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<SEC-DOCUMENT>0000950124-04-002732.txt : 20040608
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<ACCEPTANCE-DATETIME>20040608170847
ACCESSION NUMBER: 0000950124-04-002732
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20040331
FILED AS OF DATE: 20040608
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: 04854308
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>
<DOCUMENT>
<TYPE>10-K
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<FILENAME>k85711e10vk.txt
<DESCRIPTION>ANNUAL REPORT FOR FISCAL YEAR ENDED 03/31/04
<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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number: 000-20900
COMPUWARE CORPORATION
-------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CAMPUS MARTIUS, DETROIT, MI 48226-5099
------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (313) 227-7300
Securities registered pursuant to Section 12(b) of the Act: 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. [X]
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, 2003, the last business day of the registrant's
most recently completed second fiscal quarter, was $1,619,244,996, based upon
the closing sales price of the common stock on that date of $5.36 as reported on
the NASDAQ Stock Market. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are assumed to
be affiliates. Such determination should not be deemed an admission that such
officers, directors and beneficial owners are, in fact, affiliates of the
registrant.
There were 386,179,270 shares of $.01 par value common stock outstanding as of
June 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2004 Annual
Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A
are incorporated by reference in Part III.
1
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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 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 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 30
8. Consolidated Financial Statements and Supplementary Data 32
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 56
9A. Controls and Procedures 56
PART III
10. Directors and Executive Officers of the Registrant 57
11. Executive Compensation 57
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 57
13. Certain Relationships and Related Transactions 57
14. Principal Accountant Fees and Services 57
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 58
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
We provide software products and professional services designed to increase the
productivity of the information technology, or IT, departments of businesses
worldwide. In the early years of our company, we focused on offering
professional services and mainframe products in the testing and implementation
environment where we gained extensive experience and established long-term
customer relationships. Over the past several years, we have expanded our
presence into products and professional services in the application development
and integration, quality assurance, production readiness and production
availability areas of the application life cycle. We extended our offerings to
include application services by acquiring certain assets of Covisint LLC
(Covisint) effective March 1, 2004. Covisint provides business-to-business
applications and communication services that connect the global automotive
industry. Additionally, we acquired Changepoint Corporation in May 2004.
Changepoint offerings help IT organizations by providing critical insight into
IT spending, operations and management. Initial technology integration plans,
while still under development, suggest outstanding synergy between Compuware's
application development, testing and performance management tools and
Changepoint's IT governance solution. This combined solution will offer Chief
Information Officers unmatched insight and visibility into their people,
projects, resources and applications, helping technology leaders align IT
investments with business priorities.
We were incorporated in Michigan in 1973. Our executive offices are located at
One Campus Martius, Detroit, Michigan 48226-5099, and our telephone number is
(313) 227-7300.
We operate in two business segments in the software and technology services
industries: products and professional 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 business strategy is to provide a broad range of software and professional
services offerings to the largest users of information technology in the world.
Our solutions are focused on providing a real return on investment to our
clients by increasing productivity, efficiency, and visibility into their IT
applications throughout the application lifecycle. Our solutions and
professional services are in the IT Governance, application development, quality
assurance, production management and application services environments. Our
strategy is to support the most widely used technologies and platforms
implemented by the largest users of information technology in the world
including mainframe, distributed, Java, .Net, Windows, Unix, Linux, Oracle, and
SAP.
Companies with IT 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 professional services offerings.
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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.
PRODUCTS
The following table sets forth, for the periods indicated, a breakdown of
license and maintenance 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 2004 2003 2002 2004 2003 2002
--------- --------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
File-AID $ 169,063 $ 182,224 $ 230,820 13.4% 13.2% 13.3%
Abend-AID 138,943 155,769 186,827 11.0 11.3 10.7
XPEDITER 113,647 110,880 136,848 9.0 8.1 7.9
QA Center Mainframe 20,004 24,527 30,880 1.6 1.8 1.8
STROBE 85,653 80,080 101,911 6.8 5.8 5.8
--------- --------- --------- ---- ---- ----
Total Mainframe Revenue 527,310 553,480 687,286 41.8 40.2 39.5
--------- --------- --------- ---- ---- ----
UNIFACE and Optimal 45,420 42,283 43,353 3.6 3.1 2.5
DevPartner 27,557 24,290 26,722 2.2 1.8 1.5
QA Center & File-AID/Client Server 39,141 34,691 36,524 3.1 2.5 2.1
Vantage 65,390 53,152 57,497 5.1 3.9 3.3
--------- --------- --------- ---- ---- ----
Total Distributed Product Revenue 177,508 154,416 164,096 14.0 11.3 9.4
--------- --------- --------- ---- ---- ----
Total Product Revenue $ 704,818 $ 707,896 $ 851,382 55.8% 51.5% 48.9%
========= ========= ========= ==== ==== ====
</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.
IT GOVERNANCE--IT Governance by Changepoint allows IT organizations to evaluate
all of these projects providing Chief Information Officers with critical insight
into IT spending, operations and management.
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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 products 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 products 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 five product lines:
UNIFACE and Optimal, DevPartner, QACenter and File-AID/CS, Vantage and IT
Governance by Changepoint.
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.
UnifaceView is our business integration portal product. As a packaged, web-based
portal application, UnifaceView 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. UnifaceView 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.
UnifaceFlow is our business process automation and business process modeling
product that automates the execution of business tasks running within and across
an organization. UnifaceFlow helps solution architects model and automate
business processes and tasks by aligning and
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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.
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.
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. 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.
Compuware Application Reliability Solution (CARS)--Combines Compuware software
products and professional services into a defined process used to instill
discipline, automate processes and ensure consistency and repeatability
throughout the testing life cycle. Results are reported to IT management through
the application quality workbench.
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.
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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--Performance dashboard that provides an overall enterprise view of
application performance and availability across the customers infrastructure 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.
IT GOVERNANCE
IT Governance by Changepoint--Helps IT organizations by providing critical
insight into IT spending, operations and management. Combined with our other
products, we offer Chief Information Officers insight and visibility into their
people, projects, resources and applications, helping technology leaders align
IT investments with business priorities.
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 2004, 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 support 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 our development
labs and by support personnel in the offices of our foreign subsidiaries and
distributors.
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Licensees have the option of renewing their maintenance agreements each year for
an annual fee based on the license 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 2004, 2003 and 2002, maintenance
fees represented approximately 32.3%, 30.0%, and 24.9%, respectively, of our
total revenues.
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 development labs in Amsterdam, The Netherlands; Toronto,
Canada; Cambridge, Massachusetts; La Jolla, California; and Nashua, New
Hampshire.
Total technology development and support costs were $175.0 million, $154.7
million and $177.6 million during fiscal 2004, 2003 and 2002, respectively, of
which $11.3 million, $11.4 million and $13.3 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 performed at our production center in West
Bloomfield, Michigan.
PROFESSIONAL SERVICES
We offer a broad range of IT 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 IT organization to plan, design, program, implement and maintain
technology-based solutions that achieve customer business goals. Typically, the
professional services staff is integrated with the customer's development team
on a specific application or project. Professional services staff work primarily
at customer sites or at our professional services offices located throughout
North America and Europe. We also have professional services
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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.
APPLICATION SERVICES
Professional services includes our business-to-business applications and
communication services, called the Automotive Industry Operating System (AIOS).
The AIOS provides our customers with a common connection to their suppliers and
customers. We work with manufacturers, suppliers and industry trade groups
worldwide to define and implement effective common processes for the global
automotive industry. Once connected through our system, customers are able to
reduce costs, increase efficiency, enhance quality and improve time to market
using Covisint Communicate Portal Solutions and Covisint Connect data messaging.
Covisint Communicate
Communicate Portal Solutions enables industry participants to access Original
Equipment Manufacturers (OEM) applications, supplier applications and our
applications via one common infrastructure, built on specifications developed
with input from suppliers and OEM customers. This Communicate Portal serves as
the framework for OEM-to-Supplier and Supplier-to-Supplier communications.
Individual users gain the synergistic advantage of coming to the Communicate
Portal using one user I.D. and password to access an entire industry in a single
consistent user interface.
Covisint Connect
Connect is a data messaging service that provides a single connection for a
company's computers to exchange data with the computers of its partners that can
handle both EDI and XML technologies in one environment. The single connection
will permit transfer of data to customers and suppliers in the format that makes
the most sense for their company. This approach reduces the complexity of
managing multiple formats that have been dictated by customers and the multitude
of protocols and connection points that are required to conduct business. The
service integrates industry standard eBusiness applications and is built from
state-of-the-art technology designed for today's eBusiness. Connect gives our
customer the flexibility to rapidly deploy new business processes to solve
industry specific problems and can be used to exchange data between a company's
current enterprise applications and its suppliers' applications.
CUSTOMERS
Our products and professional services are used by the IT departments of a wide
variety of commercial and government organizations. Our application services are
used by global automotive industry OEMs and suppliers.
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 2004 and 2002 or greater than 10% of accounts
receivable at March 31, 2004 and 2003.
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 60 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
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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), Mercury
Interactive Corporation and Niku 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.
We believe, based on our current market position, that we have competed
effectively in the software products and professional services marketplaces.
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. 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 26 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.
11
<PAGE>
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.
EMPLOYEES
As of March 31, 2004, we employed 8,660 people worldwide, with 1,864 in products
sales, sales support and marketing; 1,563 in technology development and support;
4,452 in professional services and 781 in other general and administrative
functions. Only a small number of our international employees are represented by
labor unions. We have experienced no work stoppages and believe that our
relations with our employees are good. Our success will depend in part on our
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software developers,
professional services staff and sales and marketing personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our current executive officers, who serve at the discretion of our Board of
Directors, are listed below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter Karmanos, Jr. 61 Chairman of the Board and Chief Executive Officer
Tommi A. White 53 Chief Operating Officer
Henry A. Jallos 55 Executive Vice President, Global Account Management
Laura L. Fournier 51 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer) and Treasurer
Thomas M. Costello, Jr. 50 Senior Vice President, Human Resources, General
Counsel and Secretary
Gerald W. Smith 39 Executive Vice President, IT Governance
Robert C. Paul 41 Chief Executive Officer and President of the Covisint
Division
</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.
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 was Executive Vice President, Chief Administration
and Technology Officer at Kelly Services, Inc. Ms. White was at Kelly Services,
Inc. for nearly nine years.
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.
12
<PAGE>
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.
Thomas M. Costello, Jr., has served as General Counsel since January 1985, Vice
President from January 1995 to May 2003 and Secretary since May 1995. Mr.
Costello was appointed Senior Vice President of Human Resources in September
2003. Mr. Costello joined Compuware in June 1984 as Assistant General Counsel.
Gerald W. Smith was named Executive Vice President, IT Governance in May 2004.
Mr. Smith joined Compuware as part of the Changepoint acquisition in May 2004.
Mr. Smith co-founded Changepoint and served as its President and Chief Executive
Officer since 1994.
Robert C. Paul has served as Chief Executive Officer and President of Covisint
which was acquired in March 2004. Mr. Paul had spent nearly three years at
Covisint. Before joining Covisint, Mr. Paul spent one year as President of
SYNAPZ, a division of Future Three Corporation, and nearly two years as
President and Chief Operating Officer at Coherent Networks International.
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
In fiscal 2004, we completed the construction of our new corporate headquarters
office building (Detroit facility) in Detroit, Michigan, which consolidated our
corporate office functions and Detroit-area operations. We own the Detroit
facility 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
217,000 square feet of land on which the Detroit facility resides and
approximately 33,000 square feet in a Farmington Hills office park. The Detroit
facility houses our executive offices, primary research and development lab,
principal marketing department, a professional services office, customer service
and support teams. The West Bloomfield facility houses our production and
distribution facilities.
In July 2003 we entered into an option and purchase agreement for our Farmington
Hills, Michigan facility. The option agreement allows the holder to commit to
purchase the building for one year after the execution of the agreement. The
option selling price of the building approximates the current net book value of
$20 million for the building. If exercised, the holder would pay $5 million upon
exercise and the remaining balance in five years with interest being paid
monthly at 7% of the unpaid balance.
We lease approximately 100 professional services and sales offices in 28
countries, including five remote product research and development facilities.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On March 12, 2002, we filed suit in the United States District Court for the
Eastern District of Michigan against International Business Machines Corporation
("IBM") alleging, among other things, infringement of our copyrights and
misappropriation of our trade secrets with respect to our mainframe software
tools, intentional interference with contractual relations with our employees
and former employees, antitrust 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. In December 2003, the Court denied Compuware's Motion for
Preliminary Injunction on the trade secret and false advertising claims, ruling
that there were fact issues that needed to be decided by a jury. Compuware's
Motion did not address IBM's antitrust violations or unfair competition. Those
claims, as well as the trade secret misappropriation claims are scheduled to be
tried by a jury in September 2004. While we currently believe we ultimately will
benefit from this litigation, the impact of this action on our liquidity,
financial position and results of operations are not determinable at the present
time. In addition, IBM has filed a counterclaim against Compuware alleging
violation of six IBM patents. The Compuware products accused of infringement are
File-AID CS, Abend-AID, and Xpediter. The Court bifurcated the patent
counterclaims from the other claims and fact discovery is proceeding. No trial
date has been set for the counterclaims. We believe we have valid defenses to
the counterclaims, and we will vigorously defend against those claims.
On January 15, 2004, IBM filed patent infringement claims against Compuware in
the United States District Court for the Southern District of New York alleging
additional infringements of seven IBM patents. The Compuware products accused of
infringement are Strobe, QA Center, DevPartner and Uniface. The suit seeks
injunctive relief and unspecified monetary damages. Fact discovery is
proceeding. No trial date has been set for these claims. We believe we have
valid defenses to the claims, and intend to vigorously defend against the
lawsuit. The impact of this action on 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. ("Moody's") 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 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 Court has dismissed two of
Compuware's four claims. Discovery on this matter is proceeding.
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. The defendants
are the Company and Peter Karmanos, Jr. 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. The
case is in a preliminary procedural stage at this time.
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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Stock Market's National Market under
the symbol CPWR. As of June 1, 2004, there were approximately 6,710 shareholders
of record of our common stock. We have not paid any cash dividends on our common
stock since fiscal 1986. Our revolving credit agreement contains a minimum
tangible net worth covenant that could limit our ability to pay dividends. 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, 2004 HIGH LOW
<S> <C> <C>
Fourth quarter $ 8.65 $ 5.90
Third quarter 6.25 5.08
Second quarter 6.49 4.74
First quarter 6.52 3.30
</TABLE>
<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>
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, 2004 (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 38,155 $ 13.51 7,286
Equity compensation plans not
approved by security holders 25,471 $ 8.78 23,989
</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,
-----------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(In thousands, except earnings per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees $ 296,627 $ 295,720 $ 417,631 $ 495,572 $ 819,247
Maintenance fees 408,191 412,176 433,751 456,534 432,707
Professional services fees 559,829 667,444 889,162 1,083,050 996,120
----------- ----------- ----------- ----------- -----------
Total revenues 1,264,647 1,375,340 1,740,544 2,035,156 2,248,074
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of software license fees 31,579 30,740 34,102 37,885 28,835
Cost of professional services 513,621 611,644 840,149 973,854 877,453
Technology development and support 163,655 143,289 164,280 187,155 154,086
Sales and marketing 310,643 264,012 294,496 351,214 377,920
Administrative and general 209,797 191,131 207,166 250,324 214,961
Goodwill amortization and impairment (1 and 2) 426,344 42,092 25,586
Restructuring costs (2) 46,930
Purchased research and development 17,900
----------- ----------- ----------- ----------- -----------
Total operating expenses 1,229,295 1,240,816 2,013,467 1,842,524 1,696,741
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 35,352 134,524 (272,923) 192,632 551,333
Other income (expense) 20,665 21,691 22,076 (563) 10,443
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 56,017 156,215 (250,847) 192,069 561,776
Income tax provision (benefit) 6,185 53,113 (5,592) 72,986 209,800
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 49,832 $ 103,102 $ (245,255) $ 119,083 $ 351,976
=========== =========== =========== =========== ===========
Basic earnings (loss) per share (3) $ 0.13 $ 0.27 $ (0.66) $ 0.33 $ 0.98
Diluted earnings (loss) per share (3) 0.13 0.27 (0.66) 0.32 0.91
Shares used in computing net income (loss) per
share:
Basic earnings computation 382,630 377,028 371,786 365,192 358,560
Diluted earnings computation 384,608 378,440 371,786 372,809 384,691
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 649,945 $ 581,266 $ 506,692 $ 434,902 $ 391,801
Total assets 2,234,081 2,122,685 1,993,938 2,279,374 2,415,907
Long term debt - - - 140,000 450,000
Total shareholders' equity (4) 1,413,591 1,331,691 1,189,851 1,377,372 1,203,872
</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. In fiscal 2002, 2001 and 2000,
net income (loss) and earnings (loss) per share (diluted computation),
exclusive of amortization of goodwill, would have been ($212.4 million)
and (57 cents), $153.9 million and 41 cents and $375.9 million and 98
cents, 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 to
an unrelated third party 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.
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, and
could cause actual results to differ materially from the results implied by
these or any other forward-looking statements made by us, or on our behalf.
There can be no assurance that future results will meet expectations. While we
believe that our forward-looking statements are reasonable, you should not place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Except as required by applicable law, we do not undertake any
obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
- - In 2002, we filed a lawsuit against IBM alleging, among other things,
copyright infringement, misappropriation of trade secrets, intentional
interference with contractual relations and economic expectancy, false
advertising and various violations of the Lanham Act, as well as various
anti-trust law violations. We claim that IBM has misappropriated portions
of our software tools, used our technology to develop competing products,
used its monopoly power to engage in unlawful tying arrangements and
subverted competition on the merits. IBM has filed a counterclaim against
us alleging violation of six of their patents and in 2004 filed a separate
complaint against us alleging violation of seven different IBM patents.
Pursuing and defending these matters will be costly, time-consuming and
may divert management's time and attention. Due to these matters, our
legal expenses have increased substantially and our administrative and
general expenses could further increase as a result of these factors. In
addition, IBM may seek to influence our customers and potential customers
to reduce or eliminate the amount of our products and services that they
purchase, or our lawsuit against IBM and IBM's lawsuit against us may
otherwise be viewed negatively by our customers and potential customers
and cause them to refrain from buying our products and services. Any of
the foregoing developments could adversely affect our position in the
marketplace and 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.
- - In addition to the IBM claims discussed above, there can be no assurance
that other third parties will not assert infringement claims against us in
the future with respect to current and future products or that any such
assertion may not require us to enter into royalty arrangements or result
in costly litigation.
- - Our operating margins may decline. We do not regularly 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, product operating margins could experience
more pressure. In addition, operating margins in the professional services
business are significantly impacted by small fluctuations in revenue since
most costs are fixed during any short term period.
17
<PAGE>
- - Our results could be adversely affected by increased competition and
pricing pressures. We consider over 40 firms to be directly competitive
with one or more of our products. These competitors include but are not
limited to BMC Software, Inc., Borland, Computer Associates International,
Inc., IBM, Mercury Interactive Corporation and Niku Corporation. Some of
these competitors have substantially greater financial, marketing,
recruiting and training resources than we do.
- - The market for professional services is highly competitive, fragmented and
characterized by low barriers to entry. Our principal competitors in
professional services include but are not limited to Accenture, Computer
Sciences Corporation, Electronic Data Systems Corporation, IBM Global
Services, Analysts International Corporation, Keane, Inc. and numerous
other regional and local firms in the markets in which we have
professional services offices. Several of these competitors have
substantially greater financial, marketing, recruiting and training
resources than we do.
- - Our success depends in part on our ability to develop product enhancements
and new products that keep pace with continuing changes in technology and
customer preferences.
- - Approximately 30% of our total revenue is derived from foreign sources.
This exposes us to exchange rate risks on foreign currencies and to other
international risks such as the need to comply with foreign and U.S.
export laws, and the uncertainty of certain foreign economies.
- - We regard our software as proprietary and attempt to protect it with
copyrights, trademarks, trade secret laws and/or restrictions on
disclosure, copying and transferring title. Despite these precautions, it
may be possible for unauthorized third parties to copy certain portions of
our products or to obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the
United States.
- - We depend on key employees and technical personnel. The loss of certain
key employees or our inability to attract and retain other qualified
employees could have a material adverse effect on our business.
- - Our quarterly financial results vary and may be adversely affected by
certain relatively fixed costs. Our product revenues vary from quarter to
quarter. Net income may be disproportionately affected by a fluctuation in
revenues because only a small portion of our expenses varies with
revenues.
- - Historical seasonality in license revenue cannot be relied on as an
indicator of future performance due to the current economic conditions
affecting the IT industry.
- - Changes in world economies could cause customers to further delay or
forego decisions to license new products or upgrades to their existing
environments or to reduce their requirements for professional services,
and this could adversely affect our operating results.
- - Acts of terrorism, acts of war and other unforeseen events may cause
damage or disruption to our properties, employees, suppliers,
distributors, resellers and customers which could adversely affect our
business and operating results.
18
<PAGE>
OVERVIEW
In this section, we discuss our results of operations on a segment basis for
each of our financial reporting segments. We operate in two business segments in
the technology industry: products and professional services. We evaluate segment
performance based primarily on segment contribution before corporate expenses.
References to years are to fiscal years ended March 31.
We provide software products and professional services designed to increase the
productivity of the IT departments of businesses worldwide. In the early years
of our company, we focused on offering professional services and mainframe
products in the testing and implementation environment where we gained extensive
experience and established long-term customer relationships. Over the past
several years, we have expanded our presence into products and professional
services in the application development and integration, quality assurance,
production readiness and production availability areas of the application life
cycle.
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines, expanding our product and service offerings through key
acquisitions, developing strategic partnerships in order to provide clients with
our product solutions and managing our costs. We achieved the following since
the beginning of fiscal 2004:
- Acquired certain assets of Covisint effective March 1, 2004.
Covisint provides business-to-business applications and
communication services that connect the global automotive industry.
Revenue associated with the acquired business was approximately $11
million during Covisint's calendar year 2003. We do not expect
Covisint to have a material effect on earnings in fiscal 2005.
- Acquired Changepoint Corporation in May 2004. Changepoint offerings
provide Chief Information Officers with insight and visibility into
their people, projects, resources and applications, helping
technology leaders align IT investments with business priorities.
Revenue associated with the acquired business was approximately $20
million for the twelve months ending April 2004. We do not expect
Changepoint to have a material effect on earnings in fiscal 2005.
- Released 38 mainframe and 55 distributed products, during fiscal
2004, designed to increase the productivity of the IT departments of
our customers.
- Achieved increases in distributed product revenue which is a
reflection of our increased focus in fiscal 2004 on promoting our
distributed products.
- Began realigning our professional service segment to higher margin
offerings. This was evident in fiscal 2004 as we decreased our
revenue derived from low margin subcontract projects. We will
continue this trend in fiscal 2005 where we anticipate a first
quarter reduction in subcontract revenue and cost of approximately
$3.1 million and $3.0 million, respectively.
- Implemented a cost reduction strategy that included salary
reductions for executive management and most employees, additional
employee contributions toward healthcare, elimination of
company-sponsored holiday events and a review of other expenses.
