96,829,541 shares of the Company's
common stock are reserved for issuance under the warrant and all option plans.
Income tax benefits associated with the exercise of stock options are reflected
as adjustments to additional paid-in capital.
53
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2003 and 2002 is
as follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fiscal 2003:
Revenues $ 346,599 $ 357,994 $ 333,139 $ 337,608 $ 1,375,340
Operating income 28,860 47,398 32,031 26,235 134,524
Pre-tax income 34,038 51,258 38,528 32,391 156,215
Net income 22,465 33,830 25,429 21,378 103,102
Basic earnings per share 0.06 0.09 0.07 0.06 0.27
Diluted earnings per share 0.06 0.09 0.07 0.06 0.27
Fiscal 2002:
Revenues $ 450,475 $ 427,761 $ 453,780 $ 408,528 $ 1,740,544
Operating income (loss) 51,026 36,961 42,049 (402,959) (272,923)
Pre-tax income (loss) 55,413 42,750 48,047 (397,057) (250,847)
Net income (loss) 34,356 26,505 29,789 (335,905) (245,255)
Basic earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
Diluted earnings (loss) per share 0.09 0.07 0.08 (0.90) (0.66)
</TABLE>
17. SUBSEQUENT EVENT
Revolving Credit Facility - On May 2, 2003, the Company entered into a
$100,000,000 revolving credit facility maturing in 364 days. If at any time the
combined unencumbered liquid assets of the Company (as defined in the credit
facility) are less than $200,000,000, the credit facility will be reduced to
$50,000,000. Interest may be determined on a Eurodollar basis or base rate (as
defined in the credit facility) at the Company's option.
The terms of the credit facility contain, among other provisions, certain
financial covenants including minimum net worth requirements, and specific
limitations on additional indebtedness, liens and merger activity.
Stock Repurchase Plan - On May 6, 2003, the Company's Board of Directors
authorized the repurchase of up to $125 million of the Company's common stock.
The Company will purchase stock on the open market, through negotiated or block
transactions, periodically, based upon market and business conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in the Proxy Statement
under the captions "Election of Directors" and "Other Matters - Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Proxy Statement
under the caption "Compensation of Executive Officers and Directors"
(excluding the Compensation Committee Report on Executive Compensation and
the Performance Graph) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the Proxy Statement
under the caption "Security Ownership of Management and Major Shareholders"
and is incorporated herein by reference. In addition, the information
contained in the Equity Compensation table under Item 5 of this report and
in Note 15 in the Notes to Consolidated Financial Statements which are
included in this report in Item 8 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the Proxy Statement
under the caption "Other Matters - Related Party Transactions" and is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective to cause the
material information required to be disclosed by the Company in the reports
that it files or submits 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 have been no
significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date
the Company carried out its evaluation.
55
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries are filed herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 30
Consolidated Balance Sheets as of March 31, 2003 and 2002 31
Consolidated Statements of Operations for each of the years
ended March 31, 2003, 2002 and 2001 32
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2003, 2002 and 2001 33
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2003, 2002 and 2001 34
Notes to Consolidated Financial Statements 35-54
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Independent Auditors' Report 62
Schedule II - Valuation and Qualifying Accounts and Reserves 63
</TABLE>
All other financial statement schedules not listed above are omitted as the
required information is not applicable or the information is presented in the
consolidated financial statements or related notes.
3. EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index attached to this report. The Exhibit
Index is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 2003.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Farmington Hills, State of Michigan on June 23, 2003.
COMPUWARE CORPORATION
By: /S/ PETER KARMANOS, JR.
-------------------------------
Peter Karmanos, Jr.
Chairman of the Board, Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ PETER KARMANOS, JR. Chairman of the Board, Chief Executive Officer June 23, 2003
- -------------------------------- And Director (Principal Executive Officer)
Peter Karmanos, Jr.
/S/ JOSEPH A. NATHAN President and Chief Strategy Officer June 23, 2003
- --------------------------------
Joseph A. Nathan
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 23, 2003
- -------------------------------- and Treasurer (Chief Financial and Accounting Officer)
Laura L. Fournier
/S/ DENNIS W. ARCHER Director June 23, 2003
- --------------------------------
Dennis W. Archer
/S/ GURMINDER S. BEDI Director June 23, 2003
- --------------------------------
Gurminder S. Bedi
Director
- --------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 23, 2003
- --------------------------------
Elaine K. Didier
/S/ WILLIAM O. GRABE Director June 23, 2003
- --------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 23, 2003
- --------------------------------
William R. Halling
/S/ FAYE A. NELSON Director June 23, 2003
- --------------------------------
Faye A. Nelson
/S/ GLENDA D. PRICE Director June 23, 2003
- --------------------------------
Glenda D. Price
Director
- --------------------------------
W. James Prowse
Director
- --------------------------------
G. Scott Romney
Director
- --------------------------------
Lowell P. Weicker, Jr.
</TABLE>
57
<PAGE>
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter Karmanos, Jr., Chief Executive Officer of the Company, certify
that:
1. I have reviewed this annual report on Form 10-K of Compuware
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ Peter Karmanos, Jr.
- ------------------------------
Peter Karmanos, Jr.
Chief Executive Officer
June 23, 2003
58
<PAGE>
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Laura L. Fournier, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Compuware
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ Laura L. Fournier
- ------------------------------
Laura L. Fournier
Chief Financial Officer
June 23, 2003
59
<PAGE>
EXHIBITS
The following exhibits are filed herewith or incorporated by reference. Each
management contract or compensatory plan or arrangement filed as an exhibit to
this report is identified below with an asterisk before the exhibit number. The
Company's SEC file number is 0-20900.
Exhibit
Number Description of Document
-------- -----------------------
3(i).1 Restated Articles of Incorporation of Compuware Corporation,
as amended, as of October 25, 2000. (11)
3(i).5 Amended and Restated Bylaws of Compuware Corporation, as of
October 2001. (12)
4.0 Rights Agreement dated as of October 25, 2000 between
Compuware Corporation and Equiserve Trust Company, N.A., as
Rights Agent. (8)
4.1 Warrant dated November 16, 2001 (13)
*4.2 Revolving Credit Agreement dated as of May 2, 2003, between
Compuware Corporation and Comerica Bank
10.4 1992 Stock Option Plan. (1)
10.24 Promotion Agreement, dated September 8, 1992, between
Compuware Sports Corporation and the Company. (1)
10.35 Fiscal 1993 Stock Option Plan. (1)
10.36 Stock Option Plan for Non-Employee Directors. (1)
10.37 Fiscal 1998 Stock Option Plan (3)
10.51 Fiscal 1996 Stock Option Plan (7)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (7)
10.83 Fiscal 1999 Stock Option Plan (9)
10.84 Agreement and Plan of Merger, dated June 23, 1999, among the
Company, DPRC and COMP Acquisition Co. (5)
10.85 2001 Broad Based Stock Option Plan (6)
10.86 First Amendment to 1992 Stock Option Plan (2)
10.87 First Amendment to 1993 Stock Option Plan (2)
10.88 First Amendment to 1996 Stock Option Plan (2)
10.89 First Amendment to Stock Option Plan For Non-Employee
Directors (4)
*10.90 Phantom Stock Plan
*21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99.(B)(2) Credit Agreement, dated as of August 3, 1999, between
Compuware Corporation, Various Lenders, Comerica Bank, as
Administrative Agent and Co-Arranger, and Morgan Stanley
Senior Funding, Inc., as Lead Arranger, Syndication Agent and
Book Manager (10)
*99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------------------
(1) Incorporated by reference to the corresponding exhibit to
the Registration Statement on Form S-1, as amended
(Registration No. 33-53652).
(2) Incorporated by reference to exhibits 12.0, 12.1 and 12.2
to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
(3) Incorporated by reference to exhibit 4.1 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-37873).
(4) Incorporated by reference to exhibit 12.3 to the 1998
Annual Report on Form 10-K.
(5) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999.
(6) Incorporated by reference to exhibit 4.10 to the
Registration Statement on Form S-8 (Registration
Statement No. 333-57984).
60
<PAGE>
(7) Incorporated by reference to the corresponding exhibit to
the fiscal 2000 Annual Report on Form 10-K.
(8) Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 26, 2000.
(9) Incorporated by reference to Exhibit 10 to the Quarterly
Report on Form 10-Q for the quarterly period ended
December 31, 2000.
(10) Incorporated by reference to Exhibit 99.(B)(2) to the
Company's Amendment No. 3 (Final Amendment) to Schedule
14D-1.
(11) Incorporated by reference to the corresponding exhibit to
the fiscal 2001 Annual Report on Form 10-K.
(12) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2001.
(13) Incorporated by reference to the corresponding exhibit to
the Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2001.
61
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF COMPUWARE CORPORATION:
We have audited the consolidated financial statements of Compuware Corporation
and subsidiaries as of March 31, 2003 and 2002 and for each of the three years
in the period ended March 31, 2003, and have issued our report thereon dated May
6, 2003, (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the adoption of FASB 142 "Goodwill and Other
Intangible Assets"); such report is included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedule of
Compuware Corporation and subsidiaries, listed in Item 14(a)2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 6, 2003
62
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- --------------- ---------------------------------- ----------------- -------------
ADDITIONS
----------------------------------
CHARGED
BALANCE AT CHARGED TO OTHER (1) BALANCE AT
BEGINNING TO COSTS ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ---------------------------------------- --------------- ---------------------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 2003 $ 23,190 $ 10,139 $ 6,786 $ 26,543
Year ended March 31, 2002 21,267 10,037 8,114 23,190
Year ended March 31, 2001 15,466 10,432 4,631 21,267
</TABLE>
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
63
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
4.2 Revolving Credit Agreement dated as of May 2, 2003 between
Compuware Corporation and Comerica Bank
10.90 Phantom Stock Plan
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>3
<FILENAME>k77829exv4w2.txt
<DESCRIPTION>REVOLVING CREDIT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.2
EXECUTION COPY
================================================================================
COMPUWARE CORPORATION
CREDIT AGREEMENT
DATED AS OF MAY 2, 2003
COMERICA BANK
================================================================================
<PAGE>
TABLE OF CONTENTS
SCHEDULES
Schedule 2.4 List of Officers Authorized to Make Telephone Requests
Schedule 6.5 Employee Pension Benefit Plans
Schedule 6.8 Subsidiaries
Schedule 6.9 Environmental Matters
Schedule 8.1 Existing Debt
Schedule 8.4 Permitted Liens
Schedule 8.7 Non-Arms Length Transactions with Affiliates
<PAGE>
TABLE OF CONTENTS
(Continued)
EXHIBITS
EXHIBIT A FORM OF NOTE
EXHIBIT B FORM OF SUBSIDIARY GUARANTY
EXHIBIT C FORM OF REQUEST FOR ADVANCE
EXHIBIT D FORM OF LIQUIDITY CERTIFICATE
EXHIBIT E FORM OF COVENANT COMPLIANCE CERTIFICATE
EXHIBIT F INVESTMENT GUIDELINES
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, made as of the 2nd day of May, 2003, by and
between COMPUWARE CORPORATION, a Michigan corporation (herein called "Company")
and COMERICA BANK, a Michigan banking corporation, of Detroit, Michigan (herein
called "Bank").
RECITALS
A. Company desires to obtain a $100,000,000 revolving credit
facility from Bank.
B. Bank is willing to extend such credit to Company on the terms
and conditions herein set forth.
NOW, THEREFORE, Bank and Company agree as follows:
W I T N E S S E T H
1. DEFINITIONS
For the purposes of this Agreement the following terms have the
following meanings:
"Advance" shall mean a borrowing requested by Company and made by Bank
under Section 2 of this Agreement, including any refunding or conversions of
such borrowings pursuant to Section 3.3 hereof, and shall include a
Eurodollar-based Advance and a Prime-based Advance.
"Affiliate" shall mean, with respect to any Person (other than, with
respect to Company, a Wholly-Owned Subsidiary), any other Person directly or
indirectly Controlling (including but not limited to all directors and officers
of such Person), Controlled by, or under direct or indirect common Control with
such Person. A Person shall be deemed to Control a corporation for the purposes
of this definition if such Person possesses, directly or indirectly, the power
(i) to vote 10% or more of the securities having ordinary voting power for the
election of directors or managers of such corporation or (ii) to direct or cause
the direction of the management and policies of such corporation, whether
through the ownership of voting securities, by contract or otherwise.
"Alternate Base Rate" shall mean for any day a rate per annum (rounded
upwards, if necessary, to the next higher 1/100 of 1%) equal to the Federal
Funds Effective Rate in effect on such day plus one percent (1%).
"Applicable Eurodollar Margin" shall mean one percent (1%).
"Asset Sale" shall mean the sale, transfer, lease or other disposition
by the Company or any Subsidiary of any asset (other than stock or other
ownership interests of any Subsidiary) to any Person (other than to the Company
or any Guarantor), other than sales, transfers or other
<PAGE>
dispositions of Inventory in the ordinary course of business and sales or other
dispositions of assets that have been damaged, become obsolete or are no longer
useable in the conduct of the business of the Company or such Subsidiary.
"Business Day" shall mean any day on which commercial banks are open
for domestic and international business (including dealings in foreign exchange)
in Detroit and London.
"Capitalized Lease" shall mean any lease of any property (whether real,
personal or mixed) by any Person as lessee which, in conformity with GAAP, is,
or is required to be accounted for as, a capital lease on the balance sheet of
such Person, together with any renewals of such leases (or entry into new
leases) on substantially similar terms.
"Cash Equivalents" shall mean (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than three years from the date of acquisition, (ii) marketable direct
obligations issued by any State of the United States of America or any local
government or other political subdivision thereof rated (at the time of
acquisition of such security) at least AA by Standard & Poor's Corporation
("S&P") or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's")
having maturities of not more than one year from the date of acquisition, (iii)
U.S. Dollar denominated time deposits, certificates of deposit and bankers'
acceptances of (x) Bank, (y) any domestic commercial bank of recognized standing
having capital and surplus in excess of $500,000,000 or (z) any bank whose
short-term commercial paper rating (at the time of acquisition of such security)
by S&P is at least A-l or the equivalent thereof or by Moody's is at least P-1
or the equivalent thereof (any such bank, an "Approved Bank"), in each case with
maturities of not more than six months from the date of acquisition, (iv)
commercial paper and variable or fixed rate notes issued by Bank or by the
parent company of Bank and commercial paper and variable rate notes issued by,
or guaranteed by, any industrial or financial company with a short-term
commercial paper rating (at the time of acquisition of such security) of at
least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, or guaranteed by any industrial company with a long-term
unsecured debt rating (at the time of acquisition of such security) of at least
AA or the equivalent thereof by S&P or the equivalent thereof by Moody's and in
each case maturing within one year after the date of acquisition and (v)
repurchase agreements with Bank maturing within one year from the date of
acquisition that are fully collateralized by investment instruments that would
otherwise be Cash Equivalents. Notwithstanding the foregoing, any investments
permitted by Company's investment guidelines as currently in effect, a copy of
which is attached to this Agreement as Exhibit F, or as amended with the Bank's
consent, shall be deemed to be "Cash Equivalents" for all purposes of this
Agreement.
"Change of Control" shall mean (i) any Person or "group" (within the
meaning of Sections 13(d) and 14(d) under the Securities Exchange Act, as in
effect on the Effective Date), shall have (A) acquired beneficial ownership (as
such term is used in Rule 13d-3 under the Securities Exchange Act, as in effect
of the Effective Date) of 33% or more on a fully diluted basis of the voting
interest in the Company's voting capital stock or (B) obtained the power
(whether or not exercised) to elect a majority of the Company's directors or
(ii) the Board of Directors of the Company shall cease to consist of a majority
of Continuing Directors.
2
<PAGE>
"Commitment" shall mean One Hundred Million Dollars ($100,000,000),
subject to reduction or termination under Section 2 and Section 3.
"Consolidated" shall mean, when used with reference to any financial
term in this Agreement, the aggregate for two or more Persons of the amounts
signified by such term for all such Persons determined on a consolidated basis
in accordance with GAAP. Unless otherwise specified herein, references to
Consolidated financial statements or data of the Company shall be deemed to mean
the financial statements and data of the Company in consolidation with its
Subsidiaries in accordance with GAAP.
"Consolidated Net Worth" shall mean at anytime, the consolidated
stockholders' equity of the Company and its consolidated Subsidiaries at that
time, as determined in accordance with GAAP.
"Continuing Directors" shall mean the directors of the Company on the
Effective Date and each other director if such director's nomination for
election to the Board of Directors of the Company is recommended by a majority
of the then Continuing Directors.