These measures were intended to save a total of $10 million to $15
million each quarter, starting in the third quarter of 2004. Savings
in the third and fourth quarters of 2004 were in line with our
overall estimates. Due to the positive financial results reported
during the third and fourth quarters of 2004 and the outlook for
continued revenue and profitability growth, certain of the
cost-cutting measures that were put in place (primarily salary
reductions) were rescinded effective April 1, 2004.
Our ability to achieve our strategies and objectives is subject to a number of
factors some of which we may not be able to control. See "Forward-Looking
Statements".
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
<TABLE>
<CAPTION>
Percentage of Period-to-Period
Total Revenues Change
---------------------------- ------------------
Fiscal Year Ended
March 31, 2003 2002
---------------------------- to to
2004 2003 2002 2004 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUE:
Software license fees 23.5% 21.5% 24.0% 0.3% (29.2)%
Maintenance fees 32.3 30.0 24.9 (1.0) (5.0)
Professional services fees 44.2 48.5 51.1 (16.1) (24.9)
----- ----- -----
Total revenues 100.0 100.0 100.0 (8.0) (21.0)
----- ----- -----
OPERATING EXPENSES:
Cost of software license fees 2.5 2.2 2.0 2.7 (9.9)
Cost of professional services 40.6 44.5 48.3 (16.0) (27.2)
Technology development and support 12.9 10.4 9.4 14.2 (12.8)
Sales and marketing 24.6 19.2 16.9 17.7 (10.4)
Administrative and general 16.6 13.9 11.9 9.8 (7.7)
Goodwill amortization and impairment 24.5 (100.0)
Restructuring cost 2.7 (100.0)
----- ----- -----
Total operating expenses 97.2 90.2 115.7 (0.9) (38.4)
----- ----- -----
Income (loss) from operations 2.8 9.8 (15.7) (73.7) 149.3
Other income 1.6 1.6 1.3 (4.7) (1.7)
----- ----- -----
Income (loss) before income taxes 4.4 11.4 (14.4) (64.1) 162.3
Income tax provision (benefit) 0.5 3.9 (0.3) (88.4) **
----- ----- -----
Net income (loss) 3.9% 7.5% (14.1)% (51.7)% 142.0%
===== ===== =====
</TABLE>
** Not meaningful
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. Product revenue which consists of software license fees and
maintenance fees, comprised 55.8%, 51.5% and 48.9% of total revenue during 2004,
2003 and 2002, respectively. OS/390 product revenue (mainframe revenue)
decreased $26.2 million or 4.7% during 2004 and decreased $133.8 million or
19.5% during 2003. Revenue from distributed software products increased by $23.1
million, or 15.0% during 2004 and decreased $9.7 million, or 5.9% during 2003.
License revenue increased $0.9 million or 0.3% during 2004 to $296.6 million
from $295.7 million during 2003 and decreased $121.9 million or 29.2% during
2003 from $417.6 million during 2002. License revenue was positively impacted by
fluctuations in foreign currencies during 2004 compared to fiscal 2003.
Excluding the favorable effect of such foreign currency fluctuations, license
revenue would have been approximately $277.8 million during fiscal 2004,
compared to $295.7 million during fiscal 2003, a decrease of 6.1%.
20
<PAGE>
Maintenance fees decreased $4.0 million or 1.0% to $408.2 million during 2004
from $412.2 million during 2003 and decreased $21.6 million or 5.0% during 2003
from $433.8 million during 2002. Maintenance fees were positively impacted by
fluctuations in foreign currencies during 2004 compared to fiscal 2003.
Excluding the effect of foreign currency fluctuations, maintenance fees would
have been approximately $387.9 million during 2004, compared to $412.2 million
during 2003, a decrease of 5.9%.
The overall declines in product revenue from 2003 to 2004 and from 2002 to 2003
were primarily attributable to decreases in mainframe license fees and
maintenance fees associated with an overall decrease in technology spending and
a decrease in customer demand for large enterprise license agreements which are
multi-year, and often multi-payment contracts.
We license software to customers using two types of software licenses, perpetual
and term. Generally, perpetual software licenses allow customers a perpetual
right to run our software on hardware up to a licensed aggregate MIPS (Millions
of Instructions Per Second) capacity or to run our distributed software for a
specified number of users or servers. Term licenses allow customers a right to
run our software for a limited period of time on hardware up to a licensed
aggregate MIPS capacity. 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
customers' business needs, customers are allowed 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 collection is
reasonably probable. 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.
Product revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
United States $ 375,670 $ 409,441 $ 532,772
Europe and Africa 246,579 221,272 223,636
Other international operations 82,569 77,183 94,974
---------- ---------- ----------
Total product revenue $ 704,818 $ 707,896 $ 851,382
========== ========== ==========
</TABLE>
21
<PAGE>
PRODUCT CONTRIBUTION AND EXPENSES
Financial information for the product segment is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
Revenue $ 704,818 $ 707,896 $ 851,382
Expenses 505,877 438,041 492,878
---------- ---------- ----------
Product contribution $ 198,941 $ 269,855 $ 358,504
========== ========== ==========
</TABLE>
The product segment generated contribution margins of 28.2%, 38.1% and 42.1%
during 2004, 2003 and 2002, respectively. Product expenses include cost of
software license fees, technology development and support costs, and sales and
marketing expenses. These factors are discussed below.
Cost of software license fees includes amortization of capitalized software, the
cost of duplicating and disseminating products to customers and the cost of
author royalties. As a percentage of software license fees, cost of software
license fees were 10.6%, 10.4% and 8.2% in 2004, 2003 and 2002, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Also included here are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives. As a
percentage of product revenue, costs of technology development and support were
23.2%, 20.2% and 19.3% in 2004, 2003 and 2002, 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 research and
development expenditures during 2004 increased $20.3 million or 13.1%, to $175.0
million from $154.7 million in 2003 and decreased $22.9 million or 12.9% during
2003 from $177.6 million in 2002.
The increase in technology costs for 2004 was primarily attributable to higher
compensation, benefit and bonus costs of approximately $23.1 million offset by a
decrease in depreciation expense of approximately $2.6 million. Compensation,
benefit and bonus costs were higher due to scheduled salary increases during
2004 and higher employee headcount in this area which increased by 5.9% to an
average headcount of 1,529 people during 2004. Depreciation expense declined due
to approximately $18 million of computer equipment which became fully
depreciated in the first and second quarters of 2004. A portion of the increase
was offset by cost reduction strategies implemented in October 2003 that
resulted in a reduction of technology development and support costs totaling
$2.0 during the third and fourth quarters of 2004.
The decrease in technology costs for 2003 was primarily attributable to lower
bonus costs of approximately $9.7 million, decreases in computer equipment
depreciation and purchased software amortization totaling approximately $7.8
million and reduced travel and communication costs of approximately $3.2
million.
Sales and marketing costs consist primarily of personnel related costs
associated with product direct sales and sales support, marketing for all our
offerings, and personnel costs associated with new sales initiatives. Sales and
marketing costs increased $46.6 million or 17.7%, during 2004 to $310.6 million
from $264.0 million in 2003 and decreased $30.5 million or 10.4% during 2003
from $294.5 million in 2002. As a percentage of product revenue, sales and
marketing costs were 44.1%, 37.3% and 34.6% in 2004, 2003 and 2002,
respectively.
22
<PAGE>
The increase in sales and marketing costs for 2004 was primarily attributable to
higher salary and benefit costs of approximately $27.1 million, increased
commission and bonus costs of approximately $12.5 million and higher advertising
costs of approximately $5.8 million. Compensation, benefit, commission and bonus
costs were higher due to salary increases during 2004, higher employee headcount
in this area which increased by 4.6% to an average headcount of 1,852 people
during 2004 and the negative effect of foreign currency fluctuations on these
costs as the U.S. dollar continued to weaken throughout fiscal 2004.
Approximately 50% of total sales and marketing compensation, benefit, commission
and bonus costs were attributable to our non-U.S. sales force. The change in
advertising costs was a result of increases in the promotion of our products in
the distributed software marketplace during fiscal 2004. In late October 2003,
we implemented cost reduction strategies that resulted in a reduction of sales
and marketing costs totaling $1.9 million during the third and fourth quarters
of 2004.
The decrease in sales and marketing costs for 2003 was primarily attributable to
reduced headcount which decreased by 18.8% to an average headcount of 1,770
people during 2003 resulting in lower compensation and benefit costs of
approximately $16.3 million, decreased travel costs of approximately $4.6
million and lower bonus and commission costs of approximately $6.6 million.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of IT professional services, including business systems
analysis, design and programming, software conversion and system planning and
consulting. Revenue from professional services decreased $107.6 million or 16.1%
during 2004 and decreased $221.7 million or 24.9% during 2003.
The decrease in revenue for 2004 was due, primarily, to a reduction in demand
for professional services as customers continue to postpone large projects,
continued downward pressure on our billing rates due to the highly competitive
nature of the professional services market and an increased effort in fiscal
2004 to reduce our involvement with lower margin subcontract IT projects in
order to focus our resources on higher margin projects for the future.
The decrease in revenue for 2003 was 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 (Caretech), 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,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
United States $ 499,670 $ 599,913 $ 795,284
Europe and Africa 56,749 64,816 90,536
Other international operations 3,410 2,715 3,342
---------- ---------- ----------
Total professional services revenue $ 559,829 $ 667,444 $ 889,162
========== ========== ==========
</TABLE>
23
<PAGE>
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for the professional services segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Revenue $ 559,829 $ 667,444 $ 889,162
Expenses 513,621 611,644 840,149
---------- ---------- ----------
Professional services contribution $ 46,208 $ 55,800 $ 49,013
========== ========== ==========
</TABLE>
During 2004, the professional services segment generated a contribution margin
of 8.3%, compared to 8.4% and 5.5% during 2003 and 2002, respectively.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services decreased $98.0 million or 16.0% during
2004 and decreased $228.5 million or 27.2% during 2003.
The decrease in cost of professional services for 2004 was primarily
attributable to lower compensation, benefit, bonus and travel costs of
approximately $86.8 million and a decrease in subcontractor costs of
approximately $12.2 million. Compensation, benefit, bonus and travel costs were
lower due to a 12.4% reduction in average employee headcount in this area to
4,956 people during 2004. In late October 2003, we implemented cost reduction
strategies that resulted in a reduction of professional services costs totaling
$14.1 million during the third and fourth quarters of 2004. All professional
services salaries have been reviewed and adjusted effective April 1, 2004.
The decrease in cost of professional services for 2003 was primarily
attributable 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 professional services billable staff
decreased 25.8% to an average headcount of 5,660 people during 2003.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses consist of costs associated with the
operations and administration of the Company. These costs include the corporate
executive, finance, human resources, legal and corporate communications
departments. In addition, administrative and general costs include all
facility-related costs, such as rent, building depreciation, maintenance,
utilities, etc., associated with all of our locations. Administrative and
general expenses increased $18.7 million or 9.8%, during 2004 to $209.8 million
from $191.1 million in 2003 and decreased $16.1 million or 7.7% during 2003 from
$207.2 million in 2002.
The increase in administrative and general expenses for 2004 was primarily
attributable to an increase in legal fees of approximately $10.4 million and
higher depreciation expense associated with the new Detroit headquarters
building of approximately $5.6 million. In late October 2003, we implemented
cost reduction strategies that resulted in a reduction to administrative and
general costs totaling $1.7 million during the third and fourth quarters of
2004.
The decrease in administrative and general expenses in 2003 was primarily
attributable to decreased building rent of approximately $19.7 million,
decreased utility costs of approximately $6.0 million and decreased
compensation, benefit and bonus costs of approximately $20.7 million resulting
from the restructuring discussed below offset, in part, by increased legal costs
of approximately $22.1 million.
External legal fees for all litigation, including IBM and other matters were
$45.0 million, $34.6 million and $12.5 million in 2004, 2003 and 2002.
Litigation expense has increased significantly over the past two years due
primarily to the IBM litigation. Because a majority of the costs in connection
with the IBM litigation have been incurred during the preparation of this case
for trial, we do not expect litigation expenses to increase. Barring any unknown
future litigation claims, these expenses should decline moderately.
24
<PAGE>
Other income consists primarily of interest earnings on deferred customer
receivables and interest income realized from investments. Other income for 2004
was $20.7 million compared to $21.7 million in 2003 and $22.1 million in 2002.
Income taxes are accounted for using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. During the
third quarter of 2004, we recorded an income tax benefit of $9.5 million
relating primarily to favorable tax settlements with the U.S. Internal Revenue
Service and recent developments in other tax matters both in the US and other
taxing jurisdictions. Excluding this tax benefit, the effective tax rate for
2004 was 28% compared to 34% for 2003. The decrease in the effective tax rate is
primarily due to the higher percentage impact of certain tax benefit items as a
result of the decline in income. The income tax provision was $6.2 million for
2004, net of the $9.5 million income tax benefit in the third quarter. This
compares to an income tax provision of $53.1 million for 2003.
RESTRUCTURING CHARGE
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability in the future by better aligning cost
structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization.
The following table summarizes the accrual for the restructuring and charges
against the accrual during 2002, 2003 and 2004 (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)
Adjustment (1,356) 2,012 (593) (63)
----------- ---------- ---------- ---------- -----------
Accrual at March 31, 2003 $ 698 $ 19,088 $ 15 $ - $ 19,801
Incurred during year ended
March 31, 2004 (591) (5,600) (4) (6,195)
----------- ---------- ---------- ---------- -----------
Accrual at March 31, 2004 $ 107 $ 13,488 $ 11 $ - $ 13,606
=========== ========== ========== ========== ===========
</TABLE>
*Lease obligations will end in March of 2009.
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 reduced. The accrual for
facilities costs was increased, since the Company had 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,
2004.
25
<PAGE>
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 (U.S. GAAP). The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Assumptions and estimates were based on facts and circumstances at March 31,
2004. However, 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 - A basic criteria for revenue recognition is that
collectibility is reasonably assured. We evaluate collectibility based on past
customer history, external credit ratings and payment terms within various
customer agreements. Future events or inaccuracies in reported credit data that
result in a change to collectibility expectations could have a negative effect
on our operating results.
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. Changes in rates charged for stand
alone maintenance and professional services could have a significant impact on
how bundled revenue agreements are characterized as license, maintenance or
professional services and therefore, on the timing of revenue recognition in the
future.
Generally, revenues from license and maintenance transactions that include
installment payment terms are recognized in the same manner as those requiring
current payment. This is because we have an established business practice of
offering installment payment terms to customers and have a history of
successfully enforcing original payment terms without making concessions.
However, because a significant portion of our license fee revenue is earned in
connection with installment sales, changes in future economic conditions or
technological developments could adversely affect our ability to immediately
record license fees for these types of transactions and/or limit our ability to
collect these receivables.
Professional Services Fees - 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.
Unforeseen events that result in additional time or costs being required to
complete such projects could affect the timing of revenue recognition for the
balance of the project as well as services margins going forward, and could have
a negative effect on our results of operations.
Based on our interpretation of US GAAP including SOP 97-2 and 98-9, Securities
and Exchange Commission SAB 104 and EITF 00-21, 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.
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
26
<PAGE>
basis, giving consideration to collection experience and any information on the
financial viability of the customer. The allowance is reviewed and adjusted each
quarter based on the best information available at the time. Unforeseen events
which negatively affect the ability of our customer's to meet their payment
obligations would negatively impact our ability to collect outstanding amounts
due from customers and may cause a material impact on our financial position and
results of operations due to a change in the assumptions and judgment on which
we base this estimate.
Capitalized Software - The cost of purchased and internally developed software
is capitalized and stated at the lower of unamortized cost or expected net
realizable value. We compute annual amortization using the straight-line method
over the remaining estimated economic life of the software product which is
generally five years. Software is subject to rapid technological obsolescence
and future product revenue estimates supporting the capitalized software cost
can be negatively affected based upon competitive products and pricing. Such
adverse developments could reduce the estimated net realizable value of our
capitalized software and could result in impairment or a shorter estimated life.
Such events would require us to take a charge in the period in which the event
occurred or to increase the amortization expense in future periods and would
have a negative effect on our results of operations.
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. To analyze goodwill, we measure
its 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.
The fair value of the reporting unit including the goodwill is then compared to
the carrying value of each reporting unit (Products and Professional Services).
If the carrying amount of the reporting unit goodwill exceeds the implied fair
value of the goodwill, the impairment loss is recognized as an operating expense
in an amount equal to that excess. Changes in any of these estimates and
assumptions, and unknown future events or circumstances (e.g. economic
conditions or technological developments), could have a significant impact on
whether or not an impairment charge is recognized and the magnitude of any such
charge.
Investments in Partially Owned Companies - As discussed in Note 5 to the
Consolidated Financial Statements, we have minority investments in and advances
to certain privately held companies for strategic purposes. At March 31, 2004,
the net carrying value of our investments and advances to these entities totaled
$25.9 million. Additionally, we have guaranteed outstanding lease obligations of
$3.2 million at March 31, 2004. We regularly evaluate the financial condition of
these partially owned companies to assess potential impairment in the carrying
value of our investments in and advances to these entities. We consider their
current financial situation, including their ability to meet current cash
requirements, expected future cash flows and any other information known to us
in determining whether an impairment charge is appropriate. Unknown factors or
unforeseen events that impair their ability to pay their obligations or to
operate profitably could have an impact on our ability to recoup our investments
in and outstanding advances to these companies and could require us to expense
all or a portion of the outstanding investments and advances in that period.
Deferred Tax Assets Valuation Allowance and Tax Liabilities - We estimate income
taxes in each of the jurisdictions in which we operate, net deferred tax assets
based on expected future taxable benefits in such jurisdictions and our
valuation allowance for deferred tax assets. For additional information
regarding these estimates see Note 12 to the Consolidated Financial Statements.
Changes in estimates of projected future operating results or in assumptions
regarding our ability to generate future taxable income during the periods in
which temporary differences are deductible could result in significant changes
to these accruals and, therefore, to our net income.
27
<PAGE>
In addition, we recognize contingent tax liabilities through tax expense for
estimated exposures related to our current tax positions. We evaluate the need
for contingent tax liabilities on a quarterly basis and any change in the amount
will be recorded in our results of operations, as appropriate. It could take
several years to resolve certain of these contingencies.
Other - Other accounting policies, although not generally subject to the same
level of estimation as those discussed above, are nonetheless important to an
understanding of the financial statements. Many assets, liabilities, revenue and
expenses require some degree of estimation or judgment in determining the
appropriate accounting.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, cash and investments totaled approximately $767.1 million.
During 2004 and 2003, cash flow from operations was $258.1 million and $370.4
million, respectively. A significant portion of operating cash flow is generated
from the collection of the current portion of prior years' receivables. The
decrease was primarily due to lower collections on customer receivables due to
the general decline in revenue from the prior year. During these periods,
capital expenditures for the Detroit Headquarters facility totaled $65.2 million
and $219.1 million, respectively, and capital expenditures for other property
and equipment and capitalized research and software development totaled $20.7
million and $17.6 million, respectively.
On May 2, 2003, we entered into a $100 million revolving credit facility
maturing on July 29, 2004. See Note 9 of Notes to Consolidated Financial
Statements for a discussion of this revolving credit facility. No borrowings
have occurred or are planned under this facility. We intend to renew this
facility upon expiration.
We have relocated to our new corporate headquarters building. The total
construction cost approximated $350 million for the building and $50 million for
furniture and fixtures. Annual depreciation expense is approximately $16
million. Future cash requirements to complete the construction will be minimal
in fiscal year 2005.
In July 2003 we entered into an option and purchase agreement for our Farmington
Hills, Michigan facility. The option agreement allows the holder to commit to
purchase the building for one year after the execution of the agreement. The
option selling price of the building approximates the current net book value of
$20 million for the building. If exercised, the holder would pay $5 million upon
exercise and the remaining balance in five years with interest being paid
monthly at 7% of the unpaid balance.
On May 6, 2003, the Board of Directors authorized the repurchase of up to $125
million of our common stock. Our purchases of stock may occur on the open
market, through negotiated or block transactions based upon market and business
conditions. We regularly evaluate market conditions for an opportunity to
repurchase our stock. During August 2003, we repurchased approximately 200,000
shares of our common stock under this program at an average price of $4.97 per
share. Approximately $124 million remains for future purchases under this
program.
As discussed in Note 5 to the Consolidated Financial Statements, we regularly
review the financial condition of our partially owned companies, inclusive of
considering the companies' relationships with their major customers, to
determine that the recorded amounts in our financial statements are appropriate
and the investments (inclusive of the debt obligations) are not impaired.
CareTech Solutions, Inc.'s (Caretech) most significant customer is the Detroit
Medical Center and Subsidiaries (DMC). The DMC has publicly announced it is
having financial difficulties. After consideration of all relevant factors, we
concluded that no impairment charge or valuation allowance related to our
investment in and receivables due from CareTech should be recorded at March 31,
2004. The DMC has requested, and CareTech has agreed, to provide the DMC with
extended payment terms up to 90 days. In turn, we have also agreed to extend 90
day payment terms to CareTech. During the third quarter of fiscal 2004, the
other shareholders of CareTech expressed an inability or unwillingness to
provide additional funding to
28
<PAGE>
meet any short falls in CareTech's cash flow requirements. Therefore, we will
record 100 percent of any future losses incurred by CareTech as a reduction to
our outstanding advances to CareTech. At March 31, 2004, the carrying value of
investments in and advances to Caretech was $22.0 million.
On February 5, 2004, we entered into an asset purchase agreement with Covisint
LLC (Covisint) which became effective March 1, 2004. We acquired selected assets
and certain liabilities related to their Communicate Portal Solutions, Connect
and Problem Solver businesses (acquired business) for approximately $7 million
in cash plus certain lease obligations up to $2.1 million.
In May 2004, we acquired all outstanding shares of Changepoint Corporation, a
privately held market-leader of IT Governance application software for
approximately $100 million in cash. The acquisition will be accounted for as a
purchase during the first quarter of fiscal 2005, and, accordingly, assets and
liabilities acquired will be recorded at fair value as of the acquisition date.
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
We believe available cash resources, together with cash flow from operations,
will be sufficient to meet cash needs for the foreseeable future.
Contractual Obligations
The following table summarizes our payments under contractual obligations and
our other commercial commitments as of March 31, 2004 (in thousands):
<TABLE>
<CAPTION>
Payment Due by Period as of March 31,
----------------------------------------------------------------------------------------
2010 and
Total 2005 2006 2007 2008 2009 Thereafter
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual obligations:
Operating leases $ 325,153 $ 29,287 $ 23,320 $ 19,396 $ 15,885 $ 11,558 $ 225,707
Other(1) 8,280 4,605 2,075 200 200 200 1,000
--------- --------- --------- --------- --------- --------- ----------
Total $ 333,433 $ 33,892 $ 25,395 $ 19,596 $ 16,085 $ 11,758 $ 226,707
========= ========= ========= ========= ========= ========= ==========
</TABLE>
(1) - Other includes a $4.0 million commitment to various City of Detroit
charities and a $4.3 million advertising agreement.
Off-Balance Sheet Arrangements
As discussed in Note 5 to the Consolidated Financial Statements, we have
guaranteed lease obligations of CareTech of up to $12.5 million. We have not
recorded any liability related to these guarantees since we believe that
CareTech will continue to meet its obligations. At March 31, 2004, CareTech's
outstanding lease obligations were approximately $3.2 million.
We currently do not have any non-consolidated special purpose entity
arrangements.
29
<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 rate):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------- Fair Value at
2005 2006 2007 Total March 31, 2004
---------- --------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Cash Equivalents $ 454,916 $ 454,916 $ 454,916
Average Interest Rate 1.03% 1.03%
Average Interest Rate (tax equivalent) 1.04% 1.04%
Investments $ 149,654 $ 157,252 $ 5,232 $ 312,138 $ 312,320
Average Interest Rate 1.51% 1.56% 1.44% 1.53%
Average Interest Rate (tax equivalent) 2.30% 1.98% 2.21% 2.14%
</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, 2004, non-current
accounts receivable amounted to $198.7 million, and are due approximately $117.4
million, $52.4 million, $18.7 million, $6.2 million and $4.0 million in each of
the years ending March 31, 2006 through 2010, 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, 2004, the fair value of such receivables is
approximately $198.4 million. Each 25 basis point increase in interest rates
would have an associated $600,000 negative impact on the fair value of
non-current accounts receivable based on the balance of such receivables at
March 31, 2004. 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
30
<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, 2004. 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, 2004 (in thousands, except contract rates):
<TABLE>
<CAPTION>
Contract Maturity Forward Fair
date in date in Contract Position in Value at
2004 2004 Rate U.S. Dollars March 31, 2004
-------- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Forward Sales
Norwegian Krone March 31 April 30 6.9425 $ 490 $ 496
Swedish Krona March 31 April 30 7.6301 315 318
Swiss Franc March 31 April 30 1.2796 727 734
------------ --------
$ 1,532 $ 1,548
============ ========
Forward Purchases
Australian Dollar March 31 April 30 1.3242 $ 10,572 $ 10,720
Danish Krone March 31 April 30 6.1310 1,566 1,587
Euro Dollar March 31 April 30 0.8209 28,621 28,906
Pounds Sterling March 31 April 30 0.5481 10,035 10,140
Hong Kong Dollar March 31 April 30 7.7827 4,626 4,619
Japanese Yen March 31 April 30 104.1770 509 508
------------ --------
$ 55,929 $ 56,480
============ ========
</TABLE>
Approximately 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.
31
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective April
1, 2002, the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 26, 2004
32
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES 2004 2003
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 454,916 $ 319,466
Investments 3 149,654 156,737
Accounts receivable, less allowance for doubtful
accounts of $22,565 and $26,543 452,057 515,819
Deferred tax asset, net 12 32,460 30,605
Income taxes refundable, net 33,946 10,853
Prepaid expenses and other current assets 19,976 16,951
---------- ----------
Total current assets 1,143,009 1,050,431
---------- ----------
INVESTMENTS 3 162,484 95,095
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 4 444,401 386,678
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION OF $193,491 AND $167,089 8 45,489 54,514
---------- ----------
OTHER:
Accounts receivable 198,742 260,735
Goodwill 2,8 213,359 212,288
Deferred tax asset, net 12 20,174
Other assets 5,8 26,597 42,770
---------- ----------
Total other assets 438,698 535,967
---------- ----------
TOTAL ASSETS $2,234,081 $2,122,685
========== ==========
</TABLE>
<TABLE>
<CAPTION>
NOTES 2004 2003
---------- ---------- ----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 35,298 $ 37,588
Accrued expenses 7 115,786 101,196
Accrued bonuses and commissions 39,176 33,383
Deferred revenue 302,804 296,998
---------- ----------
Total current liabilities 493,064 469,165
DEFERRED REVENUE 300,664 299,079
ACCRUED EXPENSES 7 22,073 22,750
DEFERRED TAX LIABILITY, NET 12 4,689
---------- ----------
Total liabilities 820,490 790,994
---------- ----------
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
385,343,692 and 382,367,156 shares in 2004
and 2003, respectively 10,15 3,853 3,824
Additional paid-in capital 722,206 704,190
Retained earnings 681,115 631,906
Accumulated other comprehensive income (loss) 6,417 (8,229)
---------- ----------
Total shareholders' equity 1,413,591 1,331,691
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,234,081 $2,122,685
========== ==========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 2004 2003 2002
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 296,627 $ 295,720 $ 417,631
Maintenance fees 408,191 412,176 433,751
Professional services fees 559,829 667,444 889,162
------------- ------------- -------------
Total revenues 1,264,647 1,375,340 1,740,544
------------- ------------- -------------
OPERATING EXPENSES:
Cost of software license fees 31,579 30,740 34,102
Cost of professional services 513,621 611,644 840,149
Technology development and support 163,655 143,289 164,280
Sales and marketing 310,643 264,012 294,496
Administrative and general 5 209,797 191,131 207,166
Goodwill amortization and impairment 8 426,344
Restructuring costs 7 46,930
------------- ------------- -------------
Total operating expenses 1,229,295 1,240,816 2,013,467
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 35,352 134,524 (272,923)
OTHER INCOME 20,665 21,691 22,076
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 56,017 156,215 (250,847)
INCOME TAX PROVISION (BENEFIT) 12 6,185 53,113 (5,592)
------------- ------------- -------------
NET INCOME (LOSS) $ 49,832 $ 103,102 $ (245,255)
============= ============= =============
Basic earnings (loss) per share 11 $ 0.13 $ 0.27 $ (0.66)
============= ============= =============
Diluted earnings (loss) per share 11 $ 0.13 $ 0.27 $ (0.66)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
--------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Gain (Loss) Equity Income (Loss)
----------- ------ ---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 2001 369,816,432 $ 3,698 $ 620,743 $ 774,059 $ (21,128) 1,377,372
Net loss (245,255) (245,255) $ (245,255)
Foreign currency translation, net
of tax 1,800 1,800 1,800
-------------
Comprehensive loss $ (243,455)
=============
Issuance of common stock 1,981,659 20 17,636 17,656
Issuance of warrant (Note 10) 2,825 2,825
Acquisition tax benefits 6,854 6,854
Exercise of employee stock options
and related tax benefit (Note 15) 4,022,163 40 24,492 24,532
Other 4,067 4,067
----------- -------- ---------- --------- ------------- -------------
BALANCE AT MARCH 31, 2002 375,820,254 3,758 676,617 528,804 (19,328) 1,189,851
Net income 103,102 103,102 $ 103,102
Foreign currency translation, net
of tax 11,099 11,099 11,099
-------------
Comprehensive income $ 114,201
=============
Issuance of common stock 6,010,067 60 18,868 18,928
Acquisition tax benefits 7,056 7,056
Exercise of employee stock options
and related tax benefit (Note 15) 536,835 6 1,649 1,655
----------- -------- ---------- --------- ------------- -------------
BALANCE AT MARCH 31, 2003 382,367,156 3,824 704,190 631,906 (8,229) 1,331,691
Net income 49,832 49,832 $ 49,832
Foreign currency translation, net
of tax 14,646 14,646 14,646
-------------
Comprehensive income $ 64,478
=============
Issuance of common stock 2,340,171 23 8,189 8,212
Acquisition tax benefits 6,579 6,579
Repurchase of common stock (200,500) (2) (371) (623) (996)
Exercise of employee stock options
and related tax benefit (Note 15) 836,865 8 3,494 3,502
Other 125 125
----------- -------- ---------- --------- ------------- -------------
BALANCE AT MARCH 31, 2004 385,343,692 $ 3,853 $ 722,206 $ 681,115 $ 6,417 $ 1,413,591
=========== ======== ========== ========= ============= =============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(IN THOUSANDS)
<TABLE>
<CAPTION>
2004 2003 2002
------------ --------- ----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 49,832 $ 103,102 $ (245,255)
Adjustments to reconcile net income (loss) to cash provided by
operations:
Goodwill amortization and impairment 426,344
Depreciation and amortization 55,175 53,808 63,619
Tax benefit from exercise of stock options 704 152 8,384
Issuance of common stock to Employee Stock Ownership Trust 9,425 10,657
Acquisition tax benefits 6,579 7,056 6,854
Deferred income taxes 23,775 36,577 (75,692)
Other 3,774 6,212 1,639
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 163,479 182,502 146,964
Prepaid expenses and other current assets (1,404) (9) 708
Other assets 4,887 776 1,972
Accounts payable and accrued expenses (1,289) (50,562) 21,435
Deferred revenue (24,378) 4,464 36,438
Income taxes (23,014) 16,870 (17,168)
------------ --------- ----------
Net cash provided by operating activities 258,120 370,373 386,899
------------ --------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment:
Headquarters facility (65,240) (219,071) (81,644)
Other (9,358) (6,222) (8,784)
Capitalized software (11,287) (11,369) (13,300)
Business (6,939)
Investments:
Proceeds 356,713 201,938 221,716
Purchases (404,048) (267,502) (210,784)
------------ --------- ----------
Net cash used in investing activities (140,159) (302,226) (92,796)
------------ --------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 2,798 1,503 16,148
Employee contribution to stock purchase plans 8,293 9,563 6,999
Repurchase of common stock (996)
Proceeds from sale of warrant 2,825
Payment of long term debt (140,000)
------------ --------- ----------
Net cash provided by (used in) financing activities 10,095 11,066 (114,028)
------------ --------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,394 6,948 (110)
------------ --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 135,450 86,161 179,965
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 319,466 233,305 53,340
------------ --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 454,916 $ 319,466 $ 233,305
============ ========= ==========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
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, communication, 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, 2004 and
2003 and the results of operations for the years ended March 31, 2004, 2003 and
2002. While management has based their assumptions and estimates on the facts
and circumstances known at March 31, 2004, final amounts may differ from
estimates.
Certain amounts in the fiscal 2003 and 2002 financial statements have been
reclassified to conform to the fiscal 2004 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 "Software Revenue Recognition" and
98-9 "Modification of SOP 97-2, "Software Revenue Recognition," With Respect to
Certain Transactions", Securities and Exchange Commission Staff Accounting
Bulletin 104 and Emerging Issues Task Force Issue 00-21 "Change in Accounting
Principle: Revenue Arrangements with Multiple Deliverables". Accordingly, the
Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the fee is fixed or determinable, and collectibility is
reasonably assured.
Software license fees - The Company's software license agreements provide 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. The Company allows deferred
payment terms on multi-year contracts, with installments collectible over the
term of the contract. Based on the Company's collection history for deferred
payments, the license fee
37
<PAGE>
portion of the receivable is discounted to its net present value and recognized
as discussed above. The discount is recognized as interest income over the term
of the receivables, and amounted to $12.6 million, $15.5 million and $19.6
million for fiscal 2004, 2003 and 2002, respectively. At March 31, 2004, current
accounts receivable includes installments on multi-year contracts totaling
$252.6 million due within the year ending March 31, 2005. Non-current accounts
receivable at March 31, 2004 amounted to $198.7 million, and are due
approximately $117.4 million, $52.4 million, $18.7 million, $6.2 million and
$4.0 million in each of the years ending March 31, 2006 through 2010,
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 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.
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.
Certain professional services contracts include a project and on-going support
for the project. Revenue associated with these contracts is recognized over the
support period when the on-going support is necessary to realize value from the
initial project.
Deferred revenue - Deferred revenue consists primarily of maintenance fees
related to the remaining term of maintenance agreements in effect at those
dates. Deferred license fees and services fees are also included in deferred
revenue for those contracts that are being recognized on a ratable basis. Long
term deferred revenue at March 31, 2004 amounted to $300.7 million, and is
expected to be recognized approximately $159.5 million, $83.9 million, $38.4
million, $12.9 million, $4.3 million and $1.7 million in each of the years
ending March 31, 2006 through 2011, respectively.
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 other income in the consolidated statements of operations.
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 40 years for buildings and three to ten
years for furniture and fixtures, computer equipment and software. Leasehold
improvements are amortized over the term of the lease, or the estimated life of
the improvement, whichever is less. Depreciation and amortization of property
and equipment totaled $28.4 million, $24.8 million and $27.0 million for the
years ended March 31, 2004, 2003 and 2002, 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, 2004 and 2003 is $12.5 million and $18.0 million, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Technology development
and support includes primarily the costs of programming personnel associated
with product development and support net of amounts capitalized. Total
technology development and support costs incurred internally by the Company were
$175.0 million,
38
<PAGE>
$154.7 million and $177.6 million in fiscal 2004, 2003 and 2002, respectively,
of which $11.3 million, $11.4 million and $13.3 million, 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 $26.4 million, $25.9
million and $32.1 million in fiscal 2004, 2003 and 2002, 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 $4.3
million 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 goodwill as of March 31, 2004 and 2003 and determined
there was no impairment.
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 $38.9 million for the year ended March 31, 2002. During
fiscal 2002, the Company recorded an aggregate charge of $387.4 million to
recognize impairment of goodwill resulting from the restructuring announced on
March 31, 2002 ($342.9 million), the transfer of the professional services
engineering division to an unrelated third party in December 2001 ($9.3 million)
and a change in technology related to its distributed products ($35.2 million).
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, 2004, the fair
value of non-current receivables is approximately $198.4 million compared to the
carrying amount of $198.7 million. At March 31, 2003, the fair value of
non-current receivables was approximately $262.3 million compared to the
carrying amount of $260.7 million. Fair value is estimated by discounting the
future cash flows using the current rate at which the Company would finance a
similar transaction.
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 period the
transactions occurred. Translation adjustments have been excluded from the
results of operations and are reported as accumulated other comprehensive income
or 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 $934,000, $1.7 million and $1.3 million for the years ended
March 31, 2004, 2003 and 2002, respectively. These amounts are included in
"administrative and general" in the consolidated statements of operations.
39
<PAGE>
At March 31, 2004, the Company had contracts maturing through April 2004 to sell
$1.5 million and purchase $55.9 million in foreign currencies. At March 31,
2003, the Company had contracts maturing through April 2003 to sell $4.3 million
and purchase $16.9 million in foreign currencies.
Stock-Based Compensation - Through March 31, 2004, in accordance with SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" and 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 2004, 2003 and
2002 consistent with the method prescribed by SFAS No. 123, Compuware's net
income (loss) and earnings (loss) per share would have been adjusted to the pro
forma amounts indicated below (in thousands, except earnings per share data):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss), as reported $ 49,832 $ 103,102 $ (245,255)
Less total stock-based employee compensation
expense determined under fair value
based method for all awards, net of tax (40,117) (51,881) (61,915)
------------ ------------ ------------
Pro forma net income (loss) $ 9,715 $ 51,221 $ (307,170)
============ ============ ============
Earnings (loss) per share:
As reported:
Basic earnings (loss) per share 0.13 0.27 (0.66)
Diluted earnings (loss) per share 0.13 0.27 (0.66)
Pro forma:
Basic earnings (loss) per share 0.03 0.14 (0.83)
Diluted earnings (loss) per share 0.03 0.14 (0.83)
</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 2004, 2003 and 2002,
respectively: expected volatility of 72.40%, 94.46%, and 64.55%; risk-free
interest rates of 2.7%, 2.9%, and 4.7%; and expected lives at date of grant of
5.0, 5.0, and 4.1 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 2004, 2003 and 2002 were $1.07, $1.11, and $2.13 per share, respectively.
Earnings Per Share (EPS) - 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 principal operating segments are products and
professional 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.
40
<PAGE>
Recently Issued Accounting Pronouncements - In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation 46, "Consolidation of
Variable Interest Entities." In December 2003, the FASB issued a revised
Interpretation 46 (FIN 46R). The FASB deferred the effective date for
consolidation of variable interest entities and amended the consolidation
requirements. 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. FIN 46R 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 FIN 46R apply to older entities in the first fiscal year or
interim period ending after March 15, 2004. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
determined that none of its partially owned companies meet the consolidation
requirements of FIN 46R. See Note 5 for a discussion of partially owned
companies.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS No. 150). This Statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Company adopted the
provisions of the Statement as of May 31, 2003 resulting in no change to the
financial statements.
2. ACQUISITION
Effective March 1, 2004, the Company purchased certain assets and assumed
certain liabilities of Covisint, LLC (Covisint), related to Covisint's
Communicate and Connect businesses (acquired business) for approximately $7
million plus certain lease obligations up to $2.1 million. The acquisition has
been accounted for using the purchase method in accordance with SFAS No. 141,
"Business Combinations". The assets and liabilities acquired have been recorded
at fair value as of the acquisition date. The aggregate amount by which the
acquisition cost exceeded the fair value of the net assets acquired was
approximately $201,000. Revenues and expenses of this business have been
reported as part of the professional services segment in fiscal 2004. Covisint's
application services include business-to-business applications and communication
services that connect the global automotive industry.
41
<PAGE>
3. INVESTMENTS
A summary of securities at March 31, 2004 and 2003 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, 2004:
Municipal Obligations $ 127,964 $ 145 $ 48 $ 128,061
Tax Advantage Auction Rate
Corporate Securities 5,000 5,000
Tax Free Auction Rate Securities 109,889 11 109,900
US Treasury Securities 67,000 91 21 67,070
Zero Coupon Municipal Bonds 2,285 4 2,289
---------- ---------- ---------- ----------
Securities classified as held to maturity $ 312,138 $ 251 $ 69 $ 312,320
========== ========== ========== ==========
March 31, 2003:
Municipal Obligations $ 122,679 $ 474 $ 9 $ 123,144
Tax Advantage Auction Rate
Corporate Securities 39,000 39,000
Tax Free Auction Rate Securities 58,100 58,100
US Treasury Securities 19,987 235 20,222
Zero Coupon Municipal Bonds 12,066 5 12,061
---------- ---------- ---------- ----------
Securities classified as held to maturity $ 251,832 $ 709 $ 14 $ 252,527
========== ========== ========== ==========
</TABLE>
Scheduled maturities of securities classified as held to maturity at March 31,
2004 were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in:
2005 $ 149,654 $ 149,712
2006 157,252 157,387
2007 5,232 5,221
--------- ---------
Total $ 312,138 $ 312,320
========= =========
</TABLE>
42
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment, summarized by major classification, is as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------
2004 2003
---------- ----------
<S> <C> <C>
Land $ 1,776 $ 1,776
Construction in progress 325,881
Buildings and improvements 393,141 31,836
Leasehold improvements 18,552 17,700
Furniture and fixtures 75,837 41,947
Computer equipment and software 79,872 77,519
---------- ----------
569,178 496,659
Less accumulated depreciation and
amortization 124,777 109,981
---------- ----------
Total $ 444,401 $ 386,678
========== ==========
</TABLE>
In July 2003, the Company entered into an option and purchase agreement for the
former headquarters building. The option agreement allows the holder to commit
to purchase the building for one year after the execution of this agreement. The
option selling price of the building approximates the current net book value of
$20 million for the building. If exercised, the holder would pay $5 million upon
exercise and the remaining balance in five years with interest paid monthly at
7% of the unpaid balance.
5. INVESTMENTS IN PARTIALLY OWNED COMPANIES
At March 31, 2004, the Company held a 33.3% interest in CareTech Solutions, Inc.
(CareTech) and a 49% interest in Foresee Results, Inc. (Foresee).
CareTech provides information technology outsourcing for healthcare
organizations including data, voice, applications and data center operations.
This investment is accounted for under the equity method including consideration
of EITF 98-13, "Accounting by an Equity Method Investor for Investee Losses When
the Investor has Loans to and Investments in Other Securities of an Investee"
(EITF 98-13).
At March 31, 2004 and 2003, the Company's carrying value of its investments in
and advances to CareTech was $22.0 million and $21.1 million, respectively.
Included in the net investment at March 31, 2004 and 2003, is a note receivable
with an adjusted basis of $14.7 million and $16.2 million, respectively, and
accounts receivable due from CareTech of $7.3 million and $4.9 million,
respectively. The note is payable in quarterly installments through January 2012
and bears interest at 5.25%. At March 31, 2004, CareTech was current with the
terms of the note.
Since 1999, the Company has guaranteed lease obligations of CareTech up to $12.5
million. The Company has not recorded any liability related to these guarantees
since it believes that CareTech will continue to meet its obligations. At March
31, 2004, CareTech's outstanding lease obligations were approximately $3.2
million.
CareTech's most significant customer is the Detroit Medical Center and
Subsidiaries (DMC). The DMC has publicly announced that it is having financial
difficulties. The Company considered the financial situation of the DMC at March
31, 2004 and concluded that no impairment charge or valuation allowance related
to our investment in and receivables due from CareTech was warranted. The DMC
has requested, and CareTech has agreed, to provide the DMC with extended payment
terms up to 90 days. The Company therefore agreed to extend 90 day payment terms
to CareTech.
43
<PAGE>
During the third quarter of fiscal 2004, the other shareholders of CareTech
expressed an inability or unwillingness to provide additional funding to meet
CareTech's cash flow requirements. Therefore, the Company will record 100
percent of any future losses incurred by CareTech as a reduction to the
Company's outstanding advances to CareTech. For the years ended March 31, 2004,
2003, and 2002, the Company recognized net income (loss) of $177,000, $(64,000)
and $173,000, respectively, from its investment in CareTech.
ForeSee was incorporated in October 2001 to provide online customer satisfaction
management. This investment is also accounted for under the equity method
including EITF 98-13.
At March 31, 2004 and 2003, the Company's carrying value of its investments in
and advances to ForeSee was $3.9 million and $4.2 million, respectively.
Included in the net investment at March 31, 2004 and 2003, are notes receivable
from ForeSee with an adjusted basis of $3.7 million and $3.5 million,
respectively. The ForeSee notes bear interest at the prime rate (4.00% at March
31, 2004) and are due between June 2007 and December 2008. The Company has
pledged $667,000 in additional loans to ForeSee, if needed, subject to approval
by the ForeSee shareholders. During the second quarter of fiscal 2004, the
Company's equity investment in ForeSee was reduced to zero. At that point, the
Company began recording 100 percent of the losses sustained by ForeSee as a
reduction to the Company's outstanding advances to ForeSee since the Company is
uncertain whether the other shareholders are willing or able to sustain their
share of the losses. The Company continues to monitor the financial situation of
ForeSee on a regular basis and has concluded that no impairment reserve was
warranted at March 31, 2004. For the years ended March 31, 2004, 2003, and 2002,
the Company recognized net losses of $2.4 million, $2.2 million and $1.0
million, respectively, from its investment in ForeSee.
Professional services revenue for the years ended March 31, 2004, 2003 and 2002
included approximately $21.3 million, $27.5 million, and $20.6 million,
respectively, from services provided to CareTech customers on a subcontractor
basis. Professional services revenue for the years ended March 31, 2004, 2003
and 2002 included approximately $932,000, $1.2 million and $580,000,
respectively, from services provided to ForeSee.
Prior to January 2002, CareTech provided services to Compuware customers on a
subcontractor basis. Cost of professional services for the years ended March 31,
2004, 2003 and 2002 included approximately $0, $16,000 and $37.5 million,
respectively, related to these services.
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, 2004, 2003 and 2002,
legal services provided by Honigman to the Company were approximately $4.4
million, $4.6 million, and $271,000, respectively. These costs are included in
"administrative and general" in the consolidated statements of operations.