"Debt" shall mean as to any Person, without duplication (a) all Funded
Debt of such Person, (b) all Guarantee Obligations of such Person, (c) all
obligations of such Person under conditional sale or other title retention
agreements relating to property or assets purchased by such Person, (d) all
indebtedness of such Person arising in connection with any interest rate swap
transaction, basis swap transaction, forward rate transaction, commodity swap
transaction, equity transaction, equity index transaction, foreign exchange
transaction, cap transaction, floor transaction (including any option with
respect to any of these transactions and any combination of any of the
foregoing) entered into by such Person and (e) any items which would be
classified as liabilities on the balance sheet of such Person. Unless the
context otherwise requires, as used in this Agreement, the term Debt refers to
Debt of Company or its Subsidiaries.
"Default" shall mean any condition or event which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default
under this Agreement.
"Domestic Subsidiary" shall mean each Subsidiary of the Company that is
incorporated under the laws of the United States or any State thereof.
"Effective Date" shall mean the date on which all the conditions
precedent set forth in Sections 5.1 through 5.7 have been satisfied.
"Environmental Laws" shall mean all federal, state and local laws
including statutes, regulations, ordinances, codes, rules, and other
governmental restrictions and requirements, relating to environmental pollution,
contamination or other impairment of the environment or any hazardous or toxic
substances of any nature, including but not be limited to the Federal Solid
Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
and the Federal Superfund Amendments and Reauthorization Act of 1986, each as
amended from time to time.
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"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, or any successor act or code.
"Eurodollar-based Advance" shall mean an Advance which bears interest
at the Eurodollar-based Rate.
"Eurodollar-based Rate" shall mean a per annum interest rate which is
the Applicable Eurodollar Margin plus the quotient of:
(a) the per annum interest rate at which Bank's Eurodollar Lending
Office offers deposits to prime banks in the eurodollar market
in an amount comparable to the relevant Eurodollar-based
Advance and for a period equal to the relevant Interest Period
at approximately the time Company requests such Advance on the
first day of such Interest Period; divided by
(b) a percentage equal to 100% minus the maximum rate on such date
at which Bank is required to maintain reserves on
"Euro-currency Liabilities" as defined in and pursuant to
Regulation D of the Board of Governors of the Federal Reserve
System or, if such regulation or definition is modified, and
as long as Bank is required to maintain reserves against a
category of liabilities which includes eurodollar deposits or
includes a category of assets which includes eurodollar loans,
the rate at which such reserves are required to be maintained
on such category;
all as conclusively determined by Bank, such sum to be rounded upward, if
necessary, to the nearest whole multiple of 1/100th of 1%.
"Eurodollar Lending Office" shall mean Bank's office located at Grand
Cayman, British West Indies or such other branch of Bank, domestic or foreign,
as it may hereafter designate as its Eurodollar Lending Office by notice to
Company.
"Event of Default" shall mean any of the events of default specified in
Section 9 hereof.
"Federal Funds Effective Rate" shall mean, for any day, a fluctuating
interest rate per annum equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such day on such transactions
received by Bank from three Federal funds brokers of recognized standing
selected by it.
"Foreign Subsidiary" shall mean each Subsidiary of Company that is not
a Domestic Subsidiary.
"Funded Debt" of any Person shall mean (a) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services as of such date (other than operating leases and trade liabilities
incurred in the ordinary course of business and payable in accordance with
customary practices and equipment purchased for which the purchase price is
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due and payable less than one year from the date the equipment is delivered to
such Person) or which is evidenced by a note, bond, debenture or similar
instrument, (b) the principal component of all obligations of such Person under
Capitalized Leases, (c) all reimbursement obligations (actual, contingent or
otherwise) of such Person in respect of letters of credit, acceptances or
similar obligations issued or created for the account of such Person and which
are the functional equivalent of indebtedness for borrowed money, (d) all
liabilities secured by any consensual liens on any property owned by such Person
as of such date even though such Person has not assumed or otherwise become
liable for the payment thereof, in each case determined in accordance with GAAP;
provided however that so long as such Person is not personally liable for such
liabilities, the amount of such liability shall be deemed to be the lesser of
the fair market value at such date of the property subject to the lien securing
such liability and the amount of the liability secured, and (e) all Guarantee
Obligations in respect of any liability which constitutes Funded Debt; provided,
however that Funded Debt shall not include any interest rate swap transaction,
basis swap transaction, forward rate transaction, commodity swap transaction,
equity transaction, equity index transaction, foreign exchange transaction, cap
transaction, floor transaction (including any option with respect to any of
these transactions and any combination of any of the foregoing) entered into by
such Person prior to the occurrence of a termination event with respect thereto.
"GAAP" shall mean, as of any applicable date of determination,
generally accepted accounting principles consistently applied in the United
States of America.
"Guarantee Obligations" shall mean as to any Person (the "guaranteeing
person") any obligation of the guaranteeing person in respect of any obligation
of another Person (including, without limitation, any bank under any letter of
credit), the creation of which was induced by a reimbursement agreement, counter
indemnity or similar obligation issued by the guaranteeing person, in either
case guaranteeing or in effect guaranteeing any Debt, leases, dividends or other
obligations (the "primary obligations") of any other third Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of the guaranteeing person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (ii) to advance or supply
funds (1) for the purchase or payment of any such primary obligation or (2) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation or (iv) otherwise to assure or hold harmless
the owner of any such primary obligation against loss in respect thereof;
provided, however, that the term Guarantee Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by
Company in good faith.
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"Guarantors" shall mean each Material Wholly-Owned Domestic Subsidiary
which is required to guarantee the obligations of the Company hereunder and
under the other Loan Documents and any other Domestic Subsidiary which has
executed and delivered (including by execution and delivery of a joinder
agreement) the Guaranty, and "Guarantor" shall mean any one of them.
"Guaranty" shall mean that certain guaranty of all outstanding
Indebtedness by the Guarantors (whether by execution thereof or by execution of
a joinder agreement thereto) substantially in the form attached as Exhibit "B."
"Hazardous Materials" shall mean and include any hazardous, toxic or
dangerous waste, substance or material defined as such in (or for purposes of)
the Environmental Laws.
"Hedging Transaction" shall mean each interest rate swap transaction,
basis swap transaction, forward rate transaction, commodity swap transaction,
equity transaction, equity index transaction, foreign exchange transaction, cap
transaction, floor transaction (including any option with respect to any of
these transactions and any combination of any of the foregoing) entered into by
Company or any Subsidiary from time to time; provided that such transaction is
entered into for risk management purposes and not for speculative purposes.
"Indebtedness" shall mean all loans, advances, indebtedness,
obligations and liabilities of Company and its Subsidiaries to Bank under this
Agreement or any of the other Loan Documents or under any hedging agreements
with the Bank, together with all other indebtedness, obligations and liabilities
whatsoever of Company and its Subsidiaries to Bank arising under or in
connection with this Agreement, whether matured or unmatured, liquidated or
unliquidated, direct or indirect, absolute or contingent, joint or several, due
or to become due, now existing or hereafter arising.
"Interest Period" shall mean a period of one (1), two (2) or three (3)
months as selected by Company pursuant to the provisions of this Agreement
commencing on the day a Eurodollar-based Advance is made, or on the effective
date of an election of the Eurodollar-based Rate made under Section 3.1.
"Inventory" shall have the meaning assigned to it in the Michigan
Uniform Commercial Code on the date of this Agreement.
"Loan Documents" shall mean collectively, this Agreement, the Note, the
Guaranty and any other instruments or agreements executed at any time pursuant
to or in connection with any such documents, and any and all amendments,
renewals, replacements, substitutions, extensions or other modifications of any
of the foregoing.
"Loan Parties" shall mean collectively Company and any or all of the
Guarantors, and "Loan Party" shall mean any one of them, as the context
indicates or otherwise requires.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business or financial condition of Company and its Subsidiaries taken as a
whole, (b) the ability of Company and the Guarantors to perform their respective
obligations under this Agreement, the Note (if issued) or any other Loan
Document to which any of them is a party, or (c) the validity or
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enforceability of this Agreement, the Note (if issued) or any of the other Loan
Documents or the rights or remedies of the Bank hereunder or thereunder.
"Material Wholly-Owned Domestic Subsidiary" shall mean each
Wholly-Owned Domestic Subsidiary of Company which, together with its
Subsidiaries, account for at least ten percent (10%) of the consolidated assets
of the Company and its Subsidiaries at the most recently ended fiscal quarter of
Company.
"Maturity Date" shall mean April 30, 2004.
"Note" shall mean the note described in Section 2.1 hereof made by
Company to Bank in the form annexed to this Agreement as Exhibit "A" as such
note may be amended or supplemented from time to time, or any other note issued
in substitution, replacement or renewal thereof from time to time.
"PBGC" is defined in Section 6.6.
"Pension Plan" is defined in Section 6.5.
"Permitted Acquisition" shall mean any acquisition by the Company or
any Subsidiary of all or substantially all of the assets of another Person, or
of a division or line of business of another Person, or shares of stock or other
ownership interests of another Person which satisfies and/or is conducted in
accordance with the following requirements:
(a) Such acquisition is of a business or Person engaged in a line
of business which is compatible with, or complementary to, the
business of the Company, or is engaged in a business using
systems or techniques not unlike those of the Company or any
Subsidiary;
(b) Both immediately before and after such acquisition no Default
or Event of Default shall have occurred and be continuing;
(c) The board of directors (or other Person(s) exercising similar
functions) of the seller of the assets or issuer of the shares
of stock or other ownership interests being acquired shall not
have disapproved such transaction or recommended that such
transaction be disapproved; and
(d) All governmental, quasi-governmental, agency, regulatory or
similar licenses, authorizations, exemptions, qualifications,
consents and approvals necessary or appropriate under any laws
applicable to Company or any of its Subsidiaries, or the
acquisition target for or in connection with the proposed
acquisition and all necessary or appropriate non-governmental
and other third-party approvals which, in each case, are
material to such acquisition shall have been obtained, and all
necessary or appropriate declarations, registrations or other
filings with any court, governmental or regulatory authority,
securities exchange or any other person have been made, and
evidence thereof satisfactory in form and substance to the
Bank shall have been delivered, or caused to have been
delivered, by Company to the Bank;
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(e) There are no actions, suits or proceedings pending or, to the
knowledge of Company threatened against or affecting the
acquisition target in any court or before or by any
governmental department, agency or instrumentality, an adverse
decision in which would materially adversely affect the
financial condition of the acquisition target or the ability
of the target company to enter into or perform its obligations
in connection with the proposed acquisition, nor are any
actions, suits, or proceedings pending, or to the knowledge of
the Company threatened against the Company or any of its
Subsidiaries which would materially adversely affect the
ability of the Company or any of its Subsidiaries to enter
into or perform their respective obligations in connection
with the proposed acquisition;
(f) The Company shall have delivered or caused to be delivered to
Bank a list of any new liens resulting from the acquisition,
which liens may only be liens permitted pursuant to Section
8.4 hereof; and
(g) The total acquisition consideration paid or incurred, or to be
paid or incurred, by the Company or the acquiring Subsidiary
with respect thereto, including all Debt (other than trade
payables and other liabilities which do not constitute Debt
for money borrowed incurred in the ordinary course of
business) which is assumed or to which such assets, businesses
or ownership interests or shares, or any Person so acquired is
subject, and all fees and expenses of the Company and its
Subsidiaries in connection with such acquisition, (i) shall be
less than $50,000,000 and (ii) when added to the aggregate
acquisition consideration (computed as aforesaid) for all
other acquisitions during the 364-day period from the date of
this Agreement through April 30, 2004, or any subsequent
364-day period beginning at the end of the immediately
preceding 364-day period and ending 364 days later shall be
less than $100,000,000.
"Permitted Liens" shall mean with respect to any Person:
(a) liens for taxes not yet due and payable or which are being
contested in good faith by appropriate proceedings diligently
pursued, provided that provision for the payment of all such
taxes has been made on the books of such Person as may be
required by GAAP;
(b) mechanics', materialmen's, banker's, carriers', warehousemen's
and similar liens and encumbrances arising in the ordinary
course of business and securing obligations of such Person
that are not overdue for a period of more than 60 days or are
being contested in good faith by appropriate proceedings
diligently pursued, provided that in the case of any such
contest (i) any proceedings commenced for the enforcement of
such liens and encumbrances shall have been duly suspended;
and (ii) such provision for the payment of such liens and
encumbrances has been made on the books of such Person as may
be required by GAAP;
(c) liens arising in connection with worker's compensation,
unemployment insurance, old age pensions and social security
benefits and similar statutory obligations
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which are not overdue or are being contested in good faith by
appropriate proceedings diligently pursued, provided that in
the case of any such contest (i) any proceedings commenced for
the enforcement of such liens shall have been duly suspended;
and (ii) such provision for the payment of such liens has been
made on the books of such Person as may be required by GAAP;
(d)(i) liens incurred in the ordinary course of business to secure
the performance of statutory obligations arising in connection
with progress payments or advance payments due under contracts
with the United States government or any agency thereof
entered into in the ordinary course of business and (ii) liens
incurred or deposits made in the ordinary course of business
to secure the performance of statutory obligations, bids,
leases, fee and expense arrangements with trustees and fiscal
agents and other similar obligations (exclusive of obligations
incurred in connection with the borrowing of money, any
lease-purchase arrangements or the payment of the deferred
purchase price of property), provided that full provision for
the payment of all such obligations set forth in clauses (i)
and (ii) has been made on the books of such Person as may be
required by GAAP, consistently applied; and
(e) minor survey exceptions or minor encumbrances, easements or
reservations, or rights of others for rights-of-way, utilities
and other similar purposes, or zoning or other restrictions as
to the use of real properties, which do not materially
interfere with the business of such Person.
"Person" or "person" shall mean any individual, corporation,
partnership, joint venture, limited liability company, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
"Prime Rate" shall mean the per annum interest rate established by Bank
as its prime rate for its borrowers as such rate may vary from time to time,
which rate is not necessarily the lowest rate on loans made by Bank at any such
time.
"Prime-based Advance" shall mean an Advance which bears interest at the
Prime-based Rate.
"Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Pension Plan other than those events as to which the
thirty-day notice period is waived under subsection 22, 23, 25, 27, 28 or 29 of
PBGC Regulation Section 4043.
"Request for Advance" shall mean a Request for Advance issued by
Company under this Agreement in the form annexed to this Agreement as Exhibit
"C."
"SEC" is defined in Section 7.1(a).
"Securities Act" shall mean the Securities Act of 1933, as amended and
the rules promulgated under it.
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"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated under it.
"Subsidiary(ies)" shall mean any other corporation, association, joint
stock company, business trust, limited liability company or any other business
entity of which more than fifty percent (50%) of the outstanding voting stock,
share capital, membership or other interests, as the case may be, is owned
either directly or indirectly by any Person or one or more of its Subsidiaries,
or the management of which is otherwise controlled, directly, or indirectly
through one or more intermediaries, or both, by any Person and/or its
Subsidiaries. Unless otherwise specified to the contrary herein or the context
otherwise requires, Subsidiary(ies) shall refer to the Subsidiary(ies) of the
Company.
"Unencumbered Liquid Assets" shall mean, with respect to the Company,
the aggregate, fair market value (as reasonably determined by Bank) of the
Company's unencumbered (i) cash, (ii) Cash Equivalents (iii) marketable
securities which are traded on the New York Stock Exchange, American Stock
Exchange or the NASDAQ Stock Market and (iv) any fund or pooling arrangement
that exclusively purchased and holds the foregoing, all as determined on a
Company-only, non-consolidated, basis. "Unencumbered" means, with respect to any
asset, that such asset is not subject to any voluntary or involuntary, lien,
security interest, mortgage, pledge or other encumbrance.
"Wholly-Owned Domestic Subsidiary" shall mean each Domestic Subsidiary
of the Company that is also a Wholly-Owned Subsidiary of the Company.
"Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any
corporation 100% of whose capital stock is at the time owned by such Person
and/or one or more Wholly-Owned Subsidiaries of such Person (other than
director's qualifying shares) and (ii) any partnership, limited liability
company, association, joint venture or other entity in which such Person and/or
one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest
at such time.
2. THE INDEBTEDNESS: Revolving Credit
2.1 Subject to the terms and conditions of this Agreement
(including without limitation Section 2.3 hereof), Bank agrees to make Advances
to Company at any time and from time to time from the Effective Date until the
Maturity Date, in an aggregate principal amount not to exceed at any one time
outstanding the Commitment. All of the Advances under this Section 2 shall be
evidenced by the Note under which Advances, repayments and readvances may be
made, subject to the terms and conditions of this Agreement.
2.2 The Note shall mature on the Maturity Date and each Advance
from time to time outstanding thereunder shall bear interest at its Applicable
Interest Rate. The amount and date of each Advance, its Applicable Interest
Rate, its Interest Period, if applicable, and the amount and date of any
repayment shall be noted on Bank's records, which records will be conclusive
evidence thereof absent manifest error.
2.3 Company may request an Advance under this Section 2 upon the
delivery to Bank of a Request for Advance executed by an authorized officer of
Company, subject to the following:
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(a) each such Request for Advance shall set forth the information
required on the Request for Advance form annexed hereto as
Exhibit "C";
(b) each such Request for Advance shall be delivered to Bank by
3:00 p.m. (Detroit time) on the proposed date of Advance with
respect to Prime-based Advances, and by 12:00 p.m. (Detroit
time) three (3) Business Day prior to the proposed date of
Advance with respect to Eurodollar-based Advances;
(c) the principal amount of such Advance, plus the amount of any
outstanding indebtedness to be then combined therewith having
the same Applicable Interest Rate and Interest Period, if any,
shall be, in the case of Prime-based Advances at least
$100,000 and, in the case of a Eurodollar-based Advance, at
least $1,000,000 or any larger amount in $100,000 increments;
(d) on the proposed date of such Advance, after giving effect to
all Advances requested on that day, the principal amount of
such Advance, plus the sum of the amount of all other
outstanding Advances under this Section 2, shall not exceed
the Commitment;
(e) a Request for Advance, once delivered to Bank, shall not be
revocable by Company.
(f) each Request for Advance shall constitute a certification by
Company, as of the date hereof:
(i) both before and after such Advance, the obligations
of the Loan Parties set forth in this Agreement and
the other Loan Documents to which such Persons are
parties are valid, binding and enforceable
obligations of such Persons;
(ii) all conditions to Advances have been satisfied and
shall remain satisfied to the date of such Advance
(both before and after giving effect to such
Advance);
(iii) there is no Default or Event of Default in existence,
and none will exist upon the making of such Advance
(both before and after giving effect to such
Advance);
(iv) the representations and warranties contained in this
Agreement and the other Loan Documents are true and
correct in all material respects and shall be true
and correct in all material respects as of the making
of such Advance (both before and after giving effect
to such Advance), other than any representation or
warranty that expressly speaks only as of a different
date; and
(v) the execution of such Request for Advance will not
violate the material terms and conditions of any
material contract, agreement or other borrowing of
Company.
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2.4 Bank may also, at its option, lend under this Section 2 upon
the telephone request of an authorized officer of Company and, in the event Bank
makes any such advance upon a telephone request, the requesting officer shall
fax to Bank, on the same day as such telephone request, a Request for Advance in
the form attached as Exhibit "C." Company hereby authorizes Bank to disburse
Advances under this Section 2 pursuant to the telephone instructions of any
person purporting to be an authorized officer of Company and, notwithstanding
any provision of this Agreement to the contrary, Company shall bear all risk of
loss resulting from disbursements made upon any telephone request. Each
telephone request for an Advance shall constitute a certification of the matters
set forth in clause (f) of Section 2.3. Company certifies that Schedule 2.4
lists all Company officers authorized to request Advances by telephone. Only
those officers specified on Schedule 2.4 (as amended or supplemented in a
writing or writings executed by Company and delivered by Company to Bank in
accordance with this Agreement), and no others, are authorized to make such
telephone requests. Any Advance made pursuant to such telephone request shall
only be deposited by Bank into Company's corporate bank account, Comerica Bank
Account Number 1840278004.
2.5 Company may prepay all or part of the outstanding balance of
the Prime-based Advance(s) under the Note at any time. Upon three (3) Business
Days' prior notice to Bank, Company may prepay all or part of any
Eurodollar-based Advance, provided that the amount of any such partial
prepayment shall be at least $100,000 and the unpaid portion of such Advance
which is refunded or converted under Section 3.3 shall be subject to the
limitations of Section 2.3(c) hereof. Any prepayment of a Prime-based Advance or
a Eurodollar-based Advance made in accordance with this Section shall be without
premium, penalty or prejudice to Company's right to reborrow under the terms of
this Agreement subject, in the case of Eurodollar-based Advances, to the
provisions of Section 4.1 hereof.
2.6 Proceeds of Advances under the Note shall be used for general
corporate purposes, including working capital and Permitted Acquisitions.
2.7 (a) Provided that no Default or Event of Default has occurred
and is continuing, Company may, upon at least three (3) Business Days' prior
written notice to Bank, permanently reduce the Commitment in whole at any time,
or in part from time to time, without premium or penalty, provided that each
partial reduction of the Commitment shall be in an aggregate amount equal to at
least Ten Million Dollars ($10,000,000) or the aggregate remaining principal
amount of the Commitment, whichever is less.
(a) If at any time, the Company's Unencumbered Liquid Assets are
less than Two Hundred Million Dollars ($200,000,000), the
Commitment shall immediately, automatically and irrevocably
reduce to Fifty Million Dollars ($50,000,000).
(b) If the Commitment is reduced under Sections 2.7(a) or 2.7(b)
above, Company must prepay in accordance with the terms hereof
the amount, if any, by which the aggregate unpaid principal
amount of Advances exceeds the amount of the Commitment,
taking into account the aforesaid reductions thereof, together
with accrued but unpaid interest on the principal amount of
such prepaid Advances to the date of prepayment. If the
termination or reduction of the Commitment requires the
prepayment of a Eurodollar-based Advance on a day other than
the
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last day of the then current Interest Period applicable to
such Advance, so long as no Default or Event of Default has
occurred and is continuing, Company, rather than immediately
prepaying the Advance, may deposit with the Bank cash
collateral acceptable to the Bank in an amount equal to the
prepayment and required interest payments (to the end of the
then current Interest Payment) to be applied to the Advance at
the end of that Interest Period. Reductions of the Commitment
will not be available for reinstatement by or readvance to the
Company and shall be permanent and irrevocable. If the Company
permanently reduces the Commitment to zero and has satisfied
all of its obligations under this Agreement, this Agreement
shall terminate (except for any provisions which, by their
terms, explicitly survive the termination of this Agreement
and the payment of obligations hereunder).
3. INTEREST, INTEREST PERIODS, CONVERSIONS, PREPAYMENTS.
3.1 Interest. The Note and the Advances thereunder shall bear
interest from the date thereof on the unpaid principal balance thereof from time
to time outstanding, at a rate per annum equal to the Prime-based Rate or the
Eurodollar-based Rate, as the Company may elect subject to the provisions of
this Agreement. With respect to each Prime-based Advance, interest shall be
payable quarterly in arrears on the first Business Day of each March, June,
September and December, commencing on the first such Business Day following the
month during which such Advance is made, and at maturity (whether by
acceleration or otherwise). With respect to each Eurodollar-based Advance,
interest shall be payable on the last day of each Interest Period applicable
thereto. Notwithstanding the foregoing, from and after the occurrence of any
Event of Default and during the continuation thereof, the interest shall be
payable on demand, at a rate per annum equal to: (i) in the case of Prime-based
Advances, two percent (2%) above the Prime-based Rate; and (ii) in the case of a
Eurodollar-based Advance, two percent (2%) above the rate which would otherwise
be applicable under this Section 3.1 until the end of the then current Interest
Period, at which time such Advance shall bear interest at the rate provided for
in clause (i) of this Section 3.1. Interest on all Eurodollar-based Advances
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed. Interest on all Prime-based Advances shall be calculated on the basis
of a 365 or 366 day year, as the case may be, for the actual number of days
elapsed. The interest rate with respect to any Prime-based Advance shall change
on the effective date of any change in the Prime-based Rate.
3.2 Interest Periods. Each Interest Period for a Eurodollar-based
Advance shall commence on the date such Eurodollar-based Advance is made or is
converted from an Advance of another type pursuant to Section 3.3 hereof or on
the last day of the immediately preceding Interest Period for such
Eurodollar-based Advance, and shall end on the date one, two or three months
thereafter, as the Company may elect as set forth below, subject to the
following:
(i) no Interest Period shall extend beyond the Maturity
Date; and
(ii) any Interest Period which would otherwise end on a
day which is not a Business Day shall be extended to
the next succeeding Business Day unless the next
succeeding Business Day falls in another calendar
month, in which case, such Interest Period shall end
on the immediately preceding
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Business Day and when an Interest Period begins on a
day which has no numerically corresponding day in the
calendar month during which such Interest Period is
to end, it shall end on the last Business Day of such
calendar month.
The Company shall elect the initial Interest Period applicable to a
Eurodollar-based Advance by its Request for Advance given to the Bank pursuant
to Section 2.3 or by its notice of conversion given to the Bank pursuant to
Section 3.3, as the case may be. Provided that no Default or Event of Default
shall have occurred and be continuing, the Company may elect to continue an
Advance as a Eurodollar-based Advance by giving irrevocable written, telephonic
or telegraphic notice thereof to the Bank, before 12:00 noon on the third
Business Day before the last day of the then current Interest Period applicable
to such Eurodollar-based Advance, specifying the duration of the succeeding
Interest Period therefor. If the Bank does not receive timely notice of the
election and the Interest Period elected by the Company, the Company shall be
deemed to have elected to convert such Eurodollar-based Advance to a Prime-based
Advance at the end of the then current Interest Period.
3.3 Conversion of Advances. Provided that no Default or Event of
Default shall have occurred and be continuing, the Company may, on any Business
Day, convert any outstanding Advance into an Advance of another type in the same
aggregate principal amount, provided that any conversion of a Eurodollar-based
Advance shall be made only on the last Business Day of the then current Interest
Period applicable to such Advance. If the Company desires to convert an Advance,
it shall give the Bank written, telephonic or telegraphic notice, specifying the
date of such conversion, the Advances to be converted, the type of Advance
elected and, if the conversion is into a Eurodollar-based Advance, the duration
of the first Interest Period therefor, which notice shall be given not later
than 12:00 noon on the third Business Day before the applicable date of
conversion. Each notice of conversion described in this Section 3.3 shall
constitute and include a certification by the Company as of the date hereof as
to the matters set forth in clause (f) of Section 2.3.
3.4 Prime-based Advance in Absence of Election or Upon Default.
If, (a) as to any outstanding Eurodollar-based Advance, Bank has not received
payment of all outstanding principal and accrued interest on the last day of the
Interest Period applicable thereto, or does not receive a timely Request for
Advance meeting the requirements of Section 2 hereof with respect to the
refunding or conversion of such Advance, or (b) subject to Section 3.1 hereof,
if on such day a Default or an Event of Default shall have occurred and be
continuing, then the principal amount thereof which is not then prepaid in the
case of a Eurodollar-based Advance shall be converted automatically to a
Prime-based Advance and the Bank shall thereafter promptly notify the Company of
said action.
4. SPECIAL PROVISIONS, CHANGES IN CIRCUMSTANCES AND YIELD
PROTECTION.
4.1 If Company makes any payment of principal with respect to any
Eurodollar-based Advance on any day other than the last day of the Interest
Period applicable thereto (whether voluntarily, by acceleration, or otherwise),
or if Company fails to borrow any Eurodollar-based Advance after notice has been
given by Company to Bank in accordance with the terms hereof
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requesting such Advance, or if Company fails to make any payment of principal or
interest when due in respect of a Eurodollar-based Advance, Company shall
reimburse Bank on demand for any resulting loss, cost or expense incurred by
Bank as a result thereof, including, without limitation, any such loss, cost or
expense incurred in obtaining, liquidating, employing or redeploying deposits
from third parties, whether or not Bank shall have funded or committed to fund
such Advance. Such amount payable by Company to Bank may include, without
limitation, an amount equal to the excess, if any, of (a) the amount of interest
which would have accrued on the amount so prepaid, or not so borrowed, refunded
or converted, for the period from the date of such prepayment or of such failure
to borrow, refund or convert, through the last day of the relevant Interest
Period, at the applicable rate of interest for said Advance(s) over (b) the
amount of interest (as reasonably determined by Bank) which would have accrued
to Bank on such amount by placing such amount on deposit for a comparable period
with leading banks in the interbank eurodollar market. Calculation of any
amounts payable to Bank under this paragraph shall be made as though Bank shall
have actually funded or committed to fund the relevant Eurodollar-based Advance
through the purchase of an underlying deposit in an amount equal to the amount
of such Advance and having a maturity comparable to the relevant Interest
Period; provided, however, that Bank may fund any Eurodollar-based Advance in
any manner it deems fit and the foregoing assumptions shall be utilized only for
the purpose of the calculation of amounts payable under this paragraph. Upon the
written request of Company, Bank shall deliver to Company a certificate setting
forth the basis for determining such losses, costs and expenses, which
certificate shall be conclusively presumed correct, absent manifest error.
4.2 For any Interest Period for which the Applicable Interest Rate
is the Eurodollar-based Rate, if Bank shall designate a Eurodollar Lending
Office which maintains books separate from those of the rest of Bank, Bank shall
have the option of maintaining and carrying the relevant Advance on the books of
such Eurodollar Lending Office.
4.3 If with respect to any Interest Period Bank reasonably
determines that, by reason of circumstances affecting the foreign exchange and
interbank markets generally, deposits in Eurodollars in the applicable amounts
are not being offered to the Bank for such Interest Period, then Bank shall
forthwith give notice thereof to the Company. Thereafter, until Bank notifies
Company that such circumstances no longer exist, the obligation of Bank to make
Eurodollar-based Advances, and the right of Company to convert an Advance to or
refund an Advance as a Eurodollar-based Advance shall be suspended.
4.4 If, after the date hereof, the introduction or implementation
of, or any change in, any applicable law, rule or regulation or in the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by Bank (or its
Eurodollar Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, shall make it unlawful or impossible
for the Bank (or its Eurodollar Lending Office) to honor its obligations
hereunder to make or maintain any Advance, Bank shall forthwith give notice
thereof to Company. Thereafter (a) the obligations of Bank to make
Eurodollar-based Advances and the right of Company to convert an Advance or
refund an Advance as a Eurodollar-based Advance shall be suspended and
thereafter Company may select only the Prime-based Rate as the Applicable
Interest Rate, and (b) if Bank may not lawfully continue to maintain a
Eurodollar-based Advance to the end of the then current Interest Period
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applicable thereto, the Prime-based Rate shall be the Applicable Interest Rate
for the remainder of such Interest Period.
4.5 If the adoption or implementation after the date hereof, or
any change after the date hereof in, any applicable law, rule or regulation of
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or its
Eurodollar Lending Office) with any request or directive (whether or not having
the force of law) made by any such authority, central bank or comparable agency
after the date hereof:
(a) shall subject Bank (or its Eurodollar Lending Office) to any
tax, duty or other charge with respect to any Advance or the
Note or shall change the basis of taxation of payments to Bank
(or its Eurodollar Lending Office) of the principal of or
interest on any Advance or the Note or any other amounts due
under this Agreement in respect thereof (except for changes in
the rate of tax on the overall net income of Bank or its
Eurodollar Lending Office imposed by any jurisdiction in which
Bank is organized or engaged in business); or
(b) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of
Governors of the Federal Reserve System), special deposit or
similar requirement against assets of, deposits with or for
the account of, or credit extended by Bank (or its Eurodollar
Lending Office) or shall impose on Bank (or its Eurodollar
Lending Office) or the foreign exchange and interbank markets
any other condition affecting any Advance or the Note;
and the result of any of the foregoing is to increase the costs to Bank of
maintaining any part of the indebtedness hereunder or to reduce the amount of
any sum received or receivable by Bank under this Agreement or under the Note,
by an amount deemed by the Bank to be material, then Bank shall promptly notify
Company of such fact and demand compensation therefor and, within fifteen (15)
days after demand by Bank, Company agrees to pay to Bank such additional amount
or amounts as will compensate Bank for such increased cost or reduction. Bank
will promptly notify Company of any event of which it has knowledge which will
entitle Bank to compensation pursuant to this Section. Bank will deliver a
certificate to Company setting forth the basis for determining such additional
amount or amounts necessary to compensate Bank, which certificate shall be
conclusively presumed to be correct save for manifest error. Bank agrees that,
as promptly as practical after it becomes aware of the occurrence of any event
or the existence of a condition that will cause Bank to be entitled to
compensation under this Section, it will, to the extent not inconsistent with
Bank's internal policies, use reasonable efforts to make, fund or maintain any
affected Eurodollar-based Advance through another lending office of Bank if as a
result thereof the additional monies which would otherwise be required to be
paid in respect of such Eurodollar-based Advance would be materially reduced and
if, as determined by Bank, in its reasonable discretion, the making, funding or
maintaining of such Eurodollar-based Advance through such other lending office
would not materially adversely affect such Advance or Bank. Company shall pay
all reasonable expenses incurred by Bank in utilizing another lending office
pursuant to this Section.