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 years ended March 31, 2004, 2003 and 2002, legal services
provided by Dickinson to the Company were approximately $117,000, $259,000 and
$0, respectively. These costs are included in "administrative and general" in
the consolidated statements of operations.
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
44
<PAGE>
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, 2004,
2003 and 2002, advertising costs related to this agreement were approximately
$840,000, $858,000 and $845,000, respectively. These costs are included in
"sales and marketing" in the consolidated statements of operations.
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, 2004, 2003 and 2002, advertising costs related to
this agreement were approximately $276,000, $269,000 and $266,000, respectively.
These costs are included in "sales and marketing" in the consolidated statements
of operations.
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, 2004, 2003
and 2002, printing charges from Karmanos Printing and Graphics, Inc. were
approximately $649,000, $625,000 and $1.1 million, respectively. These costs are
primarily included in "sales and marketing" in the consolidated statements of
operations.
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.
The following table summarizes the accrual for the restructuring and charges
against the accrual during fiscal 2002, 2003 and 2004 (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)
Adjustment (1,356) 2,012 (593) (63)
---------- ---------- ---------- ---------- ----------
Accrual at March 31, 2003 698 19,088 15 19,801
Incurred during year ended
March 31, 2004 (591) (5,600) (4) (6,195)
---------- ---------- ---------- ---------- ----------
Accrual at March 31, 2004 $ 107 $ 13,488 $ 11 $ $ 13,606
========== ========== ========== ========== ==========
</TABLE>
45
<PAGE>
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 reduced. The accrual for
facilities costs was increased, 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,
2004.
8. GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 2004
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
<S> <C> <C> <C>
Unamortized intangible assets:
Trademarks (1) $ 370 $ 370
============ ============ ============
Amortized intangible assets:
Capitalized software (2) 238,980 (193,491) 45,489
Other (3) 7,220 (4,413) 2,807
------------ ------------ ------------
Total amortized intangible assets $ 246,200 $ (197,904) $ 48,296
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
March 31, 2003
--------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
<S> <C> <C> <C>
Amortized intangible assets:
Capitalized software (2) $ 221,603 $ (167,089) $ 54,514
Other (3) 6,200 (4,055) 2,145
------------ ------------ ------------
Total amortized intangible assets $ 227,803 $ (171,144) $ 56,659
============ ============ ============
</TABLE>
1) Certain trademarks were acquired as part of the Covisint acquisition in
fiscal 2004. These trademarks are deemed to have an indefinite life and
therefore are not being amortized.
2) Amortization of capitalized software is included in "cost of software
license fees" in the consolidated statements of operations. Capitalized
software is generally amortized over five years.
3) Other amortized intangible assets include trademarks associated with past
product acquisitions and Covisint customer contracts. These trademarks are
being amortized over ten years. The Covisint customer contracts are being
amortized over three years.
Amortization expense on intangible assets for the years ended March 31, 2004,
2003 and 2002 was $26.8 million, $26.2 million, and $34.3 million, respectively.
Annual amortization expense, based on identified intangible assets at March 31,
2004, is expected to be as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capitalized software $ 19,671 $ 10,440 $ 7,656 $ 5,080 $ 2,642
Other 670 670 642 330 330 165
-------- -------- -------- -------- -------- --------
Total $ 20,341 $ 11,110 $ 8,298 $ 5,410 $ 2,972 $ 165
======== ======== ======== ======== ======== ========
</TABLE>
46
<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 goodwill at March 31, 2004
and 2003 and determined there was no impairment in either fiscal year. Changes
in the carrying amounts of goodwill for the years ended March 31, 2004 and 2003
are 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
Acquisition 201 201
Effect of foreign currency translation 870 870
-------- -------- --------
Balance at March 31, 2004, net $ 72,182 $141,177 $213,359
======== ======== ========
</TABLE>
The Company's reported net loss and diluted loss per share exclusive of
amortization of goodwill in fiscal 2002 on an after-tax basis were as follows
(in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended
March 31, 2002
--------------
<S> <C>
Reported net loss $ (245,255)
Add goodwill amortization, net of tax 32,825
----------
Adjusted net loss $ (212,430)
==========
Adjusted basic loss per share $ (0.57)
==========
Adjusted diluted loss per share $ (0.57)
==========
</TABLE>
9. LONG TERM DEBT
The Company has no long term debt.
On May 2, 2003, the Company entered into a $100 million revolving credit
facility maturing on July 29, 2004. If at any time the combined unencumbered
liquid assets of the Company (as defined in the credit facility) are less than
$200 million, the credit facility will be reduced to $50 million. Interest is
payable at 1% over the Eurodollar rate or at the prime rate, at the Company's
option (4% at March 31, 2004). The terms of the credit facility contain, among
other provisions, a covenant to maintain a minimum $1 billion consolidated net
worth, and specific limitations on additional indebtedness, liens and merger
activity. No borrowings have occurred or are planned under this facility.
The Company incurs interest expense primarily related to the accrual for certain
abandoned leases. Cash paid for interest totaled approximately $2.2 million,
$2.2 million and $3.6 million for the years ended March 31, 2004, 2003 and 2002,
respectively.
47
<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 $2.8 million 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.
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.
Purchases of common stock occur on the open market, through negotiated or block
transactions, periodically, based upon market and business conditions. The
Company regularly evaluates market conditions for an opportunity to repurchase
common stock. During fiscal 2004, approximately 200,000 shares of Company common
stock were acquired under this program.
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,
------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Numerator: Net income (loss) $ 49,832 $ 103,102 $ (245,255)
---------- ---------- ----------
Denominator:
Weighted-average common shares outstanding 382,630 377,028 371,786
---------- ---------- ----------
Basic earnings (loss) per share $ 0.13 $ 0.27 $ (0.66)
========== ========== ==========
Diluted earnings (loss) per share:
Numerator: Net income (loss) $ 49,832 $ 103,102 $ (245,255)
---------- ---------- ----------
Denominator:
Weighted-average common shares outstanding 382,630 377,028 371,786
Dilutive effect of stock options and warrant 1,978 1,412
---------- ---------- ----------
Total shares 384,608 378,440 371,786
---------- ---------- ----------
Diluted earnings (loss) per share $ 0.13 $ 0.27 $ (0.66)
========== ========== ==========
</TABLE>
48
<PAGE>
During the years ended March 31, 2004, 2003 and 2002, the warrant and stock
options to purchase approximately 60,345,000, 61,917,000 and 66,864,000 shares,
respectively, were excluded from the diluted EPS calculation because they were
anti-dilutive.
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,
-----------------------
2004 2003
---------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred maintenance $ 8,506 $ 10,661
Amortization of intangible assets 50,601 60,319
Restructuring accrual 4,762 6,823
Allowance for doubtful accounts 5,740 7,028
U.S. tax credit carryforwards 16,849 5,768
Foreign net operating loss carryforwards 19,172 21,706
Other 34,769 31,702
---------- ----------
140,399 144,007
Less valuation allowance 9,497 6,915
---------- ----------
Net deferred tax assets 130,902 137,092
Current portion 32,832 30,850
---------- ----------
Long term portion $ 98,070 $ 106,242
========== ==========
Deferred tax liabilities:
Capitalized research and development costs $ 11,544 $ 12,790
Depreciation 42,186 16,633
Other 49,401 56,890
---------- ----------
Total deferred tax liabilities 103,131 86,313
Current portion 372 245
---------- ----------
Long term portion $ 102,759 $ 86,068
========== ==========
</TABLE>
The income tax provision (benefit) includes the following (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ (26,198) $ 6,946 $ 56,794
Foreign 10,591 9,785 8,673
State (1,215) 465 4,426
---------- ---------- ----------
Total current tax provision (benefit) (16,822) 17,196 69,893
Deferred:
Federal 20,282 30,934 (71,435)
Foreign 765 2,642 1,081
State 1,960 2,341 (5,131)
---------- ---------- ----------
Total deferred tax expense (benefit) 23,007 35,917 (75,485)
---------- ---------- ----------
Total income tax provision (benefit) $ 6,185 $ 53,113 $ (5,592)
========== ========== ==========
</TABLE>
49
<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,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax (benefit) at
statutory rates $ 19,606 $ 54,675 $ (87,796)
Increase (decrease) in taxes:
Export sales benefit (3,679) (4,065) (4,290)
State income taxes, net 484 1,824 (458)
Goodwill amortization and impairment 88,600
Settlement of prior year tax matters (1) (9,500)
Other, net (726) 679 (1,648)
---------- ---------- ----------
Provision (benefit) for income taxes $ 6,185 $ 53,113 $ (5,592)
========== ========== ==========
</TABLE>
(1) Primarily relates to favorable tax settlements with the U.S. Internal
Revenue Service and recent developments in other tax matters both in
the U.S. and other taxing jurisdictions.
At March 31, 2004 the Company has foreign net operating loss carryforwards for
income tax purposes of $19.2 million which expire as follows (in thousands):
<TABLE>
<S> <C>
Year ending March 31:
2005 1,840
2006 497
2008 235
2010 236
2011 742
Unlimited carryforward 15,622
</TABLE>
The deferred tax asset for these foreign loss carryforwards has been reduced by
a valuation allowance of $1.6 million.
For U.S. tax purposes, $741,000 (expiring 2010 through 2020) of net operating
losses is available to reduce U.S. federal income taxes. In addition, $10.4
million (expiring in 2008 and 2009) of foreign tax credits are available to
offset future U.S. federal income tax liabilities; the deferred tax asset for
these foreign tax credits has been reduced by a valuation allowance of $5.2
million. Deferred tax assets related to charitable contribution and general
business credit carryforwards are available to offset future U.S. federal income
tax liabilities of $8.2 million (expiring in 2009, 2023 and 2024). A capital
loss carryforward is available to offset future U.S. federal capital gains of
$290,000 (expiring in 2007); this asset has been reduced entirely by a valuation
allowance.
Cash paid (received) for income taxes totaled $4.6 million, ($7.9 million), and
$65.9 million for the years ended March 31, 2004, 2003 and 2002, respectively.
50
<PAGE>
13. SEGMENT INFORMATION
Compuware operates in two business segments in the software industry: products
and professional 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 extended its offerings to include application
services by adding Covisint effective March 1, 2004. Revenues and expenses of
the application services business have been reported as part of the professional
services segment beginning March 1, 2004.
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,
communication, programming, software conversion and system planning and
consulting.
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 2004 and 2002 or greater than 10% of accounts
receivable at March 31, 2004 and 2003.
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,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Products:
Mainframe $ 527,310 $ 553,480 $ 687,286
Distributed systems 177,508 154,416 164,096
------------ ------------ ------------
Total products revenue 704,818 707,896 851,382
Professional services 559,829 667,444 889,162
------------ ------------ ------------
Total revenues $ 1,264,647 $ 1,375,340 $ 1,740,544
============ ============ ============
Income (loss) from operations:
Products $ 198,941 $ 269,855 $ 358,504
Professional services 46,208 55,800 49,013
Corporate expenses (209,797) (191,131) (207,166)
Goodwill amortization (38,926)
------------ ------------ ------------
Income from operations before goodwill
impairment and other charges 35,352 134,524 161,425
Goodwill impairment charge (387,418)
Restructuring charge (46,930)
Other income 20,665 21,691 22,076
------------ ------------ ------------
Income (loss) before income taxes $ 56,017 $ 156,215 $ (250,847)
============ ============ ============
</TABLE>
51
<PAGE>
Financial information regarding geographic operations are presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
United States $ 875,340 $ 1,009,354 $ 1,328,056
Europe and Africa 303,328 286,088 314,172
Other international operations 85,979 79,898 98,316
------------ ------------ ------------
Total revenue $ 1,264,647 $ 1,375,340 $ 1,740,544
============ ============ ============
</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.
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 contribution and advertising agreements. The following
is a schedule of future minimum commitments for the next five years and in total
(in thousands):
<TABLE>
<CAPTION>
Payment Due by Period as of March 31,
----------------------------------------------------------------------------------------
2010 and
Total 2005 2006 2007 2008 2009 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual obligations:
Operating leases $ 325,153 $ 29,287 $ 23,320 $ 19,396 $ 15,885 $ 11,558 $ 225,707
Other (1) 8,280 4,605 2,075 200 200 200 1,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 333,433 $ 33,892 $ 25,395 $ 19,596 $ 16,085 $ 11,758 $ 226,707
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) - Other includes a $4.0 million commitment to various City of Detroit
charities and a $4.3 million advertising agreement.
In connection with the new headquarters facility, the Company has entered into a
lease agreement for the land associated with the facility. Total rent payments
under this agreement were approximately $750,000 and $717,000 for the years
ended March 31, 2004 and 2003, respectively. 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.
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, 2004, approximately 168,000 phantom shares had been issued. The expense
incurred related to this program was approximately $968,000 and $275,000 for the
years ended March 31, 2004 and 2003, respectively, 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.
52
<PAGE>
Legal Matters - On March 12, 2002, the Company filed suit in the United States
District Court for the Eastern District of Michigan against International
Business Machines Corporation ("IBM") alleging, among other things, infringement
of our copyrights and misappropriation of our trade secrets with respect to our
mainframe software tools, intentional interference with contractual relations
with our employees and former employees, anti-trust law violations, tortious
interference with our economic expectancy and various state law violations. The
suit seeks injunctive relief and unspecified monetary damages, among other
things, from IBM. In addition, IBM has filed a counterclaim against Compuware
alleging violation of six IBM patents. The Compuware products accused of
infringement are File-AID CS, Abend-AID, and Xpediter. The Court bifurcated the
patent counterclaims from the other claims and fact discovery is proceeding. No
trial date has been set for the counterclaims. We believe we have valid defenses
to the counterclaims, and we will vigorously defend against those claims. In
December 2003, the Court denied the Company's Motion for Preliminary Injunction
on the trade secret and false advertising claims, ruling that there were fact
issues that needed to be decided by a jury. The Company's Motion did not address
IBM's antitrust violations or unfair competition. Those claims, as well as the
trade secret misappropriation claims are scheduled to be tried by a jury in
September 2004.
On January 15, 2004, IBM filed patent infringement claims against Compuware in
the United States District Court for the Southern District of New York alleging
infringement of seven IBM patents. The suit seeks injunctive relief and
unspecified monetary damages. We believe we have valid defenses to the claims,
and intend to vigorously defend against the lawsuit.
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 suit was
brought on behalf of purchasers of the Company's common stock from January 1,
1999 to April 3, 2002. 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.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. The
Company does not believe that the outcome of any of these legal matters,
including those discussed above, will have a material adverse effect on the
Company's consolidated financial position or results of operations.
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. Contributions totaled $4.9 million, $9.4
million and $10.7 million in fiscal 2004, 2003 and 2002, respectively. The 2004
contribution was distributed to the ESOP subsequent to March 31, 2004. 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 per
53
<PAGE>
employee. 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 2004, 2003
and 2002, the Company sold approximately 2,340,000, 3,482,000, and 1,007,000
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 36,877,000 options were outstanding at
March 31, 2004. 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 2004, the Company granted approximately 619,000 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. (At March 2001, shareholder approval was not
required.) 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 2004, the
Company granted approximately 2,235,000 options under the Broad Based Stock
Option Plan. Approximately 25,471,000 options were outstanding at March 31,
2004. 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 2004, no options were granted under the Non-Employee
Director Stock Option Plan. Approximately 1,247,000 options were outstanding at
March 31, 2004.
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.
At March 31, 2004, approximately 31,000 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 2004, approximately 55,000 options were exercised under the Replacement
Stock Option Award program for which approximately 37,000 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.
54
<PAGE>
A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 2004, 2003 and 2002, and changes
during the years ending on those dates is as follows (shares in thousands):
<TABLE>
<CAPTION>
2004 2003 2002
----------------------- ---------------------- --------------------------
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 64,233 $ 11.75 65,864 $ 12.30 46,272 $ 13.53
Granted 2,854 5.45 5,975 7.17 31,380 9.46
Exercised (837) 3.37 (552) 2.82 (4,022) 5.02
Exchanged (37) 6.06 (12) 8.35 (878) 12.07
Forfeited (2,587) 10.84 (7,042) 13.79 (6,888) 12.62
------- -------- ----------
Outstanding at year end 63,626 $ 11.62 64,233 $ 11.75 65,864 $ 12.30
======= ======== ==========
Options exercisable at
year end 42,128 $ 13.06 34,510 $ 12.78 27,581 $ 12.42
======= ======== ==========
Weighted-average
fair value of options
granted during the year $ 3.22 $ 5.24 $ 5.09
======= ======== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 2004 (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 43,644 6.22 $ 8.11 23,888 $ 8.09
10.01 to 20.00 11,341 4.43 14.90 9,712 14.82
20.01 to 30.00 7,969 4.00 24.41 7,884 24.41
30.01 to 42.00 672 4.20 32.23 644 32.24
------ ------ -----
63,626 5.60 11.62 42,128 13.06
====== ====== =====
</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 38,155 $13.51 7,286
Equity compensation plans not
approved by security holders 25,471 8.78 23,989
</TABLE>
The maximum number of shares for which additional options may be granted was
31,275,605, 31,596,483 and 32,058,441 at March 31, 2004, 2003 and 2002,
respectively. At March 31, 2004, a total of 95,901,688 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.
55
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended March 31, 2004 and
2003 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 2004:
Revenues $ 306,012 $ 302,753 $ 318,185 $ 337,697 $ 1,264,647
Operating income (loss) (1,494) (16,468) 12,131 41,183 35,352
Pre-tax income (loss) 3,615 (11,830) 17,119 47,113 56,017
Net income (loss) 2,603 (8,518) 21,825 33,922 49,832
Basic earnings (loss) per share 0.01 (0.02) 0.06 0.09 0.13
Diluted earnings (loss) per share 0.01 (0.02) 0.06 0.09 0.13
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
</TABLE>
17. SUBSEQUENT EVENT
In May 2004, the Company acquired all outstanding shares of Changepoint
Corporation, a privately held market-leader of IT Governance application
software for approximately $100 million in cash. The acquisition will be
accounted for as a purchase during the first quarter of fiscal 2005, and,
accordingly, assets and liabilities acquired will be recorded at fair
value as of the acquisition date.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934. 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. No changes in the
Company's internal control over financial reporting occurred during the
quarter ended March 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.
56
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in the Proxy Statement
for the 2004 Annual Meeting of Shareholders under the captions "Corporate
Governance" (excluding the Report of the Audit Committee), "Election of
Directors" and "Other Matters - Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Proxy Statement
under the caption "Compensation of Executive Officers and 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 AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is contained in the Proxy Statement
under the caption "Security Ownership of Management and Major
Shareholders" and is incorporated herein by reference. 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is contained in the Proxy Statement
under the caption "Other Matters - Relationship with Independent Public
Accountants" and is incorporated herein by reference.
57
<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>
Report of Independent Registered Public Accounting Firm 32
Consolidated Balance Sheets as of March 31, 2004 and 2003 33
Consolidated Statements of Operations for each of the years
ended March 31, 2004, 2003, and 2002 34
Consolidated Statements of Shareholders' Equity for each of
the years ended March 31, 2004, 2003, and 2002 35
Consolidated Statements of Cash Flows for each of the years
ended March 31, 2004, 2003, and 2002 36
Notes to Consolidated Financial Statements 37-56
2. FINANCIAL STATEMENT SCHEDULE INCLUDED IN PART IV OF THIS FORM:
Report of Independent Registered
Public Accounting Firm 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
A Current Report on Form 8-K pursuant to Items 9 and 12 was filed on
January 26, 2004 reporting that on January 22, 2004, the Company
issued a press release announcing financial results for the fiscal
quarter ended December 31, 2003 and certain other information. A
copy of the earnings conference call transcript was also furnished
with the Report. The information was considered furnished, rather
than filed. No financial statements were filed with this report.
A Current Report on Form 8-K pursuant to Items 9 and 12 was filed on
February 6, 2004 reporting that on February 5, 2004, the Company
issued a press release announcing that it entered into a definitive
agreement for Compuware to acquire the products and technology of
Covisint LLC. The information was considered furnished, rather than
filed. No financial statements were filed with this report.
A Current Report on Form 8-K pursuant to Item 9 was filed on March
2, 2004 reporting that on March 1, 2004, Compuware closed the
transaction to acquire the products and technology of Covisint LLC.
The information was considered furnished, rather than filed. No
financial statements were filed with this report.
58
<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 4, 2004.
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 4, 2004
- -------------------------------- And Director (Principal Executive Officer)
Peter Karmanos, Jr.
/S/ LAURA L. FOURNIER Senior Vice President, Chief Financial Officer June 4, 2004
- -------------------------------- and Treasurer (Chief Financial and Accounting Officer)
Laura L. Fournier
/S/ DENNIS W. ARCHER Director June 4, 2004
- --------------------------------
Dennis W. Archer
Director
- --------------------------------
Gurminder S. Bedi
Director
- --------------------------------
Elizabeth A. Chappell
/S/ ELAINE K. DIDIER Director June 4, 2004
- --------------------------------
Elaine K. Didier
/S/ WILLIAM O. GRABE Director June 4, 2004
- --------------------------------
William O. Grabe
/S/ WILLIAM R. HALLING Director June 4, 2004
- --------------------------------
William R. Halling
/S/ FAYE A. NELSON Director June 4, 2004
- --------------------------------
Faye A. Nelson
/S/ GLENDA D. PRICE Director June 4, 2004
- --------------------------------
Glenda D. Price
/S/ W. JAMES PROWSE Director June 4, 2004
- --------------------------------
W. James Prowse
/S/ G. SCOTT ROMNEY Director June 4, 2004
- --------------------------------
G. Scott Romney
/S/ LOWELL P. WEICKER, JR. Director June 4, 2004
- --------------------------------
Lowell P. Weicker, Jr.
</TABLE>
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 000-20900.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2.3 Asset Purchase Agreement, dated February 4, 2004, by and between
Compuware Corporation and Covisint, LLC. (13)
2.4 Amended and Restated Share Purchase Agreement among 3087769 Nova
Scotia Company and Compuware Corporation and Changepoint Corporation
and Each of the Sellers, dated as of April 27, 2004. (13)
3(i).1 Restated Articles of Incorporation of Compuware Corporation, as
amended, as of October 25, 2000. (9)
3(i).5 Amended and Restated Bylaws of Compuware Corporation, as of October
2001. (10)
4.0 Rights Agreement dated as of October 25, 2000 between Compuware
Corporation and Equiserve Trust Company, N.A., as Rights Agent. (7)
4.1 Warrant dated November 16, 2001 (11)
4.2 Revolving Credit Agreement dated as of May 2, 2003, between
Compuware Corporation and Comerica Bank (12)
4.3 Amendment No. 1 to Credit Agreement, dated as of April 30, 2004.
(13)
*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 (6)
10.52 Advertising Agreement, dated December 1, 1996, between Arena
Management Company and the Company (6)
*10.83 Fiscal 1999 Stock Option Plan (8)
*10.85 2001 Broad Based Stock Option Plan (5)
*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 (12)
</Table>
60
<PAGE>
<TABLE>
<S> <C>
21.1 Subsidiaries of the Registrant (13)
23.1 Consent of Independent Registered Public Accounting Firm (13)
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (13)
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (13)
32.1 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. (13)
32.2 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. (13)
</TABLE>
- ------------------
(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 exhibit 4.10 to the Registration Statement on
Form S-8 (Registration Statement No. 333-57984).
(6) Incorporated by reference to the corresponding exhibit to the fiscal 2000
Annual Report on Form 10-K.
(7) 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.
(8) Incorporated by reference to Exhibit 10 to the Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000.
(9) Incorporated by reference to the corresponding exhibit to the fiscal 2001
Annual Report on Form 10-K.
(10) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001.
(11) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 2001.
(12) Incorporated by reference to the corresponding exhibit to the fiscal 2003
Annual Report on Form 10-K.
(13) Filed herewith
61
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF COMPUWARE CORPORATION:
We have audited the financial statements of Compuware Corporation and
subsidiaries (the "Company") as of March 31, 2004 and 2003, and for each of the
three years in the period ended March 31, 2004, and have issued our report
thereon dated May 26, 2004 (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the adoption of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets");
such financial statements and report are included in this Annual Report on Form
10-K. Our audits also included the financial statement schedule of Compuware
Corporation and subsidiaries, listed in Item 15(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, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
May 26, 2004
62
<PAGE>
COMPUWARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(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, 2004 $26,543 $ 2,711 $6,689 $22,565
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
</TABLE>
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2.3 Asset Purchase Agreement, dated February 4, 2004, by and between
Compuware Corporation and Covisint, LLC. (13)
2.4 Amended and Restated Share Purchase Agreement among 3087769 Nova
Scotia Company and Compuware Corporation and Changepoint Corporation
and Each of the Sellers, dated as of April 27, 2004. (13)
4.3 Amendment No. 1 to Credit Agreement, dated as of April 30, 2004.
(13)
21.1 Subsidiaries of the Registrant (13)
23.1 Consent of Independent Registered Public Accounting Firm (13)
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (13)
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (13)
32.1 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. (13)
32.2 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. (13)
</TABLE>
(13) Filed herewith.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.3
<SEQUENCE>2
<FILENAME>k85711exv2w3.txt
<DESCRIPTION>ASSET PURCHASE AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 2.3
ASSET PURCHASE AGREEMENT
DATED FEBRUARY 4, 2004
BY AND BETWEEN
COMPUWARE CORPORATION
AND
COVISINT, LLC
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Definitions................................................................. 1
2. Transfer of Assets; Assumed Liabilities; Excluded Liabilities............... 7
2.1 Transfer of Assets................................................. 7
2.2 Excluded Assets.................................................... 9
2.3 Assumption of Liabilities.......................................... 9
2.4 Excluded Liabilities............................................... 9
3. Closing..................................................................... 10
3.1 Closing Date....................................................... 10
3.2 Purchase Price..................................................... 10
3.3 Additional Payments................................................ 10
3.4 Purchase Price Allocation.......................................... 11
3.5 Actions to be Taken and Documents to be Delivered at the Closing... 12
3.6 Third Party Consents............................................... 13
3.7 Additional Consideration........................................... 13
4. Representations and Warranties of Covisint.................................. 14
4.1 Organization; Power and Authority; Authorization; Due Execution;
No Conflicts....................................................... 14
4.2 Title.............................................................. 15
4.3 Properties and Improvements........................................ 15
4.4 Other Assets of Covisint........................................... 15
4.5 Claims; Litigation; Compliance with Laws; Approvals................ 15
4.6 Agreements; Contracts.............................................. 16
4.7 Proprietary Rights................................................. 16
4.8 Employees; Employee Benefits....................................... 20
4.9 Insurance.......................................................... 21
4.10 Financial Statements............................................... 21
4.11 Undisclosed Liabilities............................................ 22
4.12 Taxes.............................................................. 22
4.13 Absence of Changes or Events....................................... 23
4.14 Environmental and Occupational Matters............................. 24
4.15 Subsidiaries....................................................... 25
4.16 [Intentionally Omitted.]........................................... 25
4.17 [Intentionally Omitted.]........................................... 25
4.18 Guarantees......................................................... 25
4.19 Related Parties.................................................... 25
4.20 [Intentionally Omitted.]........................................... 25
4.21 Brokers............................................................ 25
4.22 Disclosure......................................................... 25
5. Buyer's Representations and Warranties...................................... 26
5.1 Organization; Power and Authority.................................. 26
5.2 Authorization; Due Execution; No Conflicts......................... 26
5.3 Brokers............................................................ 26
5.4 No Knowledge....................................................... 26
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
6. Covenants................................................................... 26
6.1 Conduct Through the Closing Date................................... 26
6.2 Approvals and Consents............................................. 28
6.3 Advice of Changes.................................................. 28
6.4 Notice of Litigation............................................... 28
6.5 Access to Properties and Records; Inspection....................... 28
6.6 Supplemental Information and Documents............................. 28
6.7 Filings............................................................ 29
6.8 Non-Disclosure Agreement........................................... 29
6.9 Work in Progress................................................... 29
6.10 Change and Use of the Covisint Name................................ 29
6.11 Employee Matters and Noncompetition................................ 30
6.12 Maintenance of Books and Records................................... 30
6.13 Exclusivity........................................................ 31
6.14 Management Letters................................................. 31
6.15 Commissions........................................................ 31
7. Conditions Precedent to the Parties' Obligations to Close................... 32
7.1 Conditions Precedent of Buyer...................................... 32
7.2 Conditions Precedent of Covisint................................... 33
8. Default; Termination of Agreement........................................... 33
8.1 Default............................................................ 33
8.2 Termination........................................................ 33
9. Indemnification............................................................. 34
9.1 Indemnification by Covisint........................................ 34
9.2 Indemnification by Buyer........................................... 35
9.3 Claims for Indemnification......................................... 35
9.4 Third-Party Claims................................................. 36
9.5 Limits on Indemnification.......................................... 36
9.6 Tax Indemnification Procedure...................................... 38
10. Miscellaneous............................................................... 39
10.1 Notices............................................................ 39
10.2 No Waiver.......................................................... 40
10.3 Successors and Assigns............................................. 40
10.4 Severability....................................................... 40
10.5 Entire Agreement; Amendment........................................ 41
10.6 Cost of Litigation................................................. 41
10.7 Interpretation..................................................... 41
10.8 Counterparts....................................................... 42
10.9 Applicable Law; Choice of Forum.................................... 42
10.10 Expenses........................................................... 42
10.11 Press Releases..................................................... 43
10.12 Further Assurances................................................. 43
10.13 Certain Tax Matters................................................ 43
10.14 Post-Termination Confidentiality Requirements...................... 43
10.15 No Third Party Beneficiaries....................................... 43
</TABLE>
ii
<PAGE>
Schedules and Exhibits
<TABLE>
<CAPTION>
Schedules
- ---------
<S> <C>
Schedule 1(a) - Deferred Revenue *
Schedule 1(b) - Prepaid Expenses *
Schedule 2.1 - Assets Owned by Members; Transfers Requiring Consents *
Schedule 2.1(e) - Contracts *
Schedule 2.1(f) - Responder Contracts *
Schedule 2.2 - Excluded Assets *
Schedule 2.3 - Assumed Liabilities *
Schedule 3.3 - Additional Payments *
Schedule 3.4 - Purchase Price Allocation *
Schedule 4.1 - No Conflicts; Jurisdictions Where Qualified *
Schedule 4.3 - Properties and Improvements *
Schedule 4.4 - Leased Assets *
Schedule 4.5 - Claims; Litigation; Compliance with Laws; Approvals *
Schedule 4.6 - Agreements; Contracts; Warranties *
Schedule 4.7 - Proprietary Rights *
Schedule 4.8 - Employees; Employee Benefits *
Schedule 4.11 - Undisclosed Liabilities *
Schedule 4.12 - Taxes *
Schedule 4.13 - Absence of Changes or Events *
Schedule 4.15 - Subsidiaries *
Schedule 4.18 - Guarantees *
Schedule 4.19 - Related Parties *
Schedule 4.21 - Brokers (Covisint) *
</TABLE>
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A - Assignment and Assumption Agreement *
Exhibit B - Bill of Sale *
Exhibit C - Intellectual Property Assignment *
Exhibit D - [reserved] *
Exhibit E - [reserved] *
Exhibit F - Transition Services Agreement Outline *
Exhibit G - Officer's Certificate - Buyer *
Exhibit H - Form of Opinion of Buyer General Counsel *
Exhibit I - Officers' Certificates - Covisint *
Exhibit J - Form of Opinion of Honigman, Miller, Schwartz and Cohn *
</TABLE>
* - The Company will furnish supplementally a copy of any omitted schedule to
the Commission upon request.
iii
<PAGE>
ASSET PURCHASE AGREEMENT
This Agreement is made as of February 4, 2004, by and between Compuware
Corporation, a Michigan corporation ("Buyer"), and Covisint, LLC, a Delaware
limited liability company ("Covisint"). Certain capitalized terms used in this
Agreement are either defined or referenced in Article 1 below.
RECITALS
A. Covisint is engaged in the Business as defined below.
B. Subject to the terms and conditions hereinafter set forth, Covisint
desires to sell to Buyer, and Buyer desires to purchase from Covisint,
substantially all of the assets belonging to, used or intended to be used in the
Business.
C. The Board of Directors of Buyer and the Board of Directors of the
Managing Member of Covisint have each determined that the transactions
contemplated herein are in the best interests of their respective shareholders
and members, and have approved the transactions contemplated herein, upon the
terms and subject to the conditions set forth in this Agreement.
D. Buyer and Covisint desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated herein.
Therefore, the parties agree as follows:
1. Definitions. As used in this Agreement:
"Active Employee" is defined in Section 6.11(a) of this Agreement
"Adjustment Amount" is defined in Section 3.2 of this Agreement.
"Affiliate" means with respect to any specified Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such specified Person. For purposes of this definition "control,"
"controlling" and "controlled" means the ownership of voting securities or other
interests of a Person having by their terms ordinary voting power to elect a
majority of the Board of Directors of such Person or a majority of others
performing similar management functions with respect to such Person. For the
avoidance of doubt, General Motors Corporation, Ford Motor Company and DCX.Net
GMBH shall not be deemed Affiliates of Covisint.
"Agreement" means this Asset Purchase Agreement.
"Alternative Transaction" is defined in Section 6.13 of this
Agreement.
"Assets" is defined in Section 2.1 of this Agreement.
"Assignment and Assumption Agreement" means an assignment and
assumption agreement substantially in the form of Exhibit A attached to this
Agreement.
1
<PAGE>
"Assumed Liabilities" is defined in Section 2.3 of this Agreement.
"Benefit Plans" means "employee benefit plans" (as defined in
Section 3(3) of ERISA), and all other bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, stock bonus, phantom stock, retirement, vacation, severance, disability,
death benefit, welfare, holiday bonus, hospitalization, medical or other plan or
arrangement, providing benefits to any current or former employee, officer or
director of Covisint, or maintained or contributed to by Covisint or by any
member of its controlled group(s) as defined in Code Sections 414(b), (c), (m),
or (o) for the benefit of any employee, officer or director of Covisint.
"Bill of Sale" means a bill of sale for the sale of the Assets
substantially in the form of Exhibit B attached to this Agreement.
"Business" means Covisint's current business of development,
marketing, provision, and maintenance of systems (including hardware, software,
networks, and support thereof) related to:
(i) Covisint Connect and/or Covisint Messaging: a XML or other
uniform-language data messaging service that provides a single, or reduced
number of, connection for an enterprise's computers to exchange data with the
computers of the other enterprises with which it does business (including
integration of traditional EDI protocols into same). Covisint Connect also
includes a common web based view of traditional EDI or messaging data for
multiple originators.
(ii) Covisint Communicate and/or Covisint Portal: a common
infrastructure that permits enterprises to communicate information and to access
each other's applications via the Internet in a secure way extending down to the
individual user.
(iii) Covisint Collaborate: application, deployment and
interoperability via web services.
(iv) Covisint Problem Solver: a Covisint-developed application that
allows enterprises to communicate manufacturing problems, other associated
problems, and their subsequent resolution in a structured way via the Internet.
"Buyer" is defined in the introductory paragraph of this Agreement.
"Buyer Indemnified Parties" is defined in Section 9.1 of this
Agreement.
"Buyer's Welfare Plans" is defined in Section 6.11(a) of this
Agreement.
"Claim Notice" is defined in Section 9.3(c) of this Agreement.
"Claimant" is defined in Section 9.3(a) of this Agreement.
"Closing" is defined in Section 3.1 of this Agreement.
2
<PAGE>
"Closing Date" is the date on which the Closing takes place. For
purposes of determining any fact as of the Closing Date, such determination is
to be made as of 12:01 a.m. on such date.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Contracts" is defined in Section 2.1(g) of this Agreement.
"Covisint" is defined in the introductory paragraph of this
Agreement.
"Customers" is defined in Section 6.9 of this Agreement.
"Deferred Revenue" means the advance payments received by Covisint
with respect to obligations under Contracts to be performed by Buyer after the
Closing Date and listed on Schedule 1(a).
"Difference Amount" is defined in Section 3.3 of this Agreement.
"Entitled Party" is defined in Section 6.9 of this Agreement.
"Environmental Laws" means any Law which relates to pollution (or
the clean up of the environment), or the protection of air, surface water,
groundwater, drinking water, land (surface or subsurface), the environment or
any other natural resource or the use, storage, recycling, treatment,
generation, processing, handling, production or disposal of Hazardous Materials,
including but not limited to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 USC Sections 9601 et seq.
and 40 CFR Sections 302.1 et seq., and regulations thereunder; the Federal Clean
Air Act, as amended, 42 USC Sections 7401 et seq., and regulations thereunder;
the Resource Conservation and Recovery Act, 42 USC Sections 6901 et seq., as
amended, and regulations thereunder; and the Federal Water Pollution Control
Act, 33 USC Sections 1251 et seq., as amended, and regulations thereunder.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Estimated Statement" is defined in Section 3.3(a) of this
Agreement.
"Excluded Assets" is defined in Section 2.2 of this Agreement.
"Excluded Liabilities" is defined in Section 2.4 of this Agreement.
"Fees and Costs" means reasonable legal (including attorneys' and
legal assistants') fees, disbursements and costs; reasonable fees, disbursements
and costs of third party consultants and experts; court costs; and similar
items.
3
<PAGE>
"Final Determination" with respect to a Tax Proceeding means (a) a
final decision with respect to the proposed adjustment by an IRS agent or
officer, as evidenced by the issuance of a 90-day letter, IRS Form 870-AD or
like notice, unless judicial proceedings are timely initiated, (b) a final
decision with respect to the proposed adjustment by the United States Tax Court,
Court of Federal Claims or the appropriate Federal District Court, unless such
decision is timely appealed, (c) a final decision of a United States Court of
Appeals, unless such decision is timely appealed, or (d) a final decision by the
United States Supreme Court.
"Final Statement" is defined in Section 3.3 of this Agreement.
"Financial Statements" is defined in Section 4.10 of this Agreement.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental Entity" is defined in Section 4.1(c) of this
Agreement.
"Hazardous Materials" means asbestos-containing materials, mono- and
polychlorinated biphenyls, urea formaldehyde products, radon, radioactive
materials, any "hazardous substance", "hazardous waste", "pollutant", "Toxic
Pollutant", "oil" or "contaminant" as used in, or defined pursuant to any
Environmental Law, and any other substance, waste, pollutant, contaminant or
material, including petroleum products and derivatives, the use, transport,
disposal, storage, treatment, recycling, handling, discharge, Release,
threatened Release, discharge or emission of which is regulated or governed by
any Environmental Law.
"Indemnifying Party" is defined in Section 9.3(a) of this Agreement.
"Intellectual Property Assignments" means an assignment by Ford
Motor Company of the Proprietary Rights listed in Schedule 2.1, and assignments,
in the form attached hereto as Exhibit C, by Covisint and its Affiliates of all
of their respective rights in the Proprietary Rights in respect of the Business.
"IRS" means the Internal Revenue Service and any successor federal
agency.
"Law" or "Laws" means all applicable federal, state or local laws,
zoning and other ordinances, rules, regulations, building and other codes, court
or administrative orders, judgments or decrees, and the common law.
"Liability" or "Liabilities" means any commitments, liabilities,
obligations, indebtedness, accounts payable and accrued expenses (whether any of
the foregoing are known or unknown, asserted or unasserted, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated and/or due or to
become due) of Covisint, including any Liability or obligation for Taxes.
"License Agreements" is defined in Section 4.7(a) of this Agreement.
"Lien" is defined in Section 4.2 of this Agreement.
4
<PAGE>
"Loss" means and includes any damage, liability, loss, claim, cost,
debt, expense, obligation, Tax, assessment, lawsuit or deficiency of any kind or
nature, fixed, actual, accrued or contingent, liquidated or unliquidated,
including, without limitation Fees and Costs incident to proceedings or
investigations or the defense of any of the foregoing, whether or not litigation
has commenced.
"Open Source Materials" is defined in Section 4.7(n) of this
Agreement.
"Patents, Trademarks, and Copyrights" means:
(a) any know-how, invention (whether patentable or
unpatentable and whether or not reduced to practice), any improvements to any
invention, and any patent, patent application, statutory invention registration
or patent disclosure for the foregoing, together with any reissuance, division,
continuation, continuation-in-part, revision, extension, or reexamination of any
patent;
(b) any trademark, service mark, trade dress, logo, trade
name, corporate name, domain name, Uniform Resource Locator (URL) or other
Internet address, whether or not registered, together with any translation,
adaptation, derivation, or combination and including any associated goodwill,
and any application for registration, registration, or renewal of the foregoing;
(c) any copyrightable work (including, but not limited to,
advertising and promotional materials, catalogs, logo designs, software,
compilations of data, and website content) and any copyright therefor, and any
application for registration, registration, or renewal of the copyright; and,
(d) any copies or tangible embodiment of any of the
foregoing and all files relating thereto;
"Permitted Lien" means (i) liens for Taxes not yet due and payable
or which are being contested in good faith by appropriate proceedings and fully
reserved against, (ii) encumbrances in the nature of zoning restrictions,
easements, rights or restrictions of record on the use of real property if the
same do not materially impair the use of such property in the Business, (iii)
statutory or common law liens to secure landlords, lessors or renters under
leases or rental agreements confined to the premises rented, (iv) deposits or
pledges made in connection with, or to secure payment of, worker's compensation,
unemployment insurance, old age pension programs mandated under applicable Law
or other social security, and (v) statutory or common law liens in favor of
carriers, warehousemen, mechanics and materialmen, statutory or common law liens
to secure claims for labor, materials or supplies and other like liens.
"Person" means an individual, firm, corporation, limited liability
company, syndicate, partnership, trust, association, joint venture,
unincorporated organization, Governmental Entity or other legal or business
entity.
"Prepaid Expenses" means prepaid expenses, advance payments,
security deposits and other prepaid items paid by Covisint and listed on
Schedule 1(b).
5
<PAGE>
"Proprietary Rights" means Patents, Trademarks and Copyrights, Trade
Secrets and Other Proprietary Rights, and Software.
"Purchase Price" is defined in Section 3.2 of this Agreement.
"Recipient" is defined in Section 6.9 of this Agreement.
"Related Agreements" are all written agreements, other than this
Agreement, which are executed and delivered by Buyer, Covisint or any member of
Covisint pursuant to this Agreement in connection with the transactions
contemplated by this Agreement including the agreements attached to this
Agreement as exhibits.
"Release" means spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, disposal,
depositing and placing, including the abandonment or discarding of barrels,
containers, and other closed receptacles containing any Hazardous Material.
"Responder Contracts" means those Contracts listed in Schedule
2.1(f).
"Ruling" means a formal ruling, a determination letter, a change in
method of accounting letter or any similar announcement issued by the IRS.
"Software" means:
(a) any computer software (whether in general release or
under development), including, without limitation, source code, object code, and
databases and all related data and related documentation; and
(b) any copies or tangible embodiment of any of the
foregoing and all files relating thereto.
"Tax Authority" includes the IRS and any state, local, foreign or
other governmental authority (domestic or foreign) responsible for the
administration of any Taxes.
"Tax Claimant" is defined in Section 9.6(a) of this Agreement.
"Tax Indemnifying Party" is defined in Section 9.6(a) of this
Agreement.
"Tax" or "Taxes" means all taxes, however denominated, including any
interest, penalties or other additions to tax that may become payable in respect
thereof, imposed by any federal, territorial, state, local or foreign government
or any agency or political subdivision of any such government, which taxes will
include, without limiting the generality of the foregoing, all income or profits
taxes (including, but not limited to, federal income taxes and state income
taxes), single business taxes, real property gains taxes, payroll and employee
withholding taxes, unemployment insurance taxes, social security taxes, sales
and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts
taxes, business license taxes, occupation taxes, real and personal property
taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation,
Pension Benefit Guaranty Corporation premiums and other governmental
6
<PAGE>
charges, and other obligations of the same or of a similar nature to any of the
foregoing, which Covisint is required to pay, withhold or collect, whether
disputed or not.
"Tax Proceeding" is defined in Section 9.6(a) below.
"Tax Return" or "Tax Returns" means any return, declaration, report,
claim for refund, or information return or statement (including any schedule or
attachment thereto) and any amendment thereof required to be filed with, or
where none is required to be filed with a Tax Authority, the statement or other
document issued by, a Tax Authority in connection with any Tax.
"Terminating Breach" is defined in Section 8.2(d) of this Agreement.
"Third-Party Claim" is defined in Section 9.4(a) of this Agreement.
"Trade Secrets and Other Proprietary Rights" means:
(a) any trade secret or confidential or proprietary business
information (including, but not limited to, any idea, research and development,
know-how, formula, composition, manufacturing and production process or
technique, technical data, design, drawing, specification, customer or supplier
list, pricing and cost information, and business and marketing plan or
proposal);
(b) any other proprietary right including moral rights and
waivers of such rights by others and the right to sue and recover damages,
attorneys' fees and costs for past infringement of any patent, trademark,
copyright; and
(c) any copies or tangible embodiment of any of the
foregoing and all files relating thereto.
"Treasury Regulation" or "Treasury Regulations" means any proposed,
final or temporary regulation promulgated under the Code, including any
amendments or any substitute or successor provisions thereto.
"Working Capital Allocation" is defined in Section 3.3 of this
Agreement.