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4.6 In the event that at any time after the date of this Agreement
any change in law such as described in Section 4.5 hereof, shall, in the
reasonable opinion of Bank require that the credit provided under Section 2 of
this Agreement be treated as an asset or otherwise be included for purposes of
calculating the appropriate amount of capital to be maintained by Bank or any
corporation controlling Bank and such change has or would have the effect of
reducing the rate of return on Bank's or Bank's parent's capital or assets as a
consequence of Bank's obligations hereunder to a level below that which Bank or
Bank's parent would have achieved but for such change, then Bank shall notify
Company and demand compensation therefor and, within five (5) days after demand
by Bank, Company agrees to pay to Bank such additional amount or amounts as will
compensate Bank for such reduction. Bank will promptly notify Company of any
event of which it has knowledge which will entitle Bank to compensation pursuant
to this Section. A certificate of Bank setting forth the basis for determining
such additional amount or amounts necessary to compensate Bank shall be
conclusively presumed to be correct save for manifest error.
5. CONDITIONS
5.1 The effectiveness of this Agreement and the Bank's obligation
to make any Advances under it are conditioned on Company's furnishing to Bank,
in form and substance to be reasonably satisfactory to Bank, (i) certified
copies of resolutions of the boards of directors or partners, as applicable, of
each Loan Party evidencing approval of the transactions contemplated hereunder
and authorizing the execution and delivery of the Loan Documents, and in the
case of the Company, the requests of Advances hereunder, including incumbency
and signatures of authorized officers of the applicable Loan Party; (ii) a
certificate of good standing from the state of each Loan Party's organization
and from the state(s) in which any of them are required to be qualified to do
business; (iii) copies of each Loan Party's articles of incorporation and bylaws
or other constitutional documents, as in effect on the Effective Date and (iv)
such other documents and instruments as Bank may reasonably require.
5.2 The effectiveness of this Agreement and the Bank's obligation
to make any Advances under it are conditioned on Company's furnishing, executing
and delivering to Bank, or causing to be furnished, executed and delivered to
Bank, the Guaranty, in form to be satisfactory to Bank and supported by
appropriate resolution in certified form authorizing same.
5.3 On the date of execution of this Agreement, Company must pay
to Bank the balance of any fees payable under the terms of the commitment letter
dated January 17, 2003 from Bank to Company, as amended.
5.4 The effectiveness of this Agreement and the Bank's obligation
to make any Advances under it are conditioned on the Bank's receiving evidence
satisfactory to it that the Company and the Subsidiaries have obtained the
insurance policies required by Section 7.3 hereof and that such insurance
policies are in full force and effect.
5.5 The effectiveness of this Agreement and the Bank's obligation
to make any Advances under it are conditioned on the Loan Parties (and any of
their respective Subsidiaries or Affiliates) having each performed and complied
in all material respects with all agreements and conditions contained in this
Agreement, other Loan Documents, or any agreement or other
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document executed thereunder and required to be performed or complied with by
each of them (as of the applicable date) and none of such parties shall be in
material default in the performance or compliance with any of the terms or
provisions hereof or thereof.
5.6 The effectiveness of this Agreement and the Bank's obligation
to make any Advances under it are conditioned on the Loan Parties' furnishing to
Bank opinions of counsel to the Loan Parties, dated the Effective Date and
covering such matters as reasonably required by and otherwise reasonably
satisfactory in form and substance to the Bank.
5.7 The effectiveness of this Agreement and the Bank's obligation
to make the initial Advance under it are conditioned on the Bank's having
received, a certificate of an authorized officer of the Company dated the date
of the making such Advance hereunder, stating that to the best of his or her
knowledge after due inquiry, (a) the conditions set forth in this Section 5 have
been satisfied; (b) the representations and warranties made by Loan Parties in
this Agreement or any of the other Loan Documents, shall have been true and
correct in all material respects when made and shall be true and correct in all
material respects on and as of the Effective Date; (c) no Default or Event of
Default shall have occurred and be continuing; and (d) since March 31, 2002 or
the date of the most recent fiscal year end for which Bank has received the
financial statements required to be delivered under Section 7.1(a), whichever is
later, nothing shall have occurred which the Bank shall reasonably determine has
had, or could reasonably be expected to have, a Material Adverse Effect.
5.8 If the Effective Date has not occurred on or before May 16,
2003, this Agreement shall lapse and be of no further force and effect.
5.9 The obligations of the Bank to make Advances (including the
initial Advance) under this Agreement shall be subject to the occurrence of the
Effective Date and to the continuing conditions that:
(a) No Default or Event of Default shall exist as of the date of
the Advance;
(b) Subject to Section 5.9(c) below, Company and its Subsidiaries
shall be in compliance with the Negative Covenants set forth
in Section 8 at the time of and after giving effect to the
Advance, it being understood that failure to so comply is not
a Default or an Event of Default so long as no Indebtedness is
outstanding under this Agreement;
(c) Company and its Subsidiaries shall have been in compliance
with Sections 8.2, 8.3, 8.5 and 8.12 for the entire period
from the date of this Agreement to the date of the requested
Advance except to the extent such compliance shall have been
waived in writing by Bank in accordance with this Agreement,
provided that, for purposes of this Section 5.9, the Company
and its Subsidiaries shall be deemed to have been in
compliance with Sections 8.2 and 8.3 during such period if
they would have been in such compliance had the limitations in
clauses (i) and (ii) of paragraph (g) of the definition of
Permitted Acquisition each been $200,000,000, rather than
$50,000,000 and $100,000,000, respectively, it being
understood that,
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in any event, failure to so comply is not a Default or Event
of Default so long as no Indebtedness is outstanding under
this Agreement; and
(d) Each of the representations and warranties contained in this
Agreement and in each of the other Loan Documents shall be
true and correct in all material respects as of the date of
the Advance as if made on and as of such date (other than any
representation or warranty that expressly speaks only as of a
different date).
6. REPRESENTATIONS AND WARRANTIES
Company represents and warrants and such representations and warranties
shall be deemed to be made on the date of this Agreement, the date of each
Request for Advance and the date of each Advance.
6.1 Each Loan Party is a corporation (or other business entity)
duly organized and existing in good standing under the laws of the state of its
organization; each Loan Party is in good standing in each jurisdiction in which
it is required to be qualified to do business, except where the failure to be so
qualified would not have a Material Adverse Effect.
6.2 Execution, delivery and performance of the applicable Loan
Documents to which any such Loan Party is a party, are within its powers, having
been duly authorized, are not in contravention of law or such Loan Party's
organizational documents or of the unwaived terms of any indenture, agreement or
undertaking to which such Loan Party is a party or by which it is bound, and do
not require the consent or approval of any governmental body, agency or
authority; and the Loan Documents and other documents and instruments required
under thereunder, when issued and delivered, will be valid and binding on such
Loan Party in accordance with their terms.
6.3 No litigation or other proceeding before any court or
administrative agency is pending, or to the knowledge of the officers of
Company, is threatened against any Loan Party, the outcome of which would
reasonably be expected to have a Material Adverse Effect.
6.4 There are no security interests in, liens, mortgages, or other
encumbrances on any of Company's or any Subsidiary's assets, except to Bank or
as otherwise permitted by this Agreement.
6.5 Neither Company nor any Subsidiary maintains or contributes to
any employee pension benefit plan subject to Title IV of ERISA, except those set
forth in attached Schedule 6.5 (each, a "Pension Plan"). There was no material
unfunded past service liability of any Pension Plan maintained by the Company as
of March 31, 2002, and there is no "accumulated funding deficiency" within the
meaning of Section 302 of ERISA, or any existing material liability with respect
to any Pension Plan owed to the Pension Benefit Guaranty Corporation ("PBGC") or
any successor thereto, except any funding deficiency for which an application to
the PBGC for waiver is pending or for which a waiver has been granted by the
PBGC.
6.6 The financial statements of Company for the fiscal year ended
March 31, 2002 as filed with the SEC and previously furnished by Company to
Bank, fairly present in all material respects the financial condition of Company
and its consolidated Subsidiaries as of such date;
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since said date there has been no material adverse change in the financial
condition of Company and its consolidated Subsidiaries taken as a whole; to the
best of the knowledge of Company's officers, Company does not have any material
contingent obligations (including any liability for taxes) not disclosed by or
reserved against those financial statements, and at the present time there are
no material unrealized or anticipated losses from any present commitment of
Company or any of its Subsidiaries.
6.7 All tax returns and tax reports of Company and its
Consolidated Subsidiaries required by law to have been filed have been duly
filed or extensions obtained, or requested within permitted deadlines and all
taxes, assessments and other governmental charges or levies (other than those
presently payable without penalty and those currently being contested in good
faith for which adequate reserves have been established) upon Company and its
consolidated Subsidiaries (or any of its or their properties) which are due and
payable and for which the failure to pay would materially adversely affect its
business or the value of its property or assets have been paid. The charges,
accruals and reserves on the books of Company in respect of the Federal income
tax for all periods are adequate in the opinion of Company.
6.8 As of the date of this Agreement the Company has no
Subsidiaries other than those listed in Schedule 6.8.
6.9 Except as set forth in Schedule 6.9 and except for such
matters as are not likely to have a Material Adverse Effect:
(a) all facilities and property owned or leased by the Loan
Parties or any of their respective Subsidiaries, are in
material compliance with all Environmental Laws;
(b) to the best knowledge of the Company, there have been no
unresolved and outstanding past, and there are no pending or
threatened
(i) claims, complaints, notices or requests for
information received by any Loan Party or any of
their respective Subsidiaries with respect to any
alleged violation of any Environmental Law, or
(ii) written complaints, notices or inquiries to any Loan
Party or any of their respective Subsidiaries
regarding potential liability of the Loan Parties or
any of their respective Subsidiaries under any
Environmental Law; and
(c) to the knowledge of the Company, no conditions exist at, on or
under any property now or previously owned or leased by the
Loan Parties or any of their respective Subsidiaries which,
with the passage of time, or the giving of notice or both,
would give rise to liability of the Loan Parties or any of
their respective Subsidiaries under any Environmental Law.
6.10 Neither the Company nor any of its Subsidiaries is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. Company is not engaged principally, or as one of its important
activities, directly or indirectly, in the business of extending credit for the
purpose of purchasing or carrying margin stock, and none of the proceeds of any
of the loans hereunder will be used, directly or indirectly, for any purpose
which
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would violate the provisions of Regulation U or X of the Board of Governors of
the Federal Reserve System. Terms for which meanings are provided in Regulation
U of the Board of Governors of the Federal Reserve System or any regulations
substituted therefor, as from time to time in effect, are used in this paragraph
with such meanings.
7. AFFIRMATIVE COVENANTS
Company covenants and agrees that it will and, as applicable, it will
cause its Subsidiaries to, so long as Bank may make any Advance under this
Agreement (regardless of whether any Indebtedness is outstanding under this
Agreement) and thereafter until the irrevocable final payment in full of the
Indebtedness and the performance by the Loan Parties of all other obligations
under this Agreement and the other Loan Documents:
7.1 Furnish Bank:
(a) as soon as available, but in any event within ninety-five (95)
days after the end of each fiscal year of the Company) a copy
of the audited Consolidated financial statements of Company
and its Subsidiaries as at the end of such year and the
related audited statements of income, accumulated earnings,
and cash flows for such year and underlying assumptions,
setting forth in each case in comparative form the figures for
the previous year, with an opinion satisfactory to the Bank
and certified as being fairly stated in all material respects
by a nationally recognized certified public accounting firm
reasonably satisfactory to the Bank (including Company's
current auditors, Deloitte & Touche, LLP), it being understood
and agreed that the delivery by Company of the Company's form
10-K as filed with the Securities and Exchange Commission
("SEC") for the respective fiscal year and within ninety (90)
days after the close thereof shall satisfy the provisions of
this clause (a) to the extent that such form 10-K contains the
information and/or certification required to be delivered
pursuant to this clause (a) and, to the extent that any such
information and/or certification is not otherwise contained in
such form 10-K, such information and/or certification shall be
delivered together with the respective form 10-K;
(b) as soon as available, but in any event not later than fifty
(50) days after the end of each fiscal quarter of Company,
Company prepared unaudited Consolidated financial statements
of Company and its Subsidiaries as at the end of such fiscal
quarter and the related unaudited statements of income,
accumulated earnings and cash flows of Company and its
Subsidiaries for the portion of the fiscal year through the
end of such fiscal quarter, setting forth in each case in
comparative form the figures for the previous year, and
certified by Company; it being understood and agreed that the
delivery by Company of the Company's form 10-Q as filed with
the SEC for the respective fiscal quarter and within forty
five (45) days after the close thereof shall satisfy the
provisions of this clause (b) to the extent that such form
10-Q contains the information and/or certification required to
be delivered pursuant to this clause (b) and, to the extent
that any such information and/or certification is not
otherwise contained in such form 10-Q,
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such information and/or certification shall be delivered
together with the respective form 10-Q;
(c) as soon as available, but in any event not later than fifteen
(15) days after and as of the end of each month a Liquidity
Certificate in the form attached as Exhibit "D";
(d) concurrently with the delivery of each of the financial
statements required by Section 7.1(a) and (b) hereof, a
statement prepared and certified by the chief financial
officer of Company (or in such officer's absence, a
responsible senior officer of Company) (i) setting forth all
computations necessary to show compliance by Company with the
financial covenant contained in Section 7.10 hereof, (ii)
stating that as of the date thereof, no condition or event
which constitutes a Default hereunder or which with the
running of time and/or the giving of notice would constitute
an Event of Default hereunder has occurred and is continuing,
or if any such event or condition has occurred and is
continuing or exists, specifying in detail the nature and
period of existence thereof and any action with respect
thereto taken or contemplated to be taken by Company and (iii)
stating that the signer has personally reviewed this Agreement
and that such certificate is based on an examination
sufficient to assure that such certificate is accurate; and
(e) promptly, and in form to be reasonably satisfactory to Bank,
such other information as Bank may reasonably request from
time to time;
all such financial statements required to be delivered under this Section 7.1 to
be complete and correct in all material respects and to be prepared in
reasonable detail and in accordance with GAAP throughout the periods reflected
therein and consistent with prior periods (except as approved by such officer
and disclosed therein).
7.2 Pay and discharge, and cause its Subsidiaries to pay and
discharge, all taxes and other governmental charges, and all contractual
obligations calling for the payment of money, before the same shall become
overdue except (i) where the failure to do so would not reasonably be expected
to have a Material Adverse Effect or (ii) to the extent only that such payment
is being contested in good faith by appropriate proceedings and reserves in
conformity with GAAP with respect thereto have been provided upon the books of
the Company, provided that, in any event, the Company will, and will cause its
Subsidiaries to pay any such tax, charge or other obligation prior to the
commencement of any proceeding to foreclose any lien securing the same.
7.3 (a) Keep all property material to its business in working
order and (b) maintain, and cause its Subsidiaries to maintain, insurance
coverage on their physical assets and against other business risks in such
amounts and of such types as are consistent with past practice of Company and in
the event of acquisition of additional property, real or personal, or of
incurrence of additional risks of any nature, increase such insurance coverage
in such manner and to such extent as prudent business judgment and present
practice would dictate.
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7.4 Upon reasonable advance notice (unless a Default or Event of
Default has occurred and is continuing in which event such notice shall not be
required) and during normal business hours, permit Bank, through its authorized
attorneys, accountants and representatives, to examine Company's and each
Subsidiary's books, accounts, records, ledgers and assets of every kind and
description at all reasonable times upon oral or written request of Bank, and to
visit all of their respective offices and discuss financial matters with their
respective officers and independent certified public accountants. Company hereby
authorizes such accountants to discuss the finances and affairs of the Loan
Parties and to examine any of its or their books and other corporate records.
7.5 Promptly notify Bank of any condition or event which
constitutes a Default or with the running of time and/or the giving of notice
would constitute an Event of Default under this Agreement, and promptly inform
Bank of the existence or occurrence of any condition or event (other than
conditions having an effect on the economy in general) which could reasonably be
expected to have a Material Adverse Effect.
7.6 Promptly notify Bank of any litigation or other proceeding
before any court or administrative agency that arises, or to the knowledge of
the officers of Company is threatened against any Loan Party after the Effective
Date, the outcome of which would reasonably be expected to have a Material
Adverse Effect.
7.7 Maintain, and cause its Subsidiaries to maintain, in good
standing all licenses required by their respective states of organization or any
agency thereof, or other governmental authority that may be necessary or
required for Company and its Subsidiaries to carry on its general business
objects and purposes, except where the failure to do so would not reasonably be
expected to have a Material Adverse Effect.
7.8 Continue to engage in the business as substantially now
conducted by the Company and its Subsidiaries and businesses related thereto and
preserve, renew and keep in full force and effect its existence and comply with
all contractual obligations, except to the extent that failure to comply
therewith could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect.