2. Transfer of Assets; Assumed Liabilities; Excluded Liabilities.
2.1 Transfer of Assets. At the Closing, Covisint will sell, convey,
transfer and assign, (and cause Covisint's Affiliates to sell, convey, transfer
and assign the Assets owned by them and cause Ford Motor Company to assign to
Buyer the Proprietary Rights listed in Schedule 2.1) to Buyer, free and clear of
all Liens (other than Permitted Liens), and Buyer will purchase, all of such
rights, title and interest in and to the assets (tangible and intangible),
properties, and goodwill which relate to, or are used, held for use or intended
to be used in connection with, the operation of the Business, other than
Excluded Assets (collectively referred to herein as the "Assets"), including
Covisint's rights, title and interest in and to the following:
(a) The Business as a going concern;
7
<PAGE>
(b) All Prepaid Expenses;
(c) All owned personal property, including all computer equipment
and systems, computer accessories, machinery and equipment, materials, and
office equipment;
(d) All supplier lists and all orders, contracts and commitments
for the purchase of goods or services, including all such items relating to the
purchase of capital assets, products and supplies;
(e) Other than Responder Contracts, all customer purchase orders,
license agreements, maintenance agreements, customer contracts and customer
commitments listed on Schedule 2.1(e);
(f) All Responder Contracts, which are listed on Schedule 2.1(f)
and that are currently in effect;
(g) All other orders, contracts, commitments, personal property
leases, licenses, conditional sale or title retention agreements and guarantees
(the Assets described in items (d), (e), (f) and (g) of this Section 2.1 being
collectively referred to as the "Contracts");
(h) All Proprietary Rights owned by Covisint or Covisint's
Affiliates, and used in the Business, or owned by Ford Motor Company and listed
on Schedule 2.1;
(i) All permits, franchises, licenses, bonds, approvals,
qualifications and the like issued by any government or governmental unit,
agency, board, body or instrumentality, whether foreign, federal, state or local
and all applications therefor pertaining to the Business;
(j) All rights, claims (including refund claims), causes of action
and choses in action against third parties relating to the Assets (including,
but not limited to, rights against suppliers under warranties covering any
inventory, machinery or equipment);
(k) All financial, operating, inventory, personnel, payroll,
customer lists and customer records and all sales and promotional literature,
correspondence, proposals for the provision of services or software to
customers, and files relating to the Business;
(l) All inventory, merchandise, finished goods, raw materials,
packaging, and supplies and any prepaid deposits for the same relating to the
Business;
(m) All telephone numbers and domain names of Covisint; and
(n) All other tangible and intangible assets, whether or not
carried at value or listed on the books and records of Covisint and whether or
not in the possession of Covisint, including client relationships.
Notwithstanding the above, any items requiring a consent for transfer or
assignment and as to which consent for such transfer or assignment has not been
obtained by Covisint prior to the Closing shall be treated in accordance with
Section 3.5 and shall not be deemed to be transferred or assigned to Buyer as
part of the Assets. The foregoing sentence and Section 3.5
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shall only apply to those Contracts with respect to which Buyer has waived the
conditions for consent set forth in Section 7.1(e).
2.2 Excluded Assets. Notwithstanding the foregoing, and except as set
forth on Schedule 2.2, the following assets of Covisint shall not be sold,
conveyed, transferred or assigned to Buyer and shall not be included in the
Assets (the "Excluded Assets"):
(a) cash, cash equivalents and short term marketable securities;
(b) accounts receivable;
(c) furniture and fixtures;
(d) any real property leases;
(e) membership, ownership or other equity interests in any
subsidiaries;
(f) limited liability company seals, charter documents, minute
books, membership books, tax returns, books of accounts or other books and
records of Covisint;
(g) Benefit Plans;
(h) insurance contracts;
(i) assets not related to the Business;
(j) assets held by Covisint or any of its Affiliates in Europe
except for The General Working Frame Agreement between Peugeot Citroen
Automobile SA and Covisint Europe BV executed by Covisint on or about June 14,
2002; and
(k) all Xerox leased copiers and Pitney Bowes mailing machines.
2.3 Assumption of Liabilities. At the Closing, Buyer will assume only
those obligations and liabilities of Covisint under the Contracts to be acquired
by Buyer pursuant to Section 2.1 and set forth on Schedule 2.3, and only to the
extent that such obligations and liabilities arise or are in respect of any
period on or after the Closing Date (collectively, the "Assumed Liabilities").
The assumption by Buyer of the Assumed Liabilities shall not expand the rights
or remedies of any third party against Buyer or Covisint, as compared to any
rights and remedies that such third party would have had against Covisint had
Buyer not assumed the Assumed Liabilities.
2.4 Excluded Liabilities. Except as set forth in Section 2.3 above,
Buyer is not assuming or agreeing to pay or perform any of the Liabilities or
contracts of Covisint, (the "Excluded Liabilities"). Without limiting the
generality of the foregoing, and notwithstanding anything to the contrary in
this Agreement, the Excluded Liabilities shall include, but not be limited to,
the following:
(a) Taxes of Covisint;
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(b) Any Liability in connection with the Business or the Assets that
arises or is in respect of any period before the Closing Date;
(c) Any Liability relating to or arising out of the Excluded Assets;
(d) Any Liability with respect to the litigation, investigations and
other matters set forth on Schedule 4.5;
(e) Any Liability for any past or present employees, agents or
independent contractors of Covisint, including any workers' compensation claims,
any employee severance claims, any claims arising under any employment
contracts, stock option agreements or the Benefit Plans and any Liability for
continuing medical plan coverage under COBRA;
(f) All brokerage commissions, finder's fees or similar fees or
commissions, any accounting, legal and other professional fees, payable in
connection with this Agreement or any of the transactions contemplated hereby to
any broker, finder, agent, financial advisor accounts, attorneys, or other
representatives, acting or having acted on behalf of or employed by either
Covisint or its members;
(g) Any Liability to any members of Covisint arising out of (i) any
ownership interest in Covisint or (ii) any of the transactions contemplated
herein, including any dissent and appraisal rights;
(h) Any Liability under Environmental Laws; and
(i) Any other Liability not constituting Assumed Liabilities.
As between Covisint and Buyer, all of the Excluded Liabilities will
be the sole responsibility and obligation of Covisint.
3. Closing.
3.1 Closing Date. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Dykema Gossett PLLC,
400 Renaissance Center, Detroit, Michigan 48243 at 10:00 a.m. on March 1, 2004
or such other day and place as is mutually agreed.
3.2 Purchase Price. Subject to the terms and conditions of this
Agreement, and except as provided below, the purchase price (the "Purchase
Price") payable for the Assets is US$8,000,000, subject to adjustment pursuant
to Section 3.3. US$7,000,000 shall be paid to Covisint at Closing in immediately
available funds by wire transfer to the bank account designated by Covisint in a
notice delivered to Buyer at least three (3) business days prior to the Closing
Date. US$1,000,000, as adjusted in accordance with Section 3.3 (the "Adjustment
Amount") of the Purchase Price shall be held by Buyer pending resolution of the
matters set forth in Section 3.3.
3.3 Additional Payments. (a) Attached as Schedule 3.3 is a good faith
estimate of the amount of Prepaid Expenses and Deferred Revenue as of the
Closing Date, determined in accordance with generally accepted accounting
principles applied on a basis consistent with the
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Financial Statements. (the "Estimated Statement"). Within 45 days after the
Closing, Covisint and Buyer shall meet and agree upon a final calculation of the
amount of Prepaid Expenses and Deferred Revenue as of the Closing Date (the
"Final Statement"). Such calculation shall be made in accordance with generally
accepted accounting principles applied on a basis consistent with the Financial
Statements and the Estimated Statement. The "Difference Amount" shall be
calculated as Deferred Revenue less Prepaid Expenses on the Final Statement. If
the Difference Amount exceeds the Adjustment Amount, Covisint shall pay to the
Buyer the Difference Amount less the Adjustment Amount within two (2) business
days after such determination. If the Difference Amount is lower than the
Adjustment Amount, the Buyer shall pay Covisint the Adjustment Amount less the
Difference Amount within two (2) business days after such determination.
(b) "Working Capital Allocation" is defined in the following
sentence. Notwithstanding Section 3.3(a), the parties shall allocate current
liabilities and current assets between the parties at and as of the Closing Date
on the following general premise: current liabilities and current assets which
are incurred prior to the Closing Date shall remain the property or obligation
of Covisint; Assumed Liabilities and Assets (including accounts receivable)
arising or incurred on and after the Closing Date shall become the property or
obligation of Buyer.
(c) Within 45 days after the Closing Date, Covisint shall obtain
and deliver a fully executed copy of The General Working Frame Agreement between
Peugeot Citroen Automobile SA and Covisint Europe BV executed by Covisint on or
about June 14, 2002. In the event such agreement is not delivered by such date,
Buyer shall be entitled to a payment from Covisint of $144,000. Buyer shall be
permitted to offset such amount against the Adjustment Amount.
(d) The parties shall use their best efforts to reconcile these
items within 45 days after the Closing Date and pay the respective party any
adjustments within two (2) business days after the parties reach an agreement.
In the event the parties cannot agree upon the final amount of Prepaid Expenses,
Deferred Revenue or Working Capital Allocation within 45 days after the Closing
Date, the parties shall submit the determination of Prepaid Expenses, Deferred
Revenue and/or Working Capital Allocation, as the case may be, to a nationally
recognized accounting firm (to be mutually agreed upon by the parties) that does
not perform any material services for Buyer or Covisint, which determination
shall be made within thirty (30) days after submission and shall be final and
binding on all parties. The fees, costs and expenses incurred by such accounting
firm in making such determination shall be borne equally by the parties.
3.4 Purchase Price Allocation. The Purchase Price shall be allocated
among the acquired Assets in accordance with Schedule 3.4, which Buyer and
Covisint shall prepare within a reasonable period after the Closing Date. Except
as required by Code Section 1060, Buyer and Covisint agree to allocate the
Purchase Price among the acquired Assets as follows: the computer equipment,
office equipment and prepaid assets shall be allocated amounts, equal to the net
book values of such Assets as of the Closing Date. To the extent that the
Purchase Price exceeds the allocation to such Assets, the excess shall be
allocated to the goodwill of Covisint. The parties shall file all Tax Returns
(including amended returns and claims for refund) and information reports in a
manner consistent with such allocation, and shall use their reasonable efforts
to sustain such allocation in any subsequent Tax audit or Tax dispute. Without
limiting
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the foregoing, Covisint and Buyer each agrees to file an IRS Form 8594 in
accordance with such Schedule 3.4, and the parties agree to promptly provide
each other with the information and documentation necessary to complete the IRS
Form 8594 and such Schedule 3.4.
3.5 Actions to be Taken and Documents to be Delivered at the Closing.
(a) At the Closing, Buyer will assume possession and control of
the Assets, execute and/or deliver or cause to be executed and/or delivered the
following documents and take or will cause to be taken the following actions, as
appropriate:
(1) deliver US$7,000,000 in immediately available funds to
Covisint;
(2) the Assignment and Assumption Agreement;
(3) a transition services agreement in form and substance
mutually agreeable between the parties covering the matters set
forth in Exhibit F;
(4) officer's certificate as provided in Exhibit G;
(5) an opinion of Buyer's General Counsel in substantially
the form attached hereto as Exhibit H; and
(6) such other documents and certificates as are required by
the terms of this Agreement and the Related Agreements (including
delivery of all governmental and third party consents required in
order for Buyer to execute and deliver this Agreement and the
Related Agreements to which it is a party and to consummate the
transactions contemplated by this Agreement and such Related
Agreements) or as may be reasonably requested by Covisint.
(b) At the Closing, Covisint will execute and deliver or cause to
be executed and delivered the following documents and will take or will cause to
be taken the following actions, as appropriate:
(1) a Bill of Sale;
(2) will permit Buyer's assumption of possession and control
of the Assets;
(3) a copy of the Certificate of Formation of Covisint and a
good standing certificate from the State of Delaware and each state
in which it is qualified to do business as a foreign entity
(certified by an appropriate state official as of a date within 30
days of the Closing Date);
(4) a certificate of Covisint, in such form and substance as
Buyer may reasonably request, attesting to the satisfaction of the
conditions set forth in Section 7.1;
(5) officer's certificate as provided in Exhibit I;
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(6) an opinion of Honigman, Miller, Schwartz and Cohn LLP in
substantially the form attached hereto as Exhibit J;
(7) the Intellectual Property Assignments from Covisint and
its Affiliates and from Ford Motor Company;
(8) the Assignment and Assumption Agreement;
(9) a transition services agreement in form and substance
mutually agreeable between the parties covering the matters set
forth in Exhibit F; and
(10) such other documents and certificates as are required by
the terms of this Agreement and the Related Agreements (including
delivery of all governmental and third party consents required in
order for Covisint to execute or deliver this agreement and the
Related Agreements to which it is a party and to consummate the
transactions contemplated by this Agreement and such Related
Agreements) or as may be reasonably requested by Buyer.
3.6 Third Party Consents. To the extent that Covisint's rights under any
Contract or other Asset to be assigned to Buyer hereunder may not be assigned
without the consent of another person which has not been obtained, this
Agreement shall not constitute an agreement to assign the same if an attempted
assignment would constitute a breach thereof or be unlawful, and Covisint shall
use reasonable commercial efforts to obtain any such required consent as
promptly as possible. If any such consent shall not be obtained or if any
attempted assignment would be ineffective or would impair Buyer's rights under
the Contract or other Asset in question so that Buyer would not in effect
acquire the benefit of substantially all such rights, Covisint, to the maximum
extent permitted by law and the Contract or other Asset, shall, if Buyer so
requests, cooperate with Buyer in any reasonable arrangement designed to provide
such benefits thereunder to Buyer.
3.7 Additional Consideration. As additional consideration for the
Business and Assets, Buyer agrees to pay 50% of Covisint's liability under the
real property lease, dated November 25, 2002, relating to Covisint's offices at
20921 Lahser Road, Southfield, Michigan, accruing on and after the Closing Date.
Liability subject to this Section 3.7 shall include (a) any amounts paid in
settlement of such lease, to the extent such settlement has received the prior
written approval of Buyer, and (b) related operating expenses. Covisint shall
invoice Buyer on a monthly basis for the additional consideration due under this
Section 3.7, for liability accrued by Covisint for the preceding month, and
shall include with such invoice information in reasonable detail supporting the
charges included in the invoice and the calculation of the amount invoiced.
Payment shall be made by Buyer within fifteen (15) days after receipt of each
such invoice; provided that if Buyer disagrees with the amount of the invoice,
Buyer shall be permitted access to Covisint's books and records for the purpose
of confirming the accuracy of the amount invoiced and payment shall not be due
until Buyer and Covisint have agreed on the amount to be paid by Buyer. In the
event the parties cannot agree upon the amount within 45 days after the invoice
is received by Buyer, the parties shall submit the determination of such amount
to a nationally recognized accounting firm (to be mutually agreed upon by the
parties) that does not perform any material services for Buyer or Covisint,
which determination shall be made within thirty (30) days after submission and
shall be final and binding on all parties. The fees, costs and
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expenses incurred by such accounting firm in making such determination shall be
borne equally by the parties.
4. Representations and Warranties of Covisint. Covisint represents and
warrants to Buyer as follows as of the date of this Agreement and through and
including the Closing Date:
4.1 Organization; Power and Authority; Authorization; Due Execution; No
Conflicts.
(a) Covisint (1) is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and (2) has the limited liability company power and authority to (A) own,
operate and lease the Assets, (B) carry on the Business as it is now being
conducted, (C) enter into this Agreement and the Related Agreements to which it
is a party and, (D) consummate the transactions contemplated by this Agreement
and the Related Agreements to which it is a party, and (3) is duly qualified or
licensed and is in good standing to do business in each jurisdiction in which
the nature of the Business conducted by it has made its qualification or
licensing a legal requirement, except for those jurisdictions where the failure
to be so qualified would not have a material adverse effect on Covisint.
(b) This Agreement and each Related Agreement to which Covisint is
a party have been duly authorized by all necessary limited liability company
action of Covisint. Upon the execution and delivery of this Agreement and the
Related Agreements to which Covisint is a party, this Agreement and each such
Related Agreement will constitute the legal, valid and binding obligation of
Covisint, enforceable against Covisint, in accordance with their respective
terms, subject to judicial discretion regarding specific performance or other
equitable remedies, and except as may be limited by bankruptcy, reorganization,
insolvency, moratorium or other laws relating to or affecting the enforcement of
creditors' rights and remedies generally.
(c) Except as set forth in Schedule 4.1 to this Agreement, the
execution, delivery and performance by Covisint of this Agreement and the
Related Agreements to which Covisint is a party will not (1) constitute a breach
or violation of (A) Covisint's Certificate of Formation or Operating Agreement,
(B) any Law, or (C) any material Contracts or material agreement, right,
license, franchise, lease, indenture, deed of trust, mortgage, loan agreement or
other material instrument to which Covisint is a party or by which Covisint is
bound; (2) constitute a violation of any order, judgment or decree to which
Covisint is a party or by which Covisint's assets or properties are bound or
affected; (3) result in the acceleration of any material debt owed by Covisint;
(4) result in the creation of any lien, charge or encumbrance upon any of
Covisint's properties or assets; or (5) require any consent, approval,
authorization or permit of or from, or filing with or notification to, any
court, government, governmental authority or other regulatory or administrative
agency or commission, domestic or foreign (each, a "Governmental Entity").
(d) Set forth in Schedule 4.1 is a true and complete list of each
jurisdiction in which Covisint is qualified or licensed to do business.
(e) Set forth in Schedule 4.1 is a true and complete list of all
of the members of Covisint.
(f) Covisint has not elected to be taxed as a corporation pursuant
to Code Sections 7701 or Treasury Regulation Sections 301.7701-3.
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4.2 Title. Except for the Assets listed on Schedule 2.1 that are owned
by Ford Motor Company, Covisint has good and marketable title to all of the
Assets owned by it and valid leasehold interests in, or other rights to use, all
Assets not owned by Covisint, free and clear of all security interests,
mortgages, liens, pledges, charges or encumbrances of any nature ("Liens"),
other than Permitted Liens. The Assets constitute all of the property and assets
now used for the conduct of the Business as presently conducted by Covisint.
There are no special assessments against any of the Assets by any Governmental
Entity.
4.3 Properties and Improvements. Schedule 4.3 to this Agreement sets
forth a true and complete list of all real property owned or leased by Covisint.
4.4 Other Assets of Covisint.
(a) The Assets are sufficient to conduct the Business as currently
conducted, subject only to ordinary wear and tear.
(b) Except as set forth in Schedule 2.1 and Schedule 4.4, all of
the Assets of Covisint are owned by Covisint and, except as set forth on
Schedule 4.4 to this Agreement, Covisint is not leasing or holding on
consignment, any equipment, furniture, fixtures or other personal property with
a current value in excess of $2,500 individually and $15,000 in the aggregate.
4.5 Claims; Litigation; Compliance with Laws; Approvals.
(a) Except as disclosed in Schedule 4.5 to this Agreement,
Covisint is not: (1) a party to any litigation, proceeding or administrative
investigation, and, to the knowledge of Covisint, none is threatened against or
by Covisint or (2) subject to any outstanding order, writ, injunction or decree
of any court, government or governmental authority or arbitration against or, to
the knowledge of Covisint, affecting it. To the knowledge of Covisint, there is
no litigation, proceeding or administrative investigation pending or threatened
that affects or is related to the Business.
(b) Except as disclosed in Schedule 4.5 to this Agreement,
Covisint is not in violation of, and Covisint's actions in the consummation of
the transactions contemplated by this Agreement do not violate any Law,
including any Law relating to Covisint's employment or employment practices or
environmental or occupational safety or health. The Business is presently being
conducted in compliance with all requirements of Law, including the filing with
any Governmental Entity or other third party of any statement, report,
information or form required by Law, and all requirements of any Governmental
Entities having jurisdiction over the business or activities of Covisint. Except
as set forth in Schedule 4.5, Covisint has not, since its formation, received a
notice of violation of, been threatened in writing with a charge of violating,
or, to the knowledge of Covisint, been under investigation with respect to a
possible violation of, any Law which has not been complied with, rescinded or
resolved.
(c) Covisint maintains all material licenses and permits and has
filed all registrations, reports and other documents required by local, state,
federal and foreign authorities and regulating bodies in connection with the
Business. All such licenses and permits will remain in full force and effect
(without imposition of any material adverse condition, restriction, limitation,
cost or penalty) immediately after the Closing Date notwithstanding the
transactions
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contemplated by this Agreement. Covisint is in compliance with all such
licenses, permits and approvals, and there are no proceedings pending or, to the
knowledge of Covisint, threatened which may result in the limitation,
termination, cancellation or suspension, or any adverse modification of, any
such license, permit or approval. Schedule 4.5 to this Agreement contains a full
and complete list of all such licenses, permits and approvals.
4.6 Agreements; Contracts.
(a) Except as set forth on Schedule 4.6, all of the Contracts will
be effectively transferred to Buyer at the Closing.
(b) With respect to the Contracts other than the Responder
Contracts:
(1) neither Covisint, nor, to the knowledge of Covisint, the
other parties to such Contracts, are in material default nor has
such default been asserted by any party, and there has not occurred
any event which, with or without the passage of time or giving of
notice (or both), would constitute such a default;
(2) except as set forth on Schedule 4.6, each such Contract
will remain in full force and effect (without imposition of any
restriction, limitation, cost or penalty to Buyer) notwithstanding
the transactions contemplated by this Agreement;
(3) except as set forth on Schedule 4.6, Covisint has
performed all of its obligations required to be performed by
Covisint prior to the date of this Agreement and prior to the
Closing Date; and
(4) neither Covisint nor, to the knowledge of Covisint, the
third parties to such Contracts, has repudiated any provision of any
such Contract.
(c) To the knowledge of Covisint, less than 10% of the Responder
Contracts are in material default by Covisint or the other parties.
(d) Covisint has delivered to Buyer a true and complete copy of
each Contract (other than Responder Contracts) and a true and complete copy of
the form of Responder Contract, which are representative of those used by
Covisint.
4.7 Proprietary Rights.
(a) Covisint owns or is licensed for, and in any event possesses
sufficient and legally enforceable rights with respect to, all Proprietary
Rights that are used or exploited in, or that may be necessary to conduct the
Business as is presently conducted and as currently proposed to be conducted by
Covisint and Covisint owned or was licensed for, and in any event possessed
sufficient and legally enforceable rights with respect to, all Proprietary
Rights that were used or exploited in the Business when such Proprietary Rights
were used. Schedule 4.7 sets forth, for the Patents, Trademarks, and Copyrights
owned by Covisint, a complete and accurate list of all (1) patents and patent
applications, (2) trademark and service mark registrations and applications
therefor, (3) unregistered trademarks and service marks, (4) domain names, (5)
copyright registrations and applications therefor, (6) material unregistered
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copyrights and (7) trade secrets claimed by Covisint, indicating for each, where
applicable, (i) the jurisdiction, (ii) the patent, registration, or application
number, (iii) the date issued, and (iv) the date filed. Schedule 4.7 also sets
forth a complete and accurate list of all license agreements granting any right
to use or practice any rights under any Proprietary Rights, whether Covisint is
the licensee or licensor thereunder, and any written consent to use, settlement
or other agreements relating to any Proprietary Rights to which Covisint is a
party or otherwise bound (collectively, the "License Agreements").
(b) Covisint has all right, title, and interest in and to the
Proprietary Rights owned by Covisint free and clear of any attachments, liens or
encumbrances and is listed in the records of the appropriate United States,
state or foreign agency as the sole owner of record for each patent,
registration, or application listed on Schedule 4.7.