7.9 Comply, and cause its Subsidiaries to comply, in all material
respects, with all material requirements imposed by ERISA as presently in effect
or hereafter promulgated, including but not limited to, the minimum funding
standards under Section 302 of ERISA with respect to any Pension Plan and
promptly notify Bank after the occurrence thereof in writing of any of the
following events:
(a) the termination of a Pension Plan pursuant to Subtitle C of
Title IV of ERISA or otherwise (other than any defined
contribution plan not subject to ss.412 of the Internal
Revenue Code of 1986, as amended and any multi-employer plan);
(b) the appointment of a trustee by a United States District Court
to administer a Pension Plan;
(c) the commencement by the PBGC, or any successor thereto, of any
proceeding to terminate a Pension Plan;
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(d) the failure of a Pension Plan to satisfy the minimum funding
requirements for any plan year as established in Section 412
of the Internal Revenue Code of 1986, as amended;
(e) the withdrawal of Company or any Subsidiary from a
"multi-employer" plan, as so defined in Section 4001(a)(3) of
ERISA; or
(f) a reportable event, within the meaning of Title IV of ERISA.
7.10 Maintain as of the end of each fiscal quarter of Company,
Consolidated Net Worth of not less than One Billion Dollars ($1,000,000,000).
7.11 (a) Use and operate all of its facilities and properties in
material compliance with all Environmental Laws, keep all necessary permits,
approvals, certificates, licenses and other authorizations under Environmental
Laws in effect and remain in material compliance therewith, and handle all
Hazardous Materials in material compliance with all applicable Environmental
Laws except where the failure to do so would not reasonably be expected to have
a Material Adverse Effect;
(b) Promptly notify Bank and provide copies upon receipt of all
written claims, complaints, notices or inquiries received by
the Company or any of its Subsidiaries of a material nature
relating to its facilities and properties or compliance with
Environmental Laws, and shall promptly cure all violations of
or noncompliance with all Environmental Laws to the extent
that such violations could reasonably be likely to have a
Material Adverse Effect and shall have dismissed with
prejudice to the satisfaction of the Bank any actions and
proceedings relating to compliance with Environmental Laws to
which Company or any of its Subsidiaries is named a party,
other than such actions or proceedings being contested in good
faith and with the establishment of a reasonable reserve;
(c) To the extent necessary to materially comply with
Environmental Laws, remediate or monitor contamination arising
from a release or disposal of Hazardous Material; and
(d) Provide such information and certifications which Bank may
reasonably request from time to time to evidence compliance
with this Section 7.11.
7.12 Use all Advances as set forth in Section 2.6.
7.13 Promptly after any Subsidiary (including any Subsidiary formed
or acquired after the date of execution and delivery of this Agreement) that is
not a Guarantor becomes a Material Wholly Owned Domestic Subsidiary of the
Company, the Company must cause each such Subsidiary to execute and deliver to
Bank a joinder to the Guaranty under which such Subsidiary becomes a Guarantor
under the Guaranty, together with such other documentation as Bank may
reasonably require, not later than the date upon which such transaction is
consummated.
8. NEGATIVE COVENANTS
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Company covenants and agrees that, so long as any Indebtedness remains
outstanding under this Agreement, it will not, and will cause its Subsidiaries
not to, without the prior written consent of Bank (it being understood that the
Company shall not be obligated under this Section 8 at any time no Indebtedness
is outstanding under this Agreement):
8.1 Create, incur, assume, suffer or permit to exist any Debt,
except:
(a) Indebtedness to Bank;
(b) unsecured trade payables and accrued liabilities arising in
the ordinary course of Company's business (including, without
limitation, obligations under operating leases);
(c) Debt described in the attached Schedule 8.1;
(d) Debt under Hedging Transactions entered into with respect to
Debt permitted under this Section 8.1;
(e) Intercompany loans between the Company and the Guarantors or
among any Guarantors to the extent permitted by Section
8.8(d);
(f) Intercompany loans from Company or any Guarantor to any
Foreign Subsidiary to the extent permitted by Section 8.8(e);
(g) purchase money Debt incurred in connection with the
acquisition of fixed assets in an aggregate amount not
exceeding $25,000,000 at any time outstanding, and any
renewals or refinancing of such Debt in amounts not exceeding
the scheduled amounts (less any required amortization
according to the terms thereof), on substantially the same
terms as in effect on the Effective Date and otherwise in
compliance with this Agreement, provided that no Default or
Event of Default has occurred and is continuing, both before
and after giving effect to the incurrence thereof;
(h) Debt consisting of Guarantee Obligations of Company and its
Subsidiaries of other Debt of the Company and its Subsidiaries
otherwise permitted to be incurred under this Section 8.1;
(i) Debt under Hedging Transactions (other than those permitted
under clause (d) above) providing protection against
fluctuations in currency values in connection with the
Company's or any of its Subsidiaries' operations so long as
management of the Company or such Subsidiary, as the case may
be, has determined in good faith that the entering into of
such Hedging Transactions are bona fide hedging activities and
are not for speculative purposes;
(j) Debt of a Subsidiary existing at the time of a Permitted
Acquisition thereof by the Company or a Subsidiary thereof (or
Debt assumed at the time of such an acquisition of an asset
securing such Debt), provided that such Debt was not incurred
in connection with, or in contemplation of, such acquisition;
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(k) Debt arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts)
drawn against insufficient funds in the ordinary course of
business, so long as such Debt not otherwise constituting Debt
permitted under this Section 8.1 is extinguished within five
Business Days of the incurrence thereof;
(l) Debt in respect of bid, performance, advance payment or surety
bonds entered into in the ordinary course of business and
consistent with past practices;
(m) Debt resulting from mechanics', materialmen's and other
similar liens that arise by operation of law in connection
with goods and services delivered as part of the construction
and furnishing of Company's new headquarters building, in
Detroit, Michigan, provided, however, that the aggregate
amount of such Debt with respect to any such goods and
services does not exceed One Hundred Million Dollars
($100,000,000); and provided further that no more than Ten
Million ($10,000,000) of such Debt is past due at any time,
and that any such past due Debt is being contested in good
faith with provision for adequate reserves;
(n) Guarantee Obligations of Company or any Subsidiary in the
ordinary course of business of the performance of third
parties acting as subcontractors to Company or any Subsidiary
under contracts between Company and its customers and/or
contracts between any Subsidiary and its customers;
8.2 Enter into any merger or consolidation or sell, lease, assign,
transfer, or dispose of all, substantially all, or any part of its assets,
except:
(a) sales of inventory in the ordinary course of its business;
(b) sale or other disposition of obsolete or worn out property,
property no longer useful in the conduct of Company's or a
Subsidiary's business or property from closed offices;
(c) mergers or consolidations of any Subsidiary with or into
Company (so long as Company shall be the continuing or
surviving entity) or with or into any other Subsidiary,
provided that such Subsidiary is a Wholly-owned Subsidiary and
shall be the continuing or surviving entity;
(d) Assets sales permitted by Section 8.5;
(e) Asset Sales in which the sales price is at least the fair
market value of the assets sold and the aggregate amount of
such Asset Sales is less than $25,000,000 in any fiscal year;
(f) sale by Company of Company's headquarters building located at
31440 Northwestern Highway, Farmington Hills, Michigan 48334
and its building located at 33200 West Fourteen Mile Road,
West Bloomfield, Michigan 48322 in connection with Company's
relocation of its headquarters to Detroit, Michigan; and
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(g) mergers or consolidations in connection with Permitted
Acquisitions.
8.3 Other than Permitted Acquisitions, purchase or otherwise
acquire or become obligated for the purchase of all or substantially all of the
assets or business interests of any Person, firm or corporation, or any shares
of stock (or other ownership interests) of any corporation, trusteeship or
association, or any business or going concern, or in any other manner effect or
attempt to effectuate an expansion of present business by acquisition.
8.4 Affirmatively pledge or mortgage any of its assets, whether
now owned or hereafter acquired, or create, suffer or permit to exist any lien,
security interest in, or encumbrance thereon, except:
(a) to Bank;
(b) Permitted Liens;
(c) liens described in attached Schedule 8.4;
(d) liens and security interests securing Debt permitted by
Section 8.1(g) provided that (i) such liens are created upon
fixed assets acquired by Company after the date of this
Agreement (including by virtue of a Capitalized Lease); (ii)
any such lien or security interest is created solely for the
purpose of securing indebtedness representing, or incurred to
finance, the cost of the item of property subject thereto;
(iii) the principal amount of the indebtedness secured by such
lien does not exceed 100% of the fair value of the property at
the time it was acquired; (iv) the lien or security interest
does not cover any property other than such item of property
and (v) the aggregate amount of such liens and security
interests does not at any time exceed $25,000,000;
(e) leases or subleases granted to other Persons not materially
interfering with the conduct of the business of the Company or
any of its Subsidiaries;
(f) Liens arising from precautionary UCC financing statement
filings regarding operating leases;
(g) Liens arising out of the existence of judgments or awards not
constituting an Event of Default under Section 9.1(g),
provided that the aggregate amount of all cash and the fair
market value of all other property pledged or deposited to
secure all such judgments or awards shall not exceed
$25,000,000 at any time outstanding;
(h) any lien existing on any property or asset prior to the
acquisition thereof by the Company or any Subsidiary of the
Company or existing on any property or asset of any Person
that becomes a Subsidiary of the Company after the Effective
Date prior to the time such Person becomes a Subsidiary of the
Company, provided that (i) such lien is not created in
contemplation of or in connection with such acquisition or
such Person becoming a Subsidiary of the Company, as the case
may be, (ii) such lien shall not apply to any other property
or assets of the
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Company or any Subsidiary of the Company and (iii) such Lien
shall secure only those obligations which it secures on the
date of such acquisition or the date such Person becomes a
Subsidiary of the Company, as the case may be and extensions,
renewals and replacements thereof that do not increase the
outstanding principal amount thereof;
(i) other liens incidental to the conduct of the business or the
ownership of the assets of the Company or any Subsidiary that
either (i) (a) were not incurred in connection with borrowed
money and (b) do not secure obligations in excess of
$10,000,000 in the aggregate for all such liens or (ii) were
created by operation of law in connection with goods and
services delivered as part of the construction of Company's
new headquarters building.
8.5 Sell, assign, transfer or confer a security interest in any
account, contract, note, trade acceptance or other receivable, except to Bank
and except for sales of such accounts, contracts, notes, trade acceptances or
other receivables, the collectability of which Company has determined to be
impaired, as part of Company's commercially reasonable procedures for managing
its collections.
8.6 Materially alter the character of its business from that
conducted as of the date of this Agreement.
8.7 Enter into or allow to continue to exist any transaction or
series of transactions with any Affiliate other than on terms and conditions as
favorable to Company as would be obtainable in a comparable arms-length
transaction with a Person other than an Affiliate; provided, however, that
transactions with Affiliates described in the attached Schedule 8.7, in place on
the date of this Agreement may continue to exist and may be extended or renewed
by Company (or a subsidiary, as appropriate) on terms substantially the same as
those currently in effect, notwithstanding the terms of this Section 8.7.
8.8 Make or allow to remain outstanding any investment (whether
such investment shall be of the character of investment in shares of stock,
evidence of indebtedness or other securities or otherwise) in, or any loans or
advances or extensions of credit to, any person, firm, corporation or other
entity or association, except any of the following:
(a) investments of surplus cash in Cash Equivalents;
(b) sales on open account and in the ordinary course of business;
(c) deposits made in the ordinary course of business in order to
obtain goods or services;
(d) intercompany loans, advances and investments in Guarantors or
by any one or more Guarantors in Company;
(e) intercompany loans, advances and investments in Foreign
Subsidiaries not exceeding $50,000,000 in the aggregate at any
time outstanding;
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(f) other loans, advances and investments not exceeding
$25,000,000 in the aggregate at any time outstanding;
(g) Permitted Acquisitions; and
(h) Hedging Transactions.
8.9 Enter into or become or remain subject to any agreement, other
than this Agreement and any other agreement with respect to Debt permitted under
Section 8.1(g) (but only with respect to assets acquired with such Debt), (i)
prohibiting the creation or assumption of any lien or encumbrance upon the
properties or assets of Company or any Subsidiary or (ii) requiring an
obligation to become secured (or further secured) if another obligation is
secured or further secured.
8.10 Directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on (a) the ability of
any Subsidiary of the Company to pay dividends or make any other distributions
on its capital stock or any other interest or participation in its profits owned
by the Company or any Subsidiary of the Company, or pay any Debt owed to the
Company or any Subsidiary of the Company, (b) the ability of any Subsidiary of
the Company to make loans or advances to the Company or any Subsidiary of the
Company, (c) the ability of any Subsidiary of the Company to transfer any of its
properties or assets to the Company or any Subsidiary of the Company.
8.11 Amend, modify or otherwise alter any of the material terms and
conditions of those documents or instruments evidencing or otherwise related to
any Debt set forth on Schedule 8.1, or waive (or permit to be waived) any
provision thereof in any material respect or allow any such amendment,
modification or alteration to remain in effect, in each case without the prior
written approval of Bank.
8.12 Make, permit or consent to any amendment or other modification
to the constitutional documents of any of the Loan Parties except to the extent
that any such amendment (i) does not violate the terms and conditions of this
Agreement or any of the other Loan Documents, and (ii) could not reasonably be
expected to have a Material Adverse Effect.
8.13 Permit the fiscal year of the Company to end on a day other
than March 31.
9. EVENTS OF DEFAULT
9.1 The occurrence of any of the following events shall constitute
an Event of Default hereunder:
(a) non-payment when due of (i) the principal or interest on the
Indebtedness under this Agreement, or (ii) any fees or other
amounts payable by Company hereunder, and in the case of
interest payments and fees, continuance thereof for three (3)
Business Days;
(b) default in the observance or performance of any of the
conditions, covenants or agreements of Company set forth in
Sections 7.1(a) through (d), 7.2, 7.3(b), 7.4,
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7.5, 7.6, 7.8, 7.10, 7.12, 7.13 or Section 8 in its entirety
it being understood, for the avoidance of doubt, that failure
to comply with the terms of Section 8 at any time no
Indebtedness is outstanding hereunder is not an Event of
Default;
(c) default in observance or performance of any of the conditions,
covenants or agreements of Company herein set forth in
Sections 7.3(a), 7.7 and continuance thereof for fifteen (15)
days after notice or when a senior officer of the Company
obtains knowledge thereof;
(d) default in the observance or performance of any of the other
conditions, covenants or agreements of Company herein set
forth, and continuance thereof for a period of thirty (30)
days after notice or when a senior officer of the Company
obtains knowledge thereof;
(e) any representation or warranty made by Company or any other
Loan Party herein or in any instrument submitted pursuant
hereto proves untrue in any material adverse respect when made
or deemed made;
(f) default in the payment of any other obligation of any Loan
Party for borrowed money in an aggregate amount in excess of
Twenty Five Million Dollars ($25,000,000) individually or in
the aggregate when due (whether by acceleration or otherwise)
and continuance thereof beyond any applicable period of cure,
or in the observance or performance of any conditions,
covenants or agreements related or given with respect to any
obligations for borrowed money in an aggregate amount in
excess of Twenty Five Million Dollars ($25,000,000)
individually or in the aggregate when due (whether by
acceleration or otherwise) which continues beyond any
applicable period of cure and which is sufficient to permit
the holder thereof to accelerate the maturity of such
obligation;
(g) judgments for the payment of money in excess of the sum of
Twenty Five Million Dollars ($25,000,000) in the aggregate
shall be rendered against Company or any of its Subsidiaries
and such judgments shall remain unpaid, unvacated, unbonded or
unstayed by appeal or otherwise for a period of twenty one
(21) consecutive days from the date of its entry and such
judgment is not covered by insurance from a solvent insurer
who is defending such action without reservation of rights;
(h) the occurrence of any event, which is determined by the PBGC
to constitute grounds for termination by the PBGC of any
Pension Plan of Company or any Subsidiary or for the
appointment by the appropriate United States District Court of
a trustee to administer such plan, and such event is not
corrected and such determination is not revoked within sixty
(60) days after notice thereof has been given to the plan
administrator or Company or the applicable Subsidiary; or the
institution of proceedings by the PBGC to terminate any such
Pension Plan or to appoint a trustee to administer such plan;
or the appointment of a trustee by the appropriate United
States District Court to administer any such Pension Plan.
(i) a Change of Control shall occur;
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(j) if the Guaranty is revoked or the validity, binding effect or
enforceability of any provision thereof is challenged by any
Loan Party;
(k) any Loan Party shall be dissolved or liquidated (or any
judgment, order or decree therefor shall be entered). If a
creditors' committee shall have been appointed for the
business of the any Loan Party; or if any Loan Party shall
have made a general assignment for the benefit of creditors or
shall have been adjudicated bankrupt and if not an
adjudication based on a filing by Company it shall not have
been dismissed within sixty (60) days, or shall have filed a
voluntary petition in bankruptcy or for reorganization or to
effect a plan or arrangement with creditors or shall fail to
pay or admits in writing its inability or refusal to pay, its
debts generally as such debts become due in the ordinary
course of business (except as contested in good faith and for
which adequate reserves are made in such party's financial
statements); or shall file an answer to a creditor's petition
or other petition filed against it, admitting the material
allegations thereof for an adjudication in bankruptcy or for
reorganization; or shall have applied for or permitted the
appointment of a receiver or trustee or custodian for any of
its property or assets; or such receiver, trustee or custodian
shall have been appointed for any of its property or assets
(other than upon application or consent of any Loan Party) and
shall not have been removed within sixty (60) days; or if an
order shall be entered approving any petition for
reorganization of any Loan Party and shall not have been
reversed or dismissed within sixty (60) days; or any Loan
Party shall take any action (corporate or other) authorizing
or in furtherance any of the actions described above in this
subsection;
(l) any material provision of any Loan Document shall at any time
for any reason cease to be valid, binding and enforceable
against Loan Party or, (other than in accordance with the
terms thereof), as applicable, or the validity, binding effect
or enforceability thereof shall be contested by the any Loan
Party or any Loan Party shall deny that it has any or further
liability or obligation under any Loan Document, or any such
Loan Document shall be terminated (other than in accordance
with the terms thereof), invalidated, revoked or set aside or
in any way cease to give or provide to the Bank the benefits
purported to be created thereby.
9.2 If an Event of Default has occurred and is continuing
hereunder: (a) the Bank may declare the Commitment terminated; (b) the Bank may
declare the entire unpaid principal Indebtedness, immediately due and payable,
without presentment, notice or demand, all of which are hereby expressly waived
by Company; (c) upon the occurrence of any Event of Default specified in
subsection 9.1(k), above, and notwithstanding the lack of any declaration by
Bank, the entire unpaid principal Indebtedness shall become automatically and
immediately due and payable, and the Commitment shall be automatically and
immediately terminated; (d) the Bank may exercise any remedy permitted by this
Agreement, the other Loan Documents or law.
9.3 The remedies provided for herein are cumulative to the
remedies for collection of the Indebtedness as provided by law, in equity or by
any Loan Document. Nothing herein contained is intended, nor shall it be
construed, to preclude Bank from pursuing any other
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remedy for the recovery of any other sum to which Bank may be or become entitled
for the breach of this Agreement by Company.
9.4 Upon the occurrence and during the continuance of any Event of
Default, Bank may at any time and from time to time, without notice to the
Company (any requirement for such notice being expressly waived by the Company),
set off and apply against any and all of the obligations of the Company now or
hereafter existing under this Agreement, any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Bank to or for the credit or the account
of Company, irrespective of whether or not such deposits held or indebtedness
owing by the Bank may be contingent and unmatured. Promptly following any such
setoff, the Bank shall give written notice to Company of the occurrence thereof.
The Company hereby grants to the Bank a lien on and security interest in all
such deposits, indebtedness and property as collateral security for the payment
and performance of all of the obligations of the Company under this Agreement.
The rights of the Bank under this Section 9.4 are in addition to the other
rights and remedies (including, without limitation, other rights of setoff)
which the Bank may have.
9.5 No Event of Default may be waived by the Bank except in a
writing signed by an officer of the Bank. No single or partial exercise of any
right, power or privilege hereunder, nor any delay in the exercise thereof,
shall preclude other or further exercise of its rights by Bank. No waiver of any
Event of Default shall extend to any other or further Event of Default. No
forbearance on the part of the Bank in enforcing any of its rights shall
constitute a waiver of any of its rights. Company expressly agrees that this
Section 9.5 may not be waived or modified by the Bank by course of performance,
estoppel or otherwise.
10. MISCELLANEOUS
10.1 This Agreement shall be binding upon and shall inure to the
benefit of Company and Bank and their respective successors and assigns, except
that the credit provided for under this Agreement and no part thereof and no
obligation of Bank hereunder shall be assignable or otherwise transferable by
Company.
10.2 Company shall pay all closing costs and expenses, including,
by way of description and not limitation, reasonable outside attorney fees
(without duplication of fees and expenses for the same services) and lien search
fees incurred by Bank in connection with the commitment, consummation and
closing of this Agreement or any subsequent amendment of this Agreement or any
other Loan Document. All of said amounts required to be paid by Company may, at
Bank's option if they remain unpaid for fifteen (15) days after payment
therefore is requested by Bank, be charged by Bank as an advance against the
proceeds of the Note. All costs, including reasonable attorney fees incurred by
Bank in protecting or enforcing any of its rights against Company or in
defending Bank from any claims or liabilities by any party or otherwise incurred
by Bank in connection with a Default or an Event of Default (including
evaluation of whether a Default or Event of Default exists or will exist) or the
enforcement of this Agreement or the related documents, including by way of
description and not limitation, such charges in any court or bankruptcy
proceedings or arising out of any claim or action by any person against Bank
which would not have been asserted were it not for Bank's relationship with
Company hereunder, shall also be paid by Company.
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10.3 Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any consolidation or
other accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with GAAP.
10.4 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or the
exercise of any other power, right or privilege. The rights of Bank under this
Agreement are cumulative and not exclusive of any right or remedies which Bank
would otherwise have.
10.5 Except as expressly provided otherwise in this Agreement, all
notices and other communications provided to any party hereto under this
Agreement shall be in writing and shall be given by personal delivery, by mail,
by reputable overnight courier, by telex or by facsimile and addressed or
delivered to it at its address set forth below or at such other address as may
be designated by such party in a notice to the other parties that complies as to
delivery with the terms of this Section 10.5. Any notice, if personally
delivered or if mailed and properly addressed with postage prepaid and sent by
registered or certified mail, shall be deemed given when received; any notice,
if given to a reputable overnight courier and properly addressed, shall be
deemed given two (2) Business Days after the date on which it was sent, unless
it is actually received sooner by the named addressee; and any notice, if
transmitted by telex or facsimile, shall be deemed given when received
(answerback confirmed in the case of telexes and receipt confirmed in the case
of telecopies). Bank may, but shall not be required to, take any action on the
basis of any notice given to it by telephone, but Company shall promptly confirm
such notice in writing or by telex or facsimile, and such notice will not be
deemed to have been received until such confirmation is deemed received in
accordance with the provisions of this Section set forth above. If such
telephonic notice conflicts with any such confirmation, the terms of such
telephonic notice shall control.
To Company:
Compuware Corporation
One Campus Martius
Detroit, MI 48226
Attn: President
Fax No.: (248) 737-7690
With a copy to : General Counsel at the same address and fax
number
To Bank:
One Detroit Center
500 Woodward Avenue
Detroit, Michigan 48226
Attention: Timothy H. O'Rourke and Beverly Jones
Fax No.: (313) 222-9516
10.6 This Agreement and the Note have been delivered at Detroit,
Michigan, and shall be governed by and construed and enforced in accordance with
the laws of the State of
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Michigan. Whenever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement. Company and Bank hereby
irrevocably submit to the non-exclusive jurisdiction of any United States
Federal Court or Michigan state court sitting in Detroit, Michigan in any action
or proceeding arising out of or relating to this Agreement or any of the Loan
Documents and Company and Bank hereby irrevocably agree that all claims in
respect of such action or proceeding may be heard and determined in any such
United States Federal Court or Michigan state court. Company irrevocably
consents to the service of any and all process in any such action or proceeding
brought in any court in or of the State of Michigan by the delivery of copies of
such process to Company at its address specified on the signature page hereto or
by certified mail directed to such address or such other address as may be
designated by Company in a notice to the other parties that complies as to
delivery with the terms of Section 10.5. Nothing in this Section shall affect
the right of the Bank to serve process in any other manner permitted by law or
limit the right of the Bank to bring any such action or proceeding against
Company or any Subsidiary or any of its or their property in the courts with
subject matter jurisdiction of any other jurisdiction. Company hereby
irrevocably waives any objection to the laying of venue of any such suit or
proceeding in the above described courts.
10.7 No amendments or waiver of any provisions of this Agreement
nor consent to any departure by Company therefrom shall in any event be
effective unless the same shall be in writing and signed by the Bank and the
Company, and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given. No
amendment, waiver or consent with respect to any provision of this Agreement
shall affect any other provision of this Agreement.
10.8 All sums payable by Company to Bank under this Agreement or
the other documents contemplated hereby shall be paid directly to Bank at its
principal office set forth in Section 10.5 hereof in immediately available
United States funds, without set off, deduction or counterclaim. In its sole
discretion, Bank may charge any and all deposit or other accounts (including
without limit an account evidenced by a certificate of deposit) of Company with
Bank for all or a part of any Indebtedness then due; provided, however, that
this authorization shall not affect Company's obligation to pay, when due, any
Indebtedness whether or not account balances are sufficient to pay amounts due.
10.9 Any payment of the Indebtedness made by mail will be deemed
tendered and received only upon actual receipt by Bank at the address designated
for such payment, whether or not Bank has authorized payment by mail or any
other manner, and shall not be deemed to have been made in a timely manner
unless received on the date due for such payment, time being of the essence.
Company expressly assumes all risks of loss or liability resulting from
non-delivery or delay of delivery of any item of payment transmitted by mail or
in any other manner. Acceptance by Bank of any payment in an amount less than
the amount then due shall be deemed an acceptance on account only, and the
failure to pay the entire amount then due shall be and continue to be an Event
of Default, and at any time thereafter and until the entire amount then due has
been paid, Bank shall be entitled to exercise any and all rights conferred upon
it herein upon the occurrence of an Event of Default. Upon the occurrence and
during the
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continuance of a an Event of Default, Company waives the right to direct the
application of any and all payments at any time or times hereafter received by
Bank from or on behalf of Company. Upon the occurrence and during the
continuance of an Event of Default, Company agrees that Bank shall have the
continuing exclusive right to apply and to reapply any and all payments received
at any time or times hereafter against the Indebtedness in such manner as Bank
may deem advisable, notwithstanding any entry by Bank upon any of its books and
records. Company expressly agrees that to the extent that Bank receives any
payment or benefit and such payment or benefit, or any part thereof, is
subsequently invalidated, declared to be fraudulent or preferential, set aside
or is required to be repaid to a trustee, receiver, or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then to the
extent of such payment or benefit, the Indebtedness or part thereof intended to
be satisfied shall be revived and continued in full force and effect as if such
payment or benefit had not been made and, further, any such repayment by Bank,
to the extent that Bank did not directly receive a corresponding cash payment,
shall be added to and be additional Indebtedness payable upon demand by Bank.
10.10 In the event Company's obligation to pay interest on the
principal balance of the Note is or becomes in excess of the maximum interest
rate which Company is permitted by law to contract or agree to pay, giving due
consideration to the execution date of this Agreement, then, in that event, the
rate of interest applicable shall be deemed to be immediately reduced to such
maximum rate and all previous payments in excess of such maximum rate shall be
deemed to have been payments in reduction of principal and not of interest.
10.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS.
10.12 This Agreement may be executed in several counterparts, and
each executed copy shall constitute an original instrument, but such
counterparts together shall constitute but one and the same instrument.
10.13 This Agreement, the Note (if issued) and any Requests for
Advance hereunder, and the other Loan Documents contain the entire agreement of
the parties hereto, superseding all prior agreements, discussions and
understandings relating to the subject matter hereof, and none of the parties
shall be bound by anything not expressed in writing. In the event of any
conflict between the terms of this Agreement and the other Loan Documents, this
Agreement shall govern.
10.14 In case any one or more of the obligations of Company under
this Agreement, the Note or any of the other Loan Documents shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining obligations of Company shall not in any way be
affected or impaired thereby, and such invalidity, illegality or
35
<PAGE>
unenforceability in one jurisdiction shall not affect the validity, legality or
enforceability of the obligations of Company under this Agreement, the Note or
any of the other Loan Documents in any other jurisdiction.
10.15 Each covenant hereunder shall be given independent effect
(subject to any exceptions stated in such covenant) so that if a particular
action or condition is not permitted by any such covenant (taking into account
any such stated exception), the fact that it would be permitted by an exception
to, or would be otherwise within the limitations of, another covenant shall not
avoid the occurrence of a Default or an Event of Default.
10.16 All terms, covenants, agreements, representations and
warranties of Company or any party to any of the Loan Documents made herein or
in any of the Loan Documents or in any certificate, report, financial statement
or other document furnished by or on behalf of Company or any Subsidiary in
connection with this Agreement or any of the Loan Documents shall be deemed to
have been relied upon by the Bank, notwithstanding any investigation heretofore
or hereafter made by Bank, and those covenants and agreements of Company set
forth in Section 10.17 hereof (together with any other indemnities of Company or
any Subsidiary contained elsewhere in this Agreement or in any of the other Loan
Documents) shall survive the repayment in full of the Indebtedness and the
termination of the Commitment.
10.17 (a) Company agrees to indemnify and hold Bank harmless from
all loss, cost, damage, liability or expenses, including reasonable outside
attorneys' fees and disbursements (but without duplication of fees and expenses
for the same services), incurred by Bank by reason of an Event of Default, or
enforcing the obligations of Company or any Subsidiary under this Agreement or
any of the other Loan Documents or in the prosecution or defense of any action
or proceeding concerning any matter growing out of or connected with this
Agreement or any of the Loan Documents, excluding, however, any loss, cost,
damage, liability or expenses arising solely as a result of the gross negligence
or willful misconduct of the party seeking to be indemnified under this Section
10.17(a).
(b) Company agrees to defend, indemnify and hold harmless Bank,
and its respective employees, agents, officers and directors
from and against any and all claims, demands, penalties,
fines, liabilities, settlements, damages, costs or expenses of
whatever kind or nature (including without limitation,
reasonable attorneys and consultants fees, investigation and
laboratory fees, environmental studies required by Bank in
connection with the violation of Environmental Laws, court
costs and litigation expenses, excluding however, those
arising solely as a result of the gross negligence or willful
misconduct of the Person seeking indemnification, as the case
may be) arising out of or related to (i) the presence, use,
disposal, release or threatened release of any Hazardous
Materials on, from or affecting any premises owned or occupied
by Company or any of their respective Subsidiaries in
violation of or non-compliance with applicable Environmental
Laws, (ii) any personal injury (including wrongful death) or
property damage (real or personal) arising out of or related
to such Hazardous Materials, (iii) any lawsuit or other
proceeding brought or threatened, settlement reached or
governmental order or decree relating to such Hazardous
Materials, (iv) if any Event of Default exists and remains
uncured, the cost of remediation or monitoring of all
Hazardous
36
<PAGE>
Materials in violation of or non-compliance with applicable
Environmental Laws from all or any portion of any premises
owned by Company or their respective Subsidiaries, (v) if any
Event of Default exists and remains uncured, complying or
coming into compliance with all Environmental Laws and/or (vi)
if any Event of Default exists and remains uncured, any
violation of Environmental Laws. The obligations of Company
under this Section 10.17(b) shall be in addition to any and
all other obligations and liabilities the Company may have to
Bank at common law or pursuant to any other agreement.
10.18 The Company authorizes Bank, in its sole discretion, upon one
Business Day's notice to Company (or without notice if an Event of Default has
occurred and is continuing), to charge its general deposit account(s) maintained
at Bank for the amount of any principal, interest, or other amounts or costs due
under this Agreement when the same become due and payable under the terms of
this Agreement or the Note.
WITNESS the due execution hereof as of the day and year first above
written.
[SIGNATURES ARE ON FOLLOWING PAGE]
37
<PAGE>
COMERICA BANK COMPUWARE CORPORATION
By: /s/ Timothy H. O'Rourke By: /s/ Laura Fournier
------------------------------ ----------------------------------
Timothy H. O'Rourke
Its: Vice President Its: Senior Vice President, Chief
Financial Officer
38
<PAGE>
PROMISSORY NOTE
Detroit, Michigan
$100,000,000 May 2, 2003
On or before the Maturity Date FOR VALUE RECEIVED, COMPUWARE
CORPORATION, a Michigan corporation (herein called "Company") promises to pay to
the order of COMERICA BANK, a Michigan banking corporation (herein called
"Bank") at its Main Office at 500 Woodward Avenue, Detroit, Michigan, in lawful
money of the United States of America the indebtedness or so much of the sum of
One Hundred Million Dollars ($100,000,000) as may from time to time have been
advanced and then be outstanding hereunder pursuant to the Credit Agreement
dated as of May 2, 2003, made by and between Company and Bank (as the same may
be amended or modified from time to time, herein called "Agreement"), together
with interest thereon as hereinafter set forth.
Each of the Advances hereunder shall bear interest at the Applicable
Interest Rate from time to time applicable thereto under the Agreement or as
otherwise determined thereunder, and interest shall be computed, assessed and
payable as set forth in the Agreement.
This Note is a note under which advances, repayments and readvances may
be made from time to time, subject to the terms and conditions of the Agreement.
This Note evidences borrowings under, is subject to, and may be matured under,
the terms of the Agreement, to which reference is hereby made.