(c) The Patents, Trademarks, and Copyrights (other than foreign
trademarks) and the Trade Secrets and Other Proprietary Rights owned by Covisint
and, to the best of Covisint's actual knowledge without inquiry, any Patents,
Trademarks, and Copyrights and Trade Secrets and Other Proprietary Rights
licensed, used or exploited by Covisint, are valid and subsisting, in full force
and effect, and have not been cancelled, expired, or abandoned. No claim has
been made, asserted, or threatened, or is pending against Covisint based upon,
challenging or seeking to deny or restrict the use or exploitation by Covisint
of any of the Proprietary Rights owned or licensed by Covisint. Other than ex
parte prosecution of patent, trademark, service mark or copyright applications,
there are no proceedings or actions pending before any court or government
agency (including the United States Patent and Trademark Office or similar
foreign government agencies) related to any of the Proprietary Rights owned by
Covisint. Except as set forth on Schedule 4.7, there are no actions that must be
taken within 180 days of the date of this Agreement, including the payment of
any registration, maintenance or renewal fees or the filing of any response to
an official action of a court or government agency (including the United States
Patent and Trademark Office) or the filing of any application for the purpose of
obtaining, maintaining, perfecting, preserving or renewing any of the United
States trademarks and patent application included among the Propriety Rights
owned by Covisint.
(d) Covisint has, or has caused to be, delivered to Buyer correct,
complete, and fully executed copies of all License Agreements identified in
Schedule 4.7 and any and all ancillary documents pertaining thereto (including,
without limitation, all amendments, consents and evidence of commencement dates
and expiration dates). With respect to each of the License Agreements, Covisint
represents and warrants that:
(1) the license agreement, together with any and all
ancillary documents pertaining thereto, is legal, valid, binding,
and enforceable and in full force and effect and represents the
entire agreement with respect to the subject matter of such license
agreement;
(2) subject to obtaining required consents, the license
agreement, together with any and all ancillary documents pertaining
thereto, will continue to be legal, valid, binding, and enforceable
and in full force and effect on terms identical to those currently
in effect upon consummation of the transactions contemplated by this
Agreement and the consummation of such transactions will not
constitute a breach or default under such license agreement or
otherwise give
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any party to the license agreement other than Covisint a right to
terminate such license;
(3) Covisint has not received any notice of termination or
cancellation under such license agreement, nor any notice of a
breach or default under such license agreement which has not been
cured and Covisint has not itself sublicensed or granted any of the
licensed rights to another party in violation of the license
agreement; and,
(4) Neither Covisint nor to the best of Covisint's knowledge
any other party to such license is in breach or default in any
material respect and no event has occurred that, with notice or
lapse of time would constitute such a breach or default or permit
termination, modification, or acceleration under such license
agreement.
(e) The consummation of the transactions contemplated by this
Agreement will not result in the termination or impairment of any of the
Proprietary Rights owned by Covisint and will not require the consent of any
governmental authority in respect of such Proprietary Rights. Further all rights
of Covisint in each item of Proprietary Rights owned or licensed by Covisint are
transferable to Buyer as contemplated by this Agreement. As a result of the
transactions contemplated by this Agreement, upon the Closing Buyer shall own or
possess, or own or possess adequate and enforceable licenses, sublicenses, or
other rights to use and or exploit, without payment of any additional fee in
connection with the transfer thereof (other than to governmental authorities),
all the Proprietary Rights owned or licensed by Covisint.
(f) There are no settlements, forbearances to sue, consents,
judgments, or orders or similar obligations which (1) restrict the Covisint's
rights to use any Proprietary Rights, (2) restrict Covisint's business in order
to accommodate a third party's Proprietary Rights or (3) permit third parties to
use any Proprietary Rights owned by Covisint. Covisint has not licensed or
sublicensed its rights in any Proprietary Rights other than pursuant to the
License Agreements and no royalties, honoraria or other fees are payable by
Covisint for the use of or right to use any Proprietary Rights except pursuant
to the License Agreements.
(g) To the extent indicated in Schedule 4.7, such Patents,
Trademarks, and Copyrights have been duly registered in, filed in, or issued by,
the offices indicated in Schedule 4.7. Except for the Proprietary Rights set
forth in Schedule 2.1 held by Ford Motor Company, in each case where a
registration or patent or application for registration or patent listed in
Schedule 4.7 is held by assignment, the assignment has been duly recorded with
the governmental office from which the original registration or patent issued or
before which the application for registration or patent is pending.
(h) To the best of Covisint's knowledge, no third party is
infringing, misappropriating, diluting, or violating any Proprietary Rights of
Covisint.
(i) (1) The products or services provided by Covisint in the
Business, the (2) the conduct of the Business by Covisint, and (3) the use or
exploitation of the Proprietary Rights do not infringe or misappropriate the
rights or property of any third party. No claim has been
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made, asserted or threatened, or is pending against Covisint alleging that any
of (1), (2) or (3) conflict with or otherwise infringe or misappropriate the
rights or property of any third party.
(j) Schedule 4.7 lists all licenses or other agreements between
Covisint and any other Person wherein Covisint has agreed to, or assumed, any
obligation or duty to warrant, defend, indemnify or otherwise incur any
obligation or liability with respect to the infringement or misappropriation by
the Person of the Proprietary Rights of any other Person.
(k) All disclosures of confidential Proprietary Rights to third
parties have been made pursuant to non-disclosure agreements that protect the
confidentiality of such Proprietary Rights and restrict the use of such
Proprietary Rights to an identified purpose. Except as set forth in Schedule
4.7, all former and current employees of the Covisint have executed
non-disclosure agreements that protect the confidentiality of such Proprietary
Rights and restrict the use of such Proprietary Rights to an identified purpose.
(l) With respect to each trade secret listed on Schedule 4.7, the
documentation relating to such trade secret is current, accurate and sufficient
in detail and content to identify and explain it and to allow its full and
proper use without reliance on the knowledge or memory of any individual.
Covisint has taken all reasonable precautions to protect the secrecy,
confidentiality and value of all trade secrets (including the enforcement by
Covisint of a policy requiring each employee or contractor to execute
proprietary information and confidentiality agreements substantially in
Covisint's standard form, and all current and former employees and contractors
of Covisint have executed such an agreement). The trade secrets are not part of
the public knowledge or literature and, to Covisint's knowledge, have not been
used, divulged or appropriate either for the benefit of any Person (other than
Covisint) or to the detriment of the Covisint.
(m) The software products currently licensed by Covisint to
customers are in substantial conformance with all applicable contractual
commitments, express and implied warranties, specifications and the current
documentation, whether electronically embedded, written or otherwise, shipped
with such software products, except for errors and bugs of the type, scope and
nature generally acceptable in the software industry for similar types of
software products. Covisint has taken all actions customary in the software
industry to document the software products and their operation, such that the
software, including its source code and documentation, may be understood,
modified, and maintained in an efficient manner by reasonably competent
programmers.
(n) Schedule 4.7 lists all software or other material that is
distributed as "free software," "open source software" or under a similar
licensing or distribution model (including but not limited to the GNU General
Public License, GNU Lesser General Public License, Sun Community Source License
(SCSL) or the Sun Industry Standards License (SISL)) ("Open Source Materials")
that is used by Covisint in any way and describes the manner in which the Open
Source Materials were used and, if appropriate, modified and distributed by the
Covisint. Except as set forth in Schedule 4.7, Covisint has not (1) incorporated
Open Source Materials into, or combined Open Source Materials with, Covisint's
Software or products, (b) distributed Open Source Materials in conjunction with
Covisint's Software or products, or (c) used Open Source Materials that create,
or purport to create, obligations for Covisint with respect to Covisint's
Proprietary Rights or products or grant, or purport to grant, to any third
party, any
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rights or immunities under Covisint's Proprietary Rights (including using any
Open Source Materials that require, as a condition of use, modification or
distribution of such Open Source Materials that other software incorporated
into, derived from or distributed with such Open Source Materials be (i)
disclosed or distributed in source code form, (ii) be licensed for the purpose
of making derivative works, or (iii) be redistributable at no charge). No
Proprietary Rights or products of the Company are subject to the terms of
license of any such Open Source Materials.
4.8 Employees; Employee Benefits.
(a) Attached as Schedule 4.8 are the respective dates of hire,
positions and base salary of the employees of Covisint identified by Buyer
pursuant to Section 6.11(a). Except as set forth on Schedule 4.8, none of such
employees has any agreement with Covisint. With respect to those employees
listed on Schedule 4.8, Covisint has provided Buyer with complete copies of all
such agreements. Covisint does not have any collective bargaining or union
contracts or agreements. Except as set forth on Schedule 4.8, there have not
been any unfair labor practice complaints, material labor difficulties or work
stoppages, or threats thereof, affecting any of the employees or activities of
Covisint. To the knowledge of Covisint, there is no union campaign presently
being conducted to solicit employees to authorize a union to request a national
labor relations board certification election with respect to the employees of
Covisint. Except as set forth in Schedule 4.8, any employee of Covisint listed
on Schedule 4.8 may be terminated at will, with or without cause, without any
severance obligation.
(b) Covisint has deducted and remitted to the relevant
Governmental Entities all income taxes, unemployment insurance contributions and
other Taxes and amounts which it is required to deduct and remit to such
Governmental Entities, and Covisint has made all required filings in respect
thereof.
(c) Except as set forth on Schedule 4.8 or as otherwise required
by Law, the consummation of the transactions contemplated by this Agreement will
not in and of itself (1) entitle any current or former employee of Covisint
identified by Buyer pursuant Section 6.11(a) to severance pay, unemployment
compensation or any other similar payment, or (2) accelerate the time of payment
or vesting or increase the amount of compensation due to any such employee or
former employee.
(d) [reserved]
(e) Except as set forth on Schedule 4.8, to the knowledge of
Covisint, none of Covisint, any officer of Covisint or any of the Benefit Plans,
or any trusts created thereunder, or any trustee or administrator thereof, has
engaged in a "prohibited transaction" (as defined in Code Section 4975 or ERISA
Section 406) or any other breach of fiduciary responsibility that would subject
Covisint or any officer of Covisint to a material Tax or penalty on prohibited
transactions or to any liability under ERISA.
(f) Except as disclosed on Schedule 4.8, no such Benefit Plan that
is an employee welfare benefit plan (as defined in ERISA Section 3(1)) provides
benefits to current or future retirees or current or future former employees and
their dependents, except as required by COBRA, or applicable state continuation
coverage law.
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(g) Except as would not impose a material liability on Covisint,
or except as set forth on Schedule 4.8, each Benefit Plan and all related trust
or other agreements conform in form and operation to, and comply with, all
applicable Laws and regulations, including, without limitation, ERISA and the
Code, and all reports or information relating to each such Benefit Plan required
to be filed with any Governmental Entity or disclosed to participants has been
timely filed and disclosed.
(h) Except as disclosed in Schedule 4.8, Covisint has not
announced a plan to create, nor does it have any legally binding commitment to
create, any new arrangement which would, when established, constitute an
employee benefit plan, as defined in Section 3(3) of ERISA.
(i) All insurance premiums or contributions required, with respect
to any Benefit Plan, have been paid or accrued in full and there exist no
funding deficiencies within the meaning of Code Section 412 with respect to any
Benefit Plan. Except as disclosed on Schedule 4.8, there are no known material
retrospective adjustments provided for under any insurance contracts maintained
pursuant to any Benefit Plan with regard to policy years or other periods ending
on or before the Closing Date. No Pension Benefit Guaranty Corporation premiums
are required with respect to any Benefit Plan.
(j) Except as disclosed on Schedule 4.8, no Benefit Plan, or the
Tax deduction of any contributions thereto by Covisint, is, to the knowledge of
Covisint, the subject of an audit by any Governmental Entity, and no litigation
or asserted claims exist against Covisint or any Benefit Plan or fiduciary with
respect thereto, other than such benefit claims as are made in the normal
operation of a Benefit Plan.
4.9 Insurance. Covisint's insurance policies (i) are sufficient for
compliance with all requirements of Law; (ii) are valid, outstanding and
enforceable policies; and (iii) will remain in full force and effect through the
Closing Date.
4.10 Financial Statements. Covisint has delivered to Buyer (i) complete
copies of its audited financial statements for the years ended December 31,
2002, 2001 and 2000 with the corresponding accountants' reports, including
balance sheets and accompanying statements of profit and loss and related
schedules of cost and expense for the covered periods, as applicable, (ii) its
unaudited income statements for the year ended December 31, 2003; and (iii) its
unaudited balance sheet at December 31, 2003. All of the foregoing are referred
to as the "Financial Statements." Each of the Financial Statements presents
fairly in all material respects the financial condition, and results of
operations of Covisint as of such dates and for the periods then ended (except,
with respect to the unaudited income statement for the year ended December 31,
2003 and the unaudited balance sheet as of such date, for normal year-end
adjustments and lack of footnotes), and all of such statements were prepared in
accordance with GAAP (except, with respect to the unaudited income statement for
the year ended December 31, 2003 and the unaudited balance sheet as of such
date, for normal year-end adjustments and lack of footnotes). Additionally, as
of the date of the most recent Financial Statement submitted to Buyer and as of
the Closing Date, Covisint has no debt for borrowed money, whether long-term or
short-term, that would be required under GAAP to be reflected on such Financial
Statement which is not so reflected.
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4.11 Undisclosed Liabilities. Covisint has no material Liability except
for such Liabilities that (i) are reflected or reserved for on the most recent
Financial Statements; (ii) are disclosed in Schedule 4.11 or the other Schedules
to this Agreement; (iii) are not required to be set forth in the Schedules to
this Agreement or (iv) are commitments under Contracts.
4.12 Taxes.
(a) Covisint has timely filed (or has caused, or will cause, to be
timely filed) on its behalf (either separately or as a member of a consolidated,
combined, unitary or similar group of companies) all Tax Returns required to be
filed by it with any Tax Authority, taking into account any valid and proper
extension of time to file granted to or obtained on behalf of Covisint and all
such Tax Returns (i) are true, correct and complete in all respects at the time
of filing, (ii) correctly reflect the Liabilities of Covisint for Taxes for the
periods, properties or events covered thereby, and (iii) were prepared in
accordance with applicable laws. All Taxes (whether or not shown on such Tax
Returns) owed by Covisint through the Closing have been timely paid in full. No
unresolved deficiency for any amount of Taxes has been asserted in writing or,
to the knowledge of Covisint, has been threatened or is likely to be assessed by
a Tax Authority against Covisint. No claim has ever been made in writing by a
Tax Authority in a jurisdiction where Covisint does not file Tax Returns that
Covisint is or may be subject to taxation by that jurisdiction. Except as set
forth on Schedule 4.12, Covisint is not currently the beneficiary of any
extension of time within which to file any Tax Return. There are no Liens or
security interests on any of the assets of Covisint that arose in connection
with any failure (or alleged failure) to pay Taxes.
(b) Covisint has accrued, adequately reserved and shown on its
Financial Statements as a liability in accordance with GAAP all Taxes of
Covisint for all taxable periods (or portions thereof) which end on or before
the date of such Financial Statements. Moreover, Covisint will accrue,
adequately reserve and show as a liability in accordance with GAAP all Taxes of
Covisint for all taxable periods (or portions thereof) which end on or before
the Closing Date, including all Taxes attributable to the transaction
contemplated by this Agreement, on all financial statements for such periods.
(c) Covisint has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party, and has
otherwise complied with applicable laws relating thereto.
(d) Except as set forth in Schedule 4.12, there is no audit or
other dispute, examination, claim or other proceeding concerning any Taxes or
Tax Return of Covisint either made or raised by, or involving, any Tax
Authority, nor, to the knowledge of Covisint, is there any threat or expectation
thereof. Schedule 4.12 lists all federal, state, local, and foreign income and
other Tax Returns filed by Covisint for taxable periods ended on or after
December 31, 2001 that have been audited by a Tax Authority, and indicates those
Tax Returns that currently are the subject of audit by a Tax Authority. Covisint
has delivered, or will make available prior to the Closing Date, to Buyer true,
correct and complete copies of all Tax Returns filed by Covisint since its
formation. Covisint has delivered, or will make available prior to the Closing
Date, to Buyer all examination reports, and statements of deficiencies assessed
against or agreed to by its members (with respect to Covisint) and/or Covisint
since its formation.
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(e) Except as set forth on Schedule 4.12, Covisint has not waived
any statute of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(f) Except as set forth on Schedule 4.12, Covisint has disclosed
on its Tax Returns all positions taken therein, the nondisclosure of which could
give rise to a substantial understatement penalty within the meaning of Code
Sections 6662 or any similar provision of state, local or foreign law.
(g) None of the Assumed Liabilities is an obligation to make a
payment that will not be deductible pursuant to Code Sections 280G.
(h) There are no Rulings from, or requests for Rulings with, any
Tax Authority addressed to or involving Covisint.
(i) Covisint has complied with all Tax-related record keeping
requirements.
4.13 Absence of Changes or Events. Except as disclosed on Schedule 4.13
to this Agreement or as disclosed in the Financial Statements, Covisint has
operated the Business only in the ordinary course and, since November 30, 2003:
(a) Covisint has not made any change in its Certificate of
Formation or Operating Agreement;
(b) Covisint has not borrowed any amount or incurred, assumed,
become subject to or guaranteed any Liability, whether absolute or contingent,
other than in the ordinary course of business.
(c) Covisint has not made any material changes in its practices or
methods of accounting including, but not limited to, for Tax purposes.
(d) Covisint has not made any change in or introduced any pension,
retirement, profit sharing or bonus arrangement or other employee welfare or
benefit arrangement or other Benefit Plan.
(e) Other than the continuing deterioration of Covisint's
financial condition, Covisint has not suffered any material adverse change in
its operations, operating results, properties, assets, liabilities or condition
(financial or otherwise) of the Business or the Assets.
(f) Covisint has not suffered any event or condition of any
character which, either individually or in the aggregate, is reasonably likely
to materially adversely affect the Business or the Assets.
(g) Covisint has not suffered any damage, destruction or Loss,
whether covered by insurance or not, which is reasonably likely to materially
adversely affect its business, operations, operating results, properties,
assets, liabilities or condition (financial or otherwise).
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(h) Covisint has used its reasonable efforts to preserve its
business organizations and to retain the services of its officers and key
employees as they relate to the Business.
(i) Covisint has not increased any salary, wages, compensation or
fringe or other benefits payable or to become payable to its officers, directors
or employees, except for such increases as are in the ordinary course of
business consistent with past practice or required by applicable minimum wage
laws.
(j) Covisint has exercised its commercially reasonable efforts to
maintain the good-will of suppliers, customers and employees of, and others
having material business relationships with, Covisint relating to the Business.
(k) Covisint has not (other than the ordinary course of business)
made any Tax election nor has it settled or compromised any income or other Tax
liability or refund.
(l) Covisint has not paid, discharged or satisfied any claim or
Liability, whether absolute, accrued, asserted or unasserted, contingent or
otherwise, other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practices or in accordance with their
terms, of liabilities reflected or reserved against in the Financial Statements
and trade payables incurred since the date of the most recent Financial
Statement.
(m) Covisint has not, except in the ordinary course of business,
entered into, amended, modified or terminated any material agreement, commitment
or transaction.
(n) Covisint has not made any provision for material price
discounts or other special considerations in respect of its goods or services
not in the ordinary course of business consistent with past practices.
(o) Covisint has not sold, transferred, leased, mortgaged,
pledged, subjected to any Lien or otherwise disposed of any of its properties or
assets, real, personal or mixed, tangible or intangible, except in the ordinary
course of business consistent with past practices.
(p) Covisint has not transferred, leased, mortgaged, pledged,
subjected to any Lien or otherwise disposed of any Assets other than in the
ordinary course of business.
(q) Covisint has not entered into any agreement or understanding
to do any of the foregoing.
4.14 Environmental and Occupational Matters.
(a) Covisint has not generated, used, stored, treated,
transferred, transported, processed, manufactured, refined, handled, produced or
disposed of Hazardous Materials at or affecting such property in any manner
which violates any Environmental Law or which would give rise to Liability under
Environmental Law. Covisint has not (1) caused any property to be used to
generate, manufacture, refine, transport, treat, dispose of, transfer, produce
or process Hazardous Materials in violation of any Environmental Laws or in a
manner which gives rise to an investigatory, remedial or other duty or Liability
under any Environmental Laws, or (2)
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caused any Release or threatened Release of Hazardous Materials at, from or
affecting any property, in violation of Environmental Laws or which gives rise
to any investigatory, remedial or other duty under Environmental Laws.
(b) Covisint has never received any notice, claim or allegation of
any violation of, Liability under or of any duty to investigate or remediate any
condition under, any Environmental Law at any property. Covisint has at all
times complied and is currently in compliance with all Environmental Laws.
4.15 Subsidiaries. Except as set forth on Schedule 4.15, Covisint does
not have, nor has it had any equity interest, or right to acquire any equity
interest, whether direct or indirect, in any corporation, joint venture,
partnership, limited liability company, firm or other entity.
4.16 [Intentionally Omitted.]
4.17 [Intentionally Omitted.]
4.18 Guarantees. Except as disclosed on Schedule 4.18, none of the
Assumed Liabilities is guaranteed by any third parties.
4.19 Related Parties. Schedule 4.19 is a true and complete list and brief
description of all contracts and agreements or other transactions entered into
or agreed to within the past three years (including, without limitation, all
oral contracts and outstanding bids or offers for the foregoing) either (i)
involving amounts in excess of $50,000, or (ii) currently effective, to which
Covisint, on the one hand, is or was a party, with respect to which any officer
or director of Covisint, or any person related to any of the foregoing by blood
or marriage, on the other hand, is or was a party, other than arrangements
related to the employment of such person that are otherwise disclosed pursuant
to this Agreement. True and complete copies of all such contracts and all
documentation relating to such transactions, including, without limitation, all
amendments thereto and modifications thereof, have been delivered to Buyer prior
to the date of this Agreement. No member, director, officer or employee of
Covisint is indebted to Covisint except pursuant to a Contract.
4.20 [Intentionally Omitted.]
4.21 Brokers. Except as set forth on Schedule 4.21:
(a) Covisint (1) has not dealt with any broker or finder in
connection with this transaction; (2) has not caused or created any liability to
any broker or finder in connection with this transaction; or (3) is not aware of
any claim from any third party that it is entitled to brokerage, finders or
other similar fees in connection with this transaction.
(b) Covisint is not aware of any broker or finder which was
instrumental or had any part in bringing about this transaction.
4.22 Disclosure. To Covisint's knowledge, the statements, representations
and warranties made by Covisint in this Agreement, and the Schedules,
attachments and Exhibits to this Agreement, do not contain any untrue statement
of any material fact or omit a material fact
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necessary to make the statements contained in this Agreement, or such
Schedules, attachments or Exhibits, in light of the circumstances in which they
were made, not misleading.
5. Buyer's Representations and Warranties. Buyer represents and
warrants to Covisint as follows, as of the date of this Agreement:
5.1 Organization; Power and Authority. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan, and has the corporate power and authority to enter into this
Agreement and the Related Agreements and to consummate the transactions
contemplated by this Agreement and the Related Agreements.
5.2 Authorization; Due Execution; No Conflicts.
(a) This Agreement and each Related Agreement has been duly
authorized by all necessary corporate action on the part of Buyer. Upon the
execution and delivery by Buyer of this Agreement and the Related Agreements,
this Agreement and the Related Agreements will each constitute the legal, valid
and binding obligation of Buyer, enforceable against Buyer in accordance with
their respective terms, subject to judicial discretion regarding specific
performance or other equitable remedies, and except as may be limited by
bankruptcy, reorganization, insolvency, moratorium or other laws relating to or
affecting the enforcement of creditors' rights and remedies generally.