Company hereby waives presentment for payment, demand, protest and
notice of dishonor and nonpayment of this Note and agrees that no obligation
hereunder shall be discharged by reason of any extension, indulgence, or
forbearance granted by any holder of this Note to any party now or hereafter
liable hereon. Any transferees of, or endorser, guarantor or surety paying this
Note in full shall succeed to all rights of Bank, and Bank shall be under no
further responsibility for the exercise thereof or the loan evidenced hereby.
Nothing herein shall limit any right granted Bank by other instrument or by law.
All capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Agreement.
COMPUWARE CORPORATION
By: /s/ Laura Fournier
-------------------------------------
Its: Senior Vice President, Chief
Financial Officer
39
<PAGE>
SUBSIDIARY GUARANTY
This GUARANTY is made as of this 2nd day of May, 2003 by the
undersigned guarantors (each a "Guarantor" and any and all collectively, the
"Guarantors") to Comerica Bank ("Bank").
RECITALS
A. Pursuant to that certain Compuware Corporation Credit
Agreement dated as of May 2, 2003 (as amended or otherwise modified from time to
time, the "Credit Agreement") by and between Compuware Corporation, a Michigan
corporation ("Company") and Comerica Bank ("Bank"), the Bank has agreed to
extend credit to the Company on the terms set forth in the Credit Agreement,
with such credit consisting of the revolving credit facility ("Revolving
Credit") in an aggregate amount, subject to the terms of the Credit Agreement,
not to exceed One Hundred Million Dollars ($100,000,000) at any one time
outstanding.
B. As a condition to entering into and performing their
respective obligations under the Credit Agreement, the Bank has required that
each of the Guarantors deliver this Guaranty to the Bank.
C. Each of the Guarantors desires to see the success of the
Company and furthermore, each of the Guarantors shall receive direct and/or
indirect benefits from extensions of credit made or to be made pursuant to the
Credit Agreement to the Company.
D. The business operations of the Company and the Guarantors are
interrelated and complement one another, and such entities have a common
business purpose, with intercompany bookkeeping and accounting adjustments used
to separate their respective properties, liabilities, and transactions; and (i)
to permit their uninterrupted and continuous operations, such entities now
require and will from time to time hereafter require funds and credit
accommodations for general business purposes and (ii) the proceeds of advances
under the Revolving Credit and other credit facilities extended under the Credit
Agreement will directly or indirectly benefit the Company and the Guarantors
hereunder, severally and jointly.
NOW, THEREFORE, to induce Bank to enter into and perform its
obligations under the Credit Agreement, each of the Guarantors has executed and
delivered this guaranty (as amended and otherwise modified from time to time,
this "Guaranty").
1. Definitions. Unless otherwise provided herein, all capitalized
terms in this Guaranty shall have the meanings specified in the Credit
Agreement. The term "Bank" as used herein shall include any successors or
assigns of the Bank in accordance with the Credit Agreement.
2. Guaranty. Each of the Guarantors, hereby, jointly and
severally, guarantees to the Bank the due and punctual payment to the Bank when
due, whether by acceleration or otherwise, of all amounts, including, without
limitation, principal, interest (including interest accruing on or
<PAGE>
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding by or against the Company, whether
or not a claim for post-filing or post-petition interest is allowed in such a
proceeding), and all other liabilities and obligations, direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter
incurred, which may arise under, out of, or in connection with all Indebtedness
under or in connection with the Credit Agreement or the other Loan Documents,
whether such Indebtedness is now existing or hereafter arising including but not
limited to:
(a) the obligations of Company for payment of all sums
loaned, paid out, expended or advanced by or for the account of the Bank under
the terms of the Credit Agreement or the other Loan Documents, in connection
with the Collateral or any of the documents or instruments described in
Guaranty, the Credit Agreement or the other Loan Documents;
(b) all obligations of the Company to the Bank under any
hedging agreements; and
(c) all extensions, renewals and amendments of or to the
Credit Agreement, the Note (if issued thereunder), or such other Indebtedness,
or any replacements or substitutions therefor;
whether on account of principal, interest, reimbursement obligations, fees,
indemnities, and reasonable costs and expenses (including without limitation,
all reasonable fees and disbursements of counsel to the Bank) or otherwise, and
each of the Guarantors hereby jointly and severally agrees that if the Company
shall fail to pay any of such amounts when and as the same shall be due and
payable, or shall fail to perform and discharge any covenant, representation or
warranty in accordance with the terms of the Credit Agreement, or any of the
other Loan Documents (subject, in each case, to any applicable periods of grace
or cure), each of such Guarantors, will forthwith pay to the Bank, an amount
equal to any such amount or cause the Company to do so, and will pay any and all
damages that may be incurred or suffered in consequence thereof by the Bank and
all reasonable expenses, including reasonable attorneys' fees, that may be
incurred by the Bank in enforcing such covenant, representation or warranty of
the Company, and in enforcing the covenants and agreements of this Guaranty.
3. Unconditional Character of Guaranty. The obligations of each
of the Guarantors under this Guaranty shall be absolute and unconditional, and
shall be a guaranty of payment and not of collection, irrespective of the
validity, regularity or enforceability of the Credit Agreement, or any of the
other Loan Documents, or any provision thereof, the absence of any action to
enforce the same, any waiver or consent with respect to or any amendment of any
provision thereof (provided that any amendment of this Guaranty shall be in
accordance with the terms hereof), the recovery of any judgment against any
Person or action to enforce the same, any failure or delay in the enforcement of
the obligations of the Company under the Credit Agreement, or any of the other
Loan Documents, or any setoff, counterclaim, recoupment, limitation, defense or
termination whether with or without notice to the Guarantors. Each of the
Guarantors hereby waives diligence, demand for payment, filing of claims with
any court, any proceeding to enforce any provision of the Credit Agreement, or
any of the other Loan Documents, any right to require a proceeding first against
the Company, or against any other guarantor or other party providing collateral,
or to exhaust any security for the performance of
2
<PAGE>
the obligations of the Company, any protest, presentment, notice or demand
whatsoever, and each Guarantor hereby covenants that this Guaranty shall not be
terminated, discharged or released except, subject to Section 5.8 hereof, upon
final payment in full of all Indebtedness due and to become due from the Company
as and to the extent described above, and only to the extent of any such
payment, performance and discharge. Each Guarantor hereby further covenants that
no security now or subsequently held by the Bank for the payment of the
Indebtedness of the Company to the Bank under the Credit Agreement, or the other
Loan Documents (including, without limitation, any security for any of the
foregoing), whether in the nature of a security interest, pledge, lien,
assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, and
no act, omission or other conduct of the Bank in respect of such security, shall
affect in any manner whatsoever the unconditional obligations of this Guaranty,
and that the Bank in its sole discretion and without notice to any of the
Guarantors, may release, exchange, enforce, apply the proceeds of and otherwise
deal with any such security without affecting in any manner the unconditional
obligations of this Guaranty.
Without limiting the generality of the foregoing, the obligations of
the Guarantors under this Guaranty, and the rights of the Bank to enforce the
same by proceedings, whether by action at law, suit in equity or otherwise,
shall not be in any way affected to the extent permitted by applicable law, by
(i) any insolvency, bankruptcy, liquidation, reorganization, readjustment,
composition, dissolution, winding up or other proceeding involving or affecting
the Company, any or all of the Guarantors or any other person including any
discharge of, or bar or stay against collecting, all or any of the Indebtedness
in or as a result of any such proceeding; (ii) any change in the ownership of
any of the capital stock (or other ownership interests) of the Company or any or
all of the Guarantors, or any other party providing collateral for any
Indebtedness of the Company covered by this Guaranty, or any of their respective
Affiliates; (iii) the election by the Bank, in any bankruptcy proceeding of any
person, to apply or not apply Section 1111(b)(2) of the Bankruptcy Code; (iv)
any extension of credit or the grant of any security interest or lien under
Section 363 of the Bankruptcy Code; (v) any agreement or stipulation with
respect to the provision of adequate protection in any bankruptcy proceeding of
any person; (vi) the avoidance of any security interest or lien in favor of the
Bank for any reason; (vii) any action taken by the Bank that is authorized by
this paragraph or any other provision of this Guaranty; or (viii) any other
principle or provision of law, statutory or otherwise, which is or might be in
conflict with the terms hereof.
Each Guarantor assumes the risk of keeping itself informed concerning
the financial condition of the Company and all other circumstances bearing upon
the risk of nonpayment of the Indebtedness of the Company in favor of the Bank
arising under the Loan Documents.
Each of the Guarantors hereby waives to the fullest extent possible
under applicable law:
(a) any defense based upon the doctrine of marshaling of
assets or upon an election of remedies by the Bank, including, without
limitation, an election to proceed by non-judicial rather than judicial
foreclosure;
(b) any defense based upon any statute or rule of law
which provides that the obligation of a surety must be neither larger in amount
nor in other respects more burdensome than that of the principal;
3
<PAGE>
(c) any duty on the part of the Bank to disclose to such
Guarantor any facts the Bank may now or hereafter know about the Company,
regardless of whether the Bank has reason to believe that any such facts
materially increase the risk beyond that which such Guarantor intends to assume
or has reason to believe that such facts are unknown to such Guarantor or has a
reasonable opportunity to communicate such facts to such Guarantor, since such
Guarantor acknowledges that it is fully responsible for being and keeping
informed of the financial condition of the Company and of all circumstances
bearing on the risk of non-payment of any Indebtedness hereby guaranteed;
(d) prior to the repayment in full of all Indebtedness
and the termination of all commitments under the Credit Agreement, any and all
claims for reimbursement, contribution, exoneration, indemnity or subrogation,
or any other similar claim, which such Guarantor may have or obtain against the
Company, by reason of the existence of this Guaranty, or by reason of the
payment by such Guarantor of any Indebtedness or the performance of this
Guaranty or of any other Loan Documents, and any amounts paid to such Guarantor
on account of any such claim at any time shall be held by such Guarantor in
trust for the Bank, segregated from other funds of such Guarantor, and forthwith
upon receipt by such Guarantor shall be turned over to Bank in the exact form
received by such Guarantor (duly endorsed to Bank by such Guarantor, if
required), to be applied to such Guarantor's obligations under this Guaranty,
whether matured or unmatured, in such order and manner as Bank may determine;
and
(e) any other event or action (excluding compliance by
such Guarantor with the provisions hereof) that would result in the discharge by
operation of law or otherwise of such Guarantor from the performance or
observance of any obligation, covenant or agreement contained in this Guaranty.
Each of the Guarantors acknowledges and agrees that this is a knowing
and informed waiver of the undersigned's rights as discussed above and that the
Bank is relying on this waiver in extending credit to the Company.
The Bank may deal with the Company and any security held by them for
the obligations of the Company in the same manner and as freely as if this
Guaranty did not exist and the Bank shall be entitled, without notice to any of
the Guarantors, among other things, to grant to the Company such extension or
extensions of time to perform any act or acts as may seem advisable to the Bank
at any time and from time to time, and to permit the Company to incur additional
indebtedness to the Bank without terminating, affecting or impairing the
validity or enforceability of this Guaranty or the obligations of the Guarantors
hereunder. Each Guarantor waives all rights to participate in any security now
or hereafter held by the Bank or any Bank.
The Bank may proceed, either in its own name or in the name of each or
any of the Guarantors, or otherwise, to protect and enforce any or all of its
rights under this Guaranty by suit in equity, action at law or by other
appropriate proceedings, or to take any action authorized or permitted under
applicable law, and shall be entitled to require and enforce the performance of
all acts and things required to be performed hereunder by the Guarantors. Each
and every remedy of the Bank shall, to the extent permitted by law, be
cumulative and shall be in addition to any other remedy given hereunder or now
or hereafter existing at law or in equity.
4
<PAGE>
No waiver or release shall be deemed to have been made by the Bank of
any of its rights hereunder unless the same shall be in writing and signed by or
on behalf of the Bank as determined pursuant to the Credit Agreement, and any
such waiver shall be a waiver or release only with respect to the specific
matter and Guarantor or Guarantors involved, and shall in no way impair the
rights of the Bank or the obligations of the Guarantors under this Guaranty in
any other respect at any other time.
At the option of the Bank, any or all of the Guarantors may be joined
in any action or proceeding commenced by the Bank against the Company or any of
the other parties providing Collateral for any Indebtedness covered by this
Guaranty in connection with or based upon the Credit Agreement, or any of the
other Loan Documents or other Indebtedness, or any provision thereof, and
recovery may be had against any or all of the Guarantors in such action or
proceeding or in any independent action or proceeding against any of them,
without any requirement that the Bank first assert, prosecute or exhaust any
remedy or claim against the Company and/or any of the other parties providing
Collateral for any Indebtedness covered by this Guaranty.
4. Representations and Warranties. Each Guarantor (i) ratifies,
confirms and, by reference thereto (as fully as though such matters were
expressly set forth herein), represents and warrants with respect to itself
those matters set forth in Section 6 of the Credit Agreement to the extent
applicable to such Guarantor and those matters set forth in the recitals, and
such representations and warranties shall be deemed to be continuing
representations and warranties true and correct in all material respects so long
as this Guaranty shall be in effect; and (ii) agrees not to engage in any action
or inaction, the result of which would cause a violation of any term or
condition of the Credit Agreement.
5. Miscellaneous.
5.1 Governing Law. This Guaranty has been delivered in Michigan
and shall be interpreted and the rights of the parties hereunder shall be
determined under the laws of, and be enforceable in, the State of Michigan.
5.2 Severability. If any term or provision of this Guaranty or the
application thereof to any circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Guaranty, or the application of such term
or provision to circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Guaranty shall be valid and enforceable to the fullest extent permitted by
law.
5.3 Notice. All notices or other communications to be made or
given pursuant to this Guaranty shall be sufficient if made or given as provided
in Section 10.5 of the Credit Agreement; or at such other addresses as directed
by any of such parties to the others, as applicable, in compliance with this
paragraph.
5.4 Right of Offset. Each of the Guarantors acknowledges the
rights of the Bank, subject to the applicable terms and conditions of the Credit
Agreement, to offset against the Indebtedness of any Guarantor to the Bank under
this Guaranty, any amount owing by the Bank
5
<PAGE>
to such Guarantors, whether represented by any deposit of such Guarantors (or
any of them) with the Bank or otherwise.
5.5 Right to Cure. Each of the Guarantors shall have the right to
cure any Event of Default under the Credit Agreement or the other Loan Documents
with respect to obligations of the other Guarantors thereunder; provided that
such cure is effected within the applicable grace period or period for cure
thereunder, if any; and provided further that such cure can be effected in
compliance with the Credit Agreement. Except to the extent of payments of
principal, interest and/or other sums actually received by the Bank pursuant to
such cure, the exercise of such right to cure by any Guarantor shall not reduce
or otherwise affect the liability of any other Guarantor under this Guaranty.
5.6 Amendments. The terms of this Guaranty may not be waived,
altered, modified, amended, supplemented or terminated in any manner whatsoever
except as provided herein and in accordance with the Credit Agreement. In
accordance with Section 7.13 of the Credit Agreement, future Wholly Owned
Domestic Subsidiaries (as defined in the Credit Agreement) of Company and the
Company shall become obligated as Guarantors hereunder (each as fully as though
an original signatory hereto) by executing and delivering to the Bank that
certain joinder agreement in the form attached to this Guaranty as Exhibit A.
5.7 Joint and Several Obligation, etc. The obligation of each of
the Guarantors under this Guaranty shall be several and also joint, each with
all and also each with any one or more of the others, and may be enforced
against each severally, any two or more jointly, or some severally and some
jointly. Any one or more of the Guarantors may be released from its obligations
hereunder with or without consideration for such release and the obligations of
the other Guarantors hereunder shall be in no way affected thereby. The Bank may
fail or elect not to prove a claim against any bankrupt or insolvent Guarantor
and thereafter, the Bank may, without notice to any Guarantors, extend or renew
any part or all of any Indebtedness of the Company under the Credit Agreement or
otherwise, and may permit any such Person to incur additional Indebtedness,
without affecting in any manner the unconditional obligation of each of the
Guarantors hereunder. Such action shall not affect any right of contribution
among the Guarantors.
5.8 Release. Upon the satisfaction of the obligations of the
Guarantors hereunder, and when none of the Guarantors is subject to any
obligation hereunder or under the Credit Agreement or any of the other Loan
Documents, the Bank shall deliver to such Guarantors, upon written request
therefor, a written release of this Guaranty, provided however that, the
effectiveness of this Guaranty shall continue or be reinstated, as the case may
be, in the event: (x) that any payment received or credit given by the Bank is
returned, disgorged, rescinded or required to be recontributed to any party as
an avoidable preference, impermissible setoff, fraudulent conveyance,
restoration of capital or otherwise under any applicable state, federal or law
of any jurisdiction, including laws pertaining to bankruptcy or insolvency, and
this Guaranty shall thereafter be enforceable against the Guarantors as if such
returned, disgorged, recontributed or rescinded payment or credit has not been
received or given by the Bank, and whether or not the Bank relied upon such
payment or credit or changed its position as a consequence thereof or (y) that
any liability is imposed, or sought to be imposed against the Bank relating to
the environmental condition of any of property mortgaged or pledged to the
6
<PAGE>
Bank by any Guarantor, Company or any other party as collateral (in whole or
part) for any indebtedness or obligation evidenced or secured by this Guaranty,
whether such condition is known or unknown, now exists or subsequently arises
(excluding only conditions which arise after acquisition by the Bank or any Bank
of any such property, in lieu of foreclosure or otherwise, due to the wrongful
act or omission of the Bank, or any person other than the Company, the
Subsidiaries, or Affiliates of the Company or the Subsidiaries), and this
Guaranty shall thereafter be enforceable against the Guarantors to the extent of
all such liabilities, costs and expenses (including reasonable attorneys' fees)
incurred by the Bank as the direct or indirect result of any such environmental
condition but only for which the Company is obligated to the Bank pursuant to
the Credit Agreement. For purposes of this Guaranty "environmental condition"
includes, without limitation, conditions existing with respect to the surface or
ground water, drinking water supply, land surface or subsurface strata and the
ambient air.
5.9 Consent to Jurisdiction. Each of the Guarantors hereby
irrevocably submits to the non-exclusive jurisdiction of any United States
federal or Michigan state court sitting in Detroit in any action or proceeding
arising out of or relating to this Guaranty or any of the other Loan Documents
and Guarantors hereby irrevocably agree that all claims in respect of such
action or proceeding may be heard and determined in any such United States
federal or Michigan state court. Each of the Guarantors irrevocably consents to
the service of any and all process in any such action or proceeding brought in
any court in or of the State of Michigan (and to the receipt of any and all
notices hereunder) by the delivery of copies of such process to Guarantors at
their respective addresses specified in Section 5.3 hereof in the manner set
forth therein.
5.10 JURY TRIAL WAIVER. EACH OF THE GUARANTORS (AND THE BANK BY
ACCEPTING THE BENEFITS HEREOF) HEREBY IRREVOCABLY AGREES TO WAIVE THE RIGHT TO
TRIAL BY JURY WITH RESPECT TO ANY AND ALL ACTIONS OR PROCEEDINGS IN WHICH THE
BANK, ON ONE HAND, AND THE COMPANY OR ANY OF THE GUARANTORS, ON THE OTHER HAND,
ARE PARTIES, WHETHER OR NOT SUCH ACTIONS OR PROCEEDINGS ARISE OUT OF THIS
GUARANTY OR THE OTHER LOAN DOCUMENTS OR OTHERWISE.
5.11 Limitation under Applicable Insolvency Laws. Notwithstanding
anything to the contrary contained herein, it is the intention of the
Guarantors, the Bank that the amount of the respective Guarantor's obligations
hereunder shall be in, but not in excess of, the maximum amount thereof not
subject to avoidance or recovery by operation of applicable law governing
bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors,
dissolution, insolvency, fraudulent transfers or conveyances or other similar
laws (collectively, "Applicable Insolvency Laws"). To that end, but only in the
event and to the extent that the Guarantor's respective obligations hereunder or
any payment made pursuant thereto would, but for the operation of the foregoing
proviso, be subject to avoidance or recovery under Applicable Insolvency Laws,
the amount of the Guarantor's respective obligations hereunder shall be limited
to the largest amount which, after giving effect thereto, would not, under
Applicable Insolvency Laws, render the Guarantor's respective obligations
hereunder unenforceable or avoidable or subject to recovery under Applicable
Insolvency Laws. To the extent any payment actually made hereunder exceeds the
limitation contained in this Section 5.11, then the amount of such excess shall,
from and after the time of payment by the Guarantors (or any of them), be
reimbursed by the Bank upon demand by such Guarantors. The foregoing proviso is
intended
7
<PAGE>
solely to preserve the rights of the Bank hereunder against the Guarantors to
the maximum extent permitted by Applicable Insolvency Laws and neither the
Company nor any Guarantor nor any other Person shall have any right or claim
under this Section 5.11 that would not otherwise be available under Applicable
Insolvency Laws.
[SIGNATURES FOLLOW ON SUCCEEDING PAGES]
8
<PAGE>
IN WITNESS WHEREOF, each of the undersigned Guarantors has executed
this Guaranty as of the date first above written.
COMPUWARE INTERNATIONAL I LLC
By: Compuware Corporation
Its: Sole Member
By: /s/ Laura Fournier
-------------------------------------
Its: Senior Vice President, Chief
Financial Officer
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.90
<SEQUENCE>4
<FILENAME>k77829exv10w90.txt
<DESCRIPTION>PHANTOM STOCK PLAN
<TEXT>
<PAGE>
EXHIBIT 10.90
COMPUWARE CORPORATION
2002 DIRECTORS PHANTOM STOCK PLAN
1. DEFINITIONS. As used in this Plan, the following terms shall have the
following meanings:
(a) "Award" shall mean an award of Phantom Shares granted pursuant to
Section 6 of this Plan.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cause" shall mean termination for (1) the Participant's continued
failure to make a good faith effort to perform the Participant's duties,
(2) any willful act or omission by the Participant that the Participant
knew or had reason to know would injure the Company or any of its
subsidiaries, (3) the Participant's fraud, (4) the Participant's
dishonesty, or (5) the Participant's commission of a felony, or the
Participant's violation of any law relating to the Participant's service as
a member of the Board of Directors.
(d) "Committee" shall mean the Compensation Committee of the Board of
Directors or any other committee meeting the standards of Rule 16b-3 under
the Exchange Act, or any similar successor rule, appointed or designated by
the Board of Directors to perform any of the functions and duties of the
Committee under this Plan, or, if so designated by the Board of Directors,
the Board of Directors as a whole.
(e) "Company" shall mean Compuware Corporation, a Michigan
corporation, or any successor of Compuware Corporation.
(f) "Discretion" shall mean the sole discretion of the Committee, with
no requirement whatsoever that the Committee follow past practices, act in
a manner consistent with past practices, or treat any director in a manner
consistent with the treatment afforded other directors with respect to this
Plan or otherwise.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
(h) "Participant" shall mean any member of the Board of Directors who
is not an employee of the Company.
(i) "Phantom Share" shall mean the right to receive the Value of a
share of the Company's common stock in cash from the Company. Such right
shall be subject to the vesting and other terms and conditions of this Plan
and the agreement between the recipient of the Phantom Share and the
Company entered into at the time such Phantom Share was granted.
(j) "Plan" shall mean this Compuware Corporation 2002 Directors
Phantom Stock Plan, as amended from time to time as provided herein.
(k) "Value" as of any particular date shall mean the average of the
high and low sale prices per share of the Company's common stock on the
Nasdaq Stock Market ("NSM") for the most recent day prior to such date on
which the Company's common stock was traded on the NSM. If the Company's
common stock is not listed for trading on the NSM, (1) the
<PAGE>
last reported sale price per share on the securities exchange (or, if there
is more than one, the principal such exchange) on which the Company's
common stock is then traded; (2) if the Company's common stock is not then
listed for trading on any securities exchange or the NSM but bid and ask
information is reported by Nasdaq or another generally accepted reporting
service, the average of the high bid and low asked prices per share of the
Company's common stock, as so reported by Nasdaq or, if not reported by
Nasdaq, another generally accepted reporting service; (3) if none of the
foregoing is applicable, the fair market value of a share of Company common
stock as of the relevant date, as determined by the Committee.
2. PURPOSES OF PLAN. The purposes of this Plan are (a) to provide
directors of the Company with an increased incentive to make significant
and extraordinary contributions to the long-term performance and growth of
the Company, (b) to join the interests of directors with the interests of
the shareholders of the Company, and (c) to facilitate attracting and
retaining directors of exceptional ability.
3. ADMINISTRATION. This Plan shall be administered by the Committee.
Subject to Section 6(a) and the other provisions of this Plan, the
Committee shall determine, from those eligible to be Participants under
this Plan, the persons to be granted Awards, the amount of the Award
granted to each such person, the time such Award shall be granted and the
terms and conditions of any Award. Subject to the provisions of this Plan,
the Committee is authorized to interpret this Plan, to promulgate, amend
and rescind rules and regulations relating to this Plan and to make all
other determinations necessary or advisable for its administration.
Interpretation and construction of any provision of this Plan by the
Committee shall, unless otherwise determined by the Board of Directors, be
final and conclusive. A majority of the Committee shall constitute a
quorum, and the acts of a majority of the members present at any meeting at
which a quorum is present, or acts approved in writing by a majority of the
Committee, shall be the acts of the Committee.
4. INDEMNIFICATION OF COMMITTEE MEMBERS. In addition to such other rights
of indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with this Plan or any Award granted hereunder to the full extent
provided for under the Company's articles of incorporation or bylaws with
respect to indemnification of directors of the Company; provided, however,
that within 60 days after receipt of notice of institution of any such
claim, action, suit or proceeding the Committee member shall offer the
Company in writing the opportunity, at its own cost, to handle and defend
such claim, action, suit or proceeding.
5. ADJUSTMENTS. The number of Phantom Shares subject to each outstanding\
Award shall be subject to such adjustment as the Committee, in its
Discretion, deems appropriate to reflect such events as stock dividends,
stock splits, recapitalizations, mergers, statutory share exchanges or
reorganizations of or by the Company. Notwithstanding any other provision
of this Plan, under no circumstances may any shares of the Company's common
stock be issued or issuable pursuant to this Plan.
6. AWARDS.
(a) Automatic Grants. On each April 1 during the term of the Plan,
beginning with April 1, 2002, each Participant serving on such date shall
automatically receive an Award of the number of Phantom Shares equal to the
Value of $10,000 evidenced by an agreement
<PAGE>
substantially in the form attached to this Plan as Exhibit A. Awards to
Participants serving on the Board of Directors on April 1, 2002 shall be
made on the date of the adoption of this Plan by the Board of Directors.
Subject to Section 9, the Phantom Shares subject to each Award granted
pursuant to this Section 6(a) hereunder shall vest and become payable on
the date the holder of the Phantom Shares ceases to be a member of the
Board of Directors.
(b) Discretionary Grants. The Committee shall have the authority to
grant Awards to such Participants and for such number of Phantom Shares as
it shall designate. Such Awards may include such other provisions, such as
performance goals, as the Committee may determine.
(c) General. Each Award granted pursuant to paragraphs (a) or (b) of
this Plan shall be evidenced by an agreement between the Participant
receiving the Award and the Company that shall specify the terms thereof,
including the vesting terms, the number of Phantom Shares subject to the
Award, and such other provisions as are determined by the Committee and
which are not inconsistent with the terms of this Plan. Such provisions
may, in the Committee's Discretion, include, without limitation, a
provision terminating the Award if the Participant competes with the
Company or otherwise acts contrary to the Company's interests. The
Committee may condition any grant on the potential Participant's agreement
to such terms and conditions. Any Participant may hold more than one Award.
7. PAYMENT. Upon the vesting of any Phantom Shares, the Company shall pay
the Value of such vested Phantom Shares in cash to the Participant. The
amount of such payment shall be equal to the number of Phantom Shares then
vested (and not previously paid) multiplied by the Value. No Participant
shall have any of the rights of a shareholder of the Company with respect
to any Award or Phantom Shares, including without limitation any voting
rights or rights to receive dividends.
8. TRANSFERABILITY OF AWARD. No Phantom Shares or Award granted under this
Plan shall be transferable other than (a) by will, (b) by the laws of
descent and distribution, or (c) pursuant to a qualified domestic relations
order as defined in the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. Payments with respect to Phantom
Shares and any Award under this Plan shall be payable, during the lifetime
of the Participant, only to the Participant.
9. TERMINATION. Notwithstanding the terms of Section 6, if a Participant
is removed from the Board of Directors for Cause in accordance with
applicable law, all unvested Phantom Shares held by such Participant shall
terminate and be forfeited to the Company on the date that such Participant
ceases to be a member of the Board of Directors.
10. NO FURTHER RIGHT TO CONTINUE AS A DIRECTOR. Nothing contained in this
Plan or in any Award granted pursuant to this Plan, nor any action taken by
the Committee under this Plan, shall confer upon any Participant any right
to continue in office as a director of the Company.
11. WITHHOLDING PAYMENTS. The Company shall have the right to withhold from
a Participant's payment or require a Participant to remit sufficient funds
to satisfy applicable withholding tax obligations upon the making of any
payment following the vesting of Phantom Shares, upon such terms and
conditions as the Committee or the related Award agreement shall prescribe.
The Committee may make such other arrangements with respect to income tax
withholding as it shall deem appropriate.
<PAGE>
12. EFFECTIVENESS OF PLAN. This Plan shall be effective on the date the
Board of Directors adopts this Plan.
13. TERMINATION, DURATION AND AMENDMENTS TO THIS PLAN. This Plan shall
continue in effect until abandoned or terminated by the Board of Directors
by resolution approved in accordance with the bylaws of the Company. The
termination of this Plan shall not affect the validity of any Award which
is outstanding on the date of termination. For the purpose of conforming to
any changes in applicable law or governmental regulations, or for any other
lawful purpose, the Board of Directors shall have the right, without
approval of the shareholders of the Company or any Participant, to amend or
revise the terms of this Plan or any Award agreement under this Plan at any
time; provided, however, that any such amendment shall be in writing; and
provided, further, that no such amendment or revision, other than an
amendment or other revision made to correct an administrative error, shall
materially alter or impair any Award which shall have been previously
granted under this Plan in a manner adverse to the Participant holding such
Award without the consent of such Participant.
As adopted by the Board of Directors on January 23, 2003.
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>k77829exv21.txt
<DESCRIPTION>SUBSIDIARIES OF REGISTRANT
<TEXT>
<PAGE>
.
.
.
EXHIBIT 21.1
COMPUWARE CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
Compuware A.B............................................ Sweden
Compuware AG............................................. Switzerland
Compuware Nordic AS...................................... Norway
Compuware A/S............................................ Denmark
Compuware Asia-Pacific Holdings Ltd...................... Hong Kong
Compuware Asia Pacific Limited........................... Hong Kong
Compuware Asia Pacific Pte. Ltd.......................... Singapore
Compuware Asia-Pacific Pty. Ltd.......................... Australia
Compuware B.V............................................ Netherlands
Compuware Corporation of Canada.......................... Canada
Compuware de Mexico...................................... Mexico
Compuware do Brasil S/A.................................. Brazil
Compuware Europe B.V..................................... Netherlands
Compuware Foreign Sales Corporation...................... Barbados
Compuware Global Services, Inc........................... Michigan
Compuware Austria GmbH................................... Austria
Compuware International I LLC............................ Michigan
Compuware Japan Corporation.............................. Japan
Compuware Korea Ltd...................................... Korea
Compuware Ltd............................................ United Kingdom
Compuware NV/SA.......................................... Belgium
Compuware Overseas Holding Corporation................... Michigan
Compuware S.A............................................ Spain
Compuware S.A.R.L........................................ France
Compuware GmbH........................................... Germany
Compuware System Software B.V............................ Netherlands
Compuware SpA............................................ Italy
Reliant Data Systems Inc. ............................... Delaware
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>k77829exv23.txt
<DESCRIPTION>INDEPENDENT AUDITORS CONSENT
<TEXT>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-68808, 333-57984, 333-79821, 333-70549, 333-43971, 333-37873, 333-17263,
33-57364, 333-4522 and 33-70852 of Compuware Corporation on Form S-8 of our
reports dated May 6, 2003, (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the adoption of FASB 142 "Goodwill
and Other Intangible Assets") appearing in this Annual Report on Form 10-K of
Compuware Corporation for the year ended March 31, 2003.
DELOITTE & TOUCHE (LLP)
June 23, 2003
Detroit, Michigan
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>7
<FILENAME>k77829exv99w1.txt
<DESCRIPTION>906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
<TEXT>
<PAGE>
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Compuware Corporation (the "Company") on
Form 10-K for the fiscal year ending March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Peter Karmanos,
Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Peter Karmanos, Jr.
- -----------------------------------
Peter Karmanos, Jr.
Chief Executive Officer
June 23, 2003
A signed original or this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>8
<FILENAME>k77829exv99w2.txt
<DESCRIPTION>906 CERTIFICATION OF CHIEF FINANCIAL OFFICER
<TEXT>
<PAGE>
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Compuware Corporation (the "Company") on
Form 10-K for the fiscal year ending March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Laura L. Fournier,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Laura L. Fournier
- --------------------------------
Laura L. Fournier
Chief Financial Officer
June 23, 2003
A signed original or this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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