(b) Buyer's execution, delivery and performance of this Agreement
and the Related Agreements will not (1) constitute a breach or violation of (A)
Buyer's Articles of Incorporation or Bylaws (B) any Law or (C) any material
agreement, right, license, franchise, lease, indenture, deed of trust, mortgage,
loan agreement or other material instrument to which Buyer is a party or by
which Buyer is bound; or (2) constitute a violation of any order, judgment or
decree to which Buyer is a party or by which any of Buyer's assets are bound or
affected; (3) require any consent, approval, authorization or permit of or from,
or filing with or notification to, any Governmental Entity, except for
anti-trust notice filings.
5.3 Brokers.
(a) Buyer (1) has not dealt with any broker or finder in
connection with this transaction; (2) has not caused or created any liability to
any broker or finder in connection with this transaction; and (3) is not aware
of any claim from any third party that it is entitled to brokerage, finders or
other similar fees in connection with this transaction.
(b) Buyer is not aware of any broker or finder which was
instrumental or had any part in bringing about this transaction.
5.4 No Knowledge. Buyer has no actual knowledge of a breach of the
representations and warranties in this Agreement by Covisint.
6. Covenants.
6.1 Conduct Through the Closing Date. From and after the date of this
Agreement and through the Closing Date, Covisint will (except as otherwise
consented to in writing by Buyer):
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(a) Operate the Business in the ordinary course as historically
conducted, including payment of all trade payables and other liabilities that
constitute Assumed Liabilities pursuant to the terms of such payables without
extending the due date of such payables or liabilities, except to the extent
consistent with past practices.
(b) Not enter into any transaction, take any action, or fail to
take any action, which would result in, or could reasonably be expected to
result in, any of the representations, warranties or agreements of Covisint in
this Agreement or the Related Agreements or the Exhibits or Schedules to this
Agreement and the Related Agreements or in connection with the consummation of
the transactions contemplated by this Agreement or the Related Agreements, to
not be true and complete immediately after the occurrence of such transaction in
a manner which is adverse to the Business. Without limiting the obligations of
Covisint under this Section 6.1(b), Covisint will use commercially reasonable
efforts to: (1) maintain its assets and properties in good operating condition,
subject to ordinary wear and tear; (2) maintain its present insurance in force;
and (3) comply in all material respects with the provisions of all Contracts and
Laws, and (4) not change the compensation of any employee listed on Schedule 4.8
other than in the ordinary course; provided, however, that if any such change
involves an employee whose compensation is (or will be as a result of such
change) in excess of $100,000 per year, then such change will not be made
without the prior written consent of Buyer, which consent will not be
unreasonably withheld.
(c) Not enter into any agreements, contracts, purchases or sales
relating to the Business or the Assets other than in the ordinary course of its
business without the written consent of Buyer, including any agreements that
would dispose of or encumber any of the Assets.
(d) Use commercially reasonable efforts to preserve its present
business organization and goodwill relating to the Business and the Assets,
including the present business relationships and goodwill with customers,
suppliers and others having material business dealings with Covisint in
connection with the Business.
(e) Not (other than in the ordinary course of business): (i) make
any Tax election, (ii) file, amend or take any position on any Tax Return, (iii)
settle or compromise any Tax liability, (iv) agree to an extension of a statute
of limitation with respect to any amount of Tax (other than extensions for
filing Tax Returns) or (v) take any action, omit to take any action or enter
into any transaction that would have the effect of increasing the Tax Liability
or reducing any Tax Benefit or asset of Buyer.
(f) Except as provided by Section 6.1(e) above, prepare and file
on or before the due date therefor all Tax Returns required to be filed by
Covisint (except for any Tax Return for which an extension has been properly and
timely granted) on or before the Closing Date, and pay all Taxes (including
estimated Taxes) due on such Tax Returns (or due with respect to Tax Returns for
which an extension has been properly and timely granted) or which are otherwise
required to be paid at any time prior to or during such period.
(g) To the extent Covisint receives written notice of the
commencement or scheduling of any Tax audit, of the assessment or collection of
any Tax, or of the commencement or scheduling of any other administrative or
judicial proceeding with respect to the
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determination, assessment or collection of any Tax for Covisint, provide prompt
written notice to Buyer of such matter, setting forth information (to the extent
known) describing any asserted or potential Tax liability in reasonable detail
and including copies of any written notice or other documentation received from
the applicable Tax Authority with respect to such matter.
6.2 Approvals and Consents. Covisint will use commercially reasonable
efforts to obtain, in writing, all third party approvals and consents (other
than any governmental approvals, which are covered under Section 6.7 of this
Agreement, and other than consents to the assignment of Contracts, which to the
extent required, are covered in this Section 6.2 below) required in order to
authorize and approve this Agreement and the Related Agreements and to
consummate the transactions contemplated by this Agreement. Covisint will use
commercially reasonable efforts to obtain, in writing, all consents required for
the assignment of the Contracts.
6.3 Advice of Changes. Between the date of this Agreement and the
Closing Date, Covisint will promptly notify Buyer in writing of any fact which,
if existing or known at the date of this Agreement, would have been required to
be set forth in this Agreement or disclosed pursuant to this Agreement or a
Related Agreement or which would affect or change any of the information set
forth in the Exhibits or Schedules of this Agreement or any Related Agreement.
6.4 Notice of Litigation. Buyer, on the one hand, and Covisint, on the
other hand, will promptly notify the other in writing if, between the date of
this Agreement and the Closing Date, inclusive, it (or they) receives any
notice, or otherwise becomes aware, of any action or proceeding instituted or
threatened before any court or governmental agency by any third party to
restrain or prohibit, or obtain substantial damages in respect of, this
Agreement or any Related Agreement or the consummation of the transactions
contemplated by this Agreement or the Related Agreements.
6.5 Access to Properties and Records; Inspection. From the date of this
Agreement through the Closing Date, Buyer and its counsel, accountants and other
representatives will, upon written notice and so as not to disrupt Covisint's
operation of its business, be given reasonable access during normal business
hours to all of the properties, personnel, financial and operating data, books,
tax returns, contracts, commitments and records of Covisint, including such
access as is needed to conduct a physical inspection of the properties of
Covisint with respect to the Southfield, Michigan property in connection with
the matters to be covered in the transition services agreement between Buyer and
Covisint.
6.6 Supplemental Information and Documents. If at any time on or prior
to the Closing Date, Covisint learns or becomes aware of fact, circumstance,
situation or development that causes any of the representations or warranties
set forth in Article 4 of this Agreement to be or become false, Covisint will
promptly deliver to Buyer on or prior to the Closing Date written amendments to
the Schedules disclosing such fact, circumstance, situation or development. Upon
receipt of any one or more of such proposed amendments, Buyer may, in its sole
discretion at any time on or prior to the Closing Date, either (i) without
liability, withdraw from the transactions contemplated under this Agreement if
any fact, circumstance, situation or development set forth in such amendment
constitutes a material and adverse change to the Business or Assets, whereupon
this Agreement will automatically terminate without liability of any party, or
(ii) complete the Closing, with the aforesaid Schedule as amended, whether or
not such fact, circumstance, situation or development constitutes a material
change to such Schedule,
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whereupon this Agreement will be deemed to be (x) properly amended thereby and
(y) not breached by any such fact, circumstance, situation or development;
provided, however, that if such fact, circumstance, situation or development was
within Covisint's reasonable control and occurred after the date of this
Agreement, and Buyer elects to close the transactions contemplated by this
Agreement, then Buyer will be entitled to seek indemnification pursuant to
Article 9 of this Agreement with respect to such fact, circumstance, situation
or development, notwithstanding the preceding clause (y) of this Section 6.6.
Nothing in this Section 6.6 will relieve Covisint of liability for the breach of
any representation or warranty discovered after the Closing Date resulting from
any fact, circumstance, situation or development that arose prior to the date of
this Agreement, and Covisint will promptly notify Buyer of any such fact,
circumstance, situation or development when Covisint learns thereof.
6.7 Filings. The parties will prepare and make any necessary
notifications or filings under any federal, state, local, foreign or other laws,
rules and regulations which may be required in connection with this Agreement
and all of the transactions contemplated by this Agreement, as soon as possible,
including any antitrust law-related notifications or filings in foreign
countries. The parties will also provide all information necessary or desirable
for making (or responding to any requests for further information following) any
notification or filing.
6.8 Non-Disclosure Agreement. Covisint and Buyer agree that each party's
non-disclosure obligations contained in any non-disclosure agreement signed by
Covisint and Buyer will remain in full force and effect in accordance with the
terms of such agreement.
6.9 Work in Progress. From and after the Closing, Buyer will, in the
ordinary course of business, invoice customers under any of the Contracts who
are licensing, sublicensing or otherwise using any Proprietary Rights
(collectively, "Customers") which were not invoiced prior to the Closing. From
and after the Closing, Covisint will refer to Buyer all requests, communications
and inquiries of any Customers relating to the conduct of the Business after the
Closing. Covisint will cooperate with Buyer, and take such actions as Buyer
reasonably requests and to ensure that Customers send or deliver their payments
relating to the conduct of the Business after the Closing directly to Buyer and
to ensure that payments from or on behalf of Customers which are improperly sent
or delivered to Covisint are not commingled with Covisint's assets. Each party
(the "Recipient") will promptly remit to the other party (the "Entitled Party")
all amounts paid to the Recipient but to which the Entitled Party has the right,
including insurance proceeds. To the extent appropriate to accomplish the
foregoing, the Recipient will endorse all checks and other instruments in favor
of the Entitled Party. The Recipient will provide the Entitled Party with such
information as is necessary or reasonably requested to determine the amounts to
which the Entitled Party is entitled. Covisint will not take any action that
could interfere with Buyer's relationship with any of the Customers.
6.10 Change and Use of the Covisint Name. On or within five (5) days
after the Closing Date, Covisint shall take or cause to be taken such action as
may be required to change the company name of Covisint and the corporate name of
Covisint Inc. to a name that is not the same as, or confusingly similar to,
Covisint's current name or the other names or marks of Covisint transferred to
Buyer hereunder, and promptly thereafter Covisint shall deliver to Buyer
evidence that all necessary filings in the jurisdictions in which Covisint and
Covisint Inc. are licensed or qualified to do business to effect such name
change have been made.
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6.11 Employee Matters and Noncompetition.
(a) Buyer intends to offer employment to the Covisint employees
listed on Schedule 4.8, but shall have no obligation to hire any other employees
of Covisint; provided however, that Buyer shall be free to negotiate with and
hire any of such other employees (including without limitation persons on
approved leaves of absence). Covisint shall, and shall cause its members to,
cooperate with Buyer and encourage its employees to accept employment with
Buyer. Any Covisint employee that accepts employment with Buyer ("Active
Employee") shall be eligible to participate in Buyer's employee benefit and
fringe benefit plans, programs, policies or arrangements ("Buyer's Welfare
Plans") on such terms and conditions set forth in such plans; provided, however,
Buyer shall treat service by Active Employees with Covisint in the same manner
as service with Buyer for purposes of eligibility to participate in the Buyer
Welfare Plans, to the extent permitted under such Plans. Notwithstanding the
foregoing, Buyer will not be required to assume any employment contracts or
Benefit Plans.
(b) During the two (2) year period following the Closing Date,
Covisint shall not, and shall not permit any Affiliate to, directly or
indirectly:
(1) as an owner, member, general partner, controlling
shareholder of a privately-held corporation or shareholder to the
extent of five percent (5%) or more of the outstanding shares of a
publicly-held corporation, engage or participate in or assist others
in engaging or participating in the Business anywhere in the world;
(2) solicit, induce, or influence any customer, known
potential customer, supplier, lender, lessor or any other person
that has a business relationship at any time with Buyer, in each
case to the extent related to the Business, to discontinue, modify,
or reduce the extent of such relationship with Buyer; or
(3) recruit, solicit or otherwise induce or influence any
employee or consultant of Buyer, any material portion of whose
duties involve the Business, or any person who served as such at any
time during the six (6) months prior to the time of determination,
any material portion of whose duties involved the Business, to
discontinue such employment or consultant relationship with Buyer,
or employ or seek to employ, or cause or assist any person that
competes with Buyer in the Business, to employ or seek to employ any
employee or consultant of Buyer any material portion of whose duties
involve the Business.
6.12 Maintenance of Books and Records. Each of Buyer and Covisint shall
preserve or cause to be preserved until the sixth anniversary of the Closing
Date all records (including Tax records) possessed or to be possessed by such
party relating to any of the Assets or Assumed Liabilities prior to the Closing
Date. After the Closing Date, where there is a legitimate purpose (which shall
be deemed to include Tax filings of either party), such party shall provide the
other party with access, upon prior written reasonable request specifying the
need therefor, during regular business hours, to (a) the officers and employees
of such party and (b) the books of account and records of such party, but, in
each case, only to the extent relating to the Assets or Assumed Liabilities
prior to the Closing Date, and the other party and its representatives shall
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have the right to make copies of such books and records; provided, however, that
the foregoing right of access shall not be exercisable in such a manner as to
interfere unreasonably with the normal operations and business of such party;
and further provided that, as to so much of such information as constitutes
trade secrets or confidential business information of such party, the requesting
party and its officers, directors and representatives will use due care to not
disclose such information except (i) as required by law, (ii) with the prior
written consent of such party, which consent shall not be unreasonably withheld,
or (iii) where such information becomes available to the public generally, or
becomes generally known to competitors of such party, through sources other than
the requesting party, its Affiliates or its officers, directors or
representatives. Notwithstanding anything contained in this Section to the
contrary, such records may nevertheless be destroyed by a party if such party
sends to the other parties written notice of its intent to destroy records,
specifying with particularity the contents of the records to be destroyed. Such
records may then be destroyed after the 30th day after such notice is given
unless another party objects to the destruction, in which case the party seeking
to destroy the records shall deliver such records to the objecting party.
6.13 Exclusivity. Covisint grants to Buyer the exclusive right to acquire
the Business and the Assets unless and until this Agreement is terminated as
provided in Section 8.2. Neither Covisint, nor any of its directors, officers,
employees, members, Affiliates or representatives shall in any way, either
directly or indirectly, (i) solicit, entertain, initiate or encourage the
submission of any proposal or offer from any Person relating to the acquisition
of any equity interest or the Assets or Business of Covisint, including any
transaction structured as a merger, consolidation or share exchange (an
"Alternative Transaction") or (ii) participate in any discussions or
negotiations (and shall cease any ongoing discussions) regarding furnishing any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Covisint shall notify Buyer immediately if any Person makes any
proposal or offer with respect to any of the foregoing.
6.14 Management Letters. Covisint will provide Buyer, prior to the
Closing Date, with true and complete copies of all "management letters" received
by Covisint in connection with any prior audit within the last three years.
6.15 Commissions. After the Closing, Buyer agrees to reimburse Covisint
for any commissions earned and paid, following approval by Covisint's chief
executive officer or chief financial officer, under Covisint's Sales
Compensation Plan for sales booked by Covisint prior to the Closing Date to the
extent Buyer will receive revenue after the Closing Date. Payment shall be made
by Buyer within fifteen (15) days after receipt of each such invoice; provided
that if Buyer disagrees with the amount of the invoice, Buyer shall be permitted
access to Covisint's books and records for the purpose of confirming the
accuracy of the amount invoiced and payment shall not be due until Buyer and
Covisint have agreed on the amount to be paid by Buyer. In the event the parties
cannot agree upon the amount within 45 days after the invoice is received by
Buyer, the parties shall submit the determination of such amount to a nationally
recognized accounting firm (to be mutually agreed upon by the parties) that does
not perform any material services for Buyer or Covisint, which determination
shall be made within thirty (30) days after submission and shall be final and
binding on all parties. The fees, costs and expenses incurred by such accounting
firm in making such determination shall be borne equally by the parties.
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7. Conditions Precedent to the Parties' Obligations to Close.
7.1 Conditions Precedent of Buyer. Buyer's obligations under this
Agreement are subject to the satisfaction at or before the Closing Date of each
of the following conditions (the fulfillment of any of which may be waived in
writing by Buyer):
(a) All terms of this Agreement and the Related Agreements to be
complied with or performed by Covisint prior to or on the Closing Date will have
been complied with and performed by Covisint in all material respects, including
Covisint's timely taking of all actions and delivery of all documents required
to be taken and delivered by them under this Agreement and the Related
Agreements.
(b) The representations and warranties of Covisint contained in
this Agreement will be true and correct at and as of the Closing Date as if made
at and as of such time, with the same force and effect as if made at and as of
the Closing Date, (1) subject to Section 6.6, (2) except for those
representations and warranties which address matters only as of a particular
date which were true and correct as of such date and (3) except where the
failure to be true and correct would not, in the aggregate, have a material
adverse effect on the Business or the Assets; provided, however, that, subject
to the provisions of Section 6.6, Buyer will be entitled to seek indemnification
as provided in Article 9 of this Agreement.
(c) There will not have been any material adverse change in the
Business or the Assets.
(d) All courts of law, Governmental Entities and other third
parties, the consent, authorization or approval of which is necessary under any
applicable law, rule, order or regulation or under any contract, commitment or
other agreement of Covisint, for the consummation of the transactions
contemplated by this Agreement, will have consented to, authorized, permitted or
approved such transactions, except where the failure to obtain such consent,
authorization or approval will not have a material adverse effect on the
Business or the Assets, and any applicable waiting periods prescribed by any
domestic or foreign antitrust-related laws shall have expired.
(e) Buyer shall have received written consent in a form reasonably
satisfactory to Buyer from all third parties whose consent is necessary for the
assignment of any Contracts to be assigned and assumed by Buyer pursuant to the
terms of this Agreement, except to the extent the failure to receive any such
consent will not have a material adverse effect on the Business or the Assets.
(f) Buyer shall have received the following:
(1) Consistent with the summary provided to Buyer, a revised
or amended Services and Fees Schedule between Ford Motor Company and
Covisint, LLC, so as to indicate the 18 month term of the Portal
Services provided pursuant to Services and Fee Schedule
#NA01XXX00389, and the monthly user fee obligation of $5,000, each
as described in the proposal made to Ford Motor Company; and
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(2) A copy of exhibit 3.19 of the first amendment to the
Transaction Agreement between Covisint and Delphi Automotive
Systems, LLC, effective June 28, 2001.
7.2 Conditions Precedent of Covisint. The obligations of Covisint under
this Agreement are subject to the satisfaction at, or prior to, the Closing Date
of the following conditions precedent (the fulfillment of any of which may be
waived in writing by Covisint):
(a) All terms of this Agreement and the Related Agreements to be
complied with or performed by Buyer prior to or on the Closing Date will have
been fully complied with and performed by Buyer, as appropriate, including
Buyer's timely taking of all actions and delivery of all documents required to
be taken and delivered by it under this Agreement and the Related Agreements.
(b) The representations, warranties, disclosures and statements of
Buyer contained in this Agreement and the Related Agreements will be true and
complete as of the date of this Agreement and on the Closing Date.
8. Default; Termination of Agreement.
8.1 Default. Buyer's, on the one hand, and Covisint's, on the other
hand, obligations under this Agreement are of a special and unique character and
Buyer's, on the one hand, or Covisint's, on the other hand, failure to perform
its obligations will cause irreparable injury to the other party, the amount of
which would be extremely difficult, if not impossible, to estimate or determine
and which may not be adequately compensable by monetary damages alone.
Therefore, the injured party will be entitled, as a matter of course, to an
injunction, restraining order, writ of mandamus or other equitable relief from
any court of competent jurisdiction, including specific performance, restraining
any violation or threatened violation of any term of this Agreement or any
Related Agreement, or requiring compliance with or performance of any obligation
under this Agreement or such Related Agreement, by the violating party or
parties, or such other persons as the court may order. The parties' rights under
this Section 8.1 are cumulative and are in addition to the rights and remedies
otherwise available to them under Section 8.2 below, any other provision of this
Agreement and any other agreement or applicable law.
8.2 Termination. This Agreement may be terminated at any time before the
Closing as follows:
(a) by mutual written consent duly executed by Buyer and Covisint;
(b) by either Buyer or Covisint if the Closing has not been consummated
by March 1, 2004, provided that the right to terminate this Agreement under this
Section 8.2(b) will not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the failure
of the Closing to occur on or before such date; provided further, that the right
to terminate this Agreement under this Section 8.2(b) will not be available
until after April 1, 2004 if the sole reason that the Closing has not been
consummated is that an applicable waiting period prescribed by any domestic or
foreign antitrust-related law shall not yet have expired;
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(c) by either Buyer or Covisint if a court of competent
jurisdiction or if a Governmental Entity has issued a nonappealable final order,
decree or ruling or taken any other action having the effect of permanently
restraining, enjoining or otherwise prohibiting the transaction contemplated by
this Agreement (provided that the right to terminate this Agreement under this
Section 8.2(c) will not be available to any party who has not complied with its
obligations under this Agreement and such noncompliance materially contributed
to the issuance of any such order, decree or ruling or the taking of such
action);
(d) by Covisint or Buyer, (1) if any representation or warranty of
the other party set forth in this Agreement was untrue when made, or (2) upon a
breach of any covenant in this Agreement on the party of the other party, such
that the conditions set forth in Sections 7.1(a) or 7.1(b), or Sections 7.2(a)
or 7.2(b), as the case may be, would not be satisfied (either (1) or (2) above
being a "Terminating Breach"), provided, that, if such Terminating Breach is
curable prior to March 1, 2004 by the breaching party through the exercise of
its commercially reasonable efforts and for so long as the breaching party
continues to exercise such efforts, neither Buyer nor Covisint, respectively,
may terminate this Agreement under this Section 8.2(d); or
(e) by Buyer pursuant to Section 6.6.
Except as set forth in the following two sentences, if this
Agreement terminates in accordance with this Section 8.2, it will be null and
void and have no further force or effect, except as expressly provided in this
Agreement (including Sections 10.10 and 10.14). Except as provided in Section
6.6, any termination will not affect the terminating party's rights arising from
any breach of the obligations under this Agreement or misrepresentation of any
non-terminating parties. The parties' rights under this Section 8.2 are
cumulative and are in addition to the other rights and remedies available to the
parties under Section 8.1 above, any other provision of this Agreement, any
other agreement or applicable law.
9. Indemnification.
9.1 Indemnification by Covisint. Upon the terms and subject to the
conditions of this Article 9, Covisint will indemnify and hold Buyer, and its
directors, officers, employees, agents, consultants, representatives, Affiliates
and shareholders (collectively, "Buyer Indemnified Parties") harmless against
any Loss which any of them may incur arising out of:
(a) any breach by Covisint of any of Covisint's representations
and warranties under this Agreement or any Related Agreement, or Covisint's
breach of any covenants made in this Agreement or any Related Agreement or the
Exhibits or Schedules to this Agreement or any Related Agreement;
(b) any of the Excluded Liabilities;
(c) rules of ERISA applicable to the matters described in
paragraph (e) of Section 4.8 of this Agreement; and
(d) any action, suit, proceeding, investigation, assessment or
judgment relating to any of the matters indemnified against in this Section 9.1,
or any third-party claim
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which if proven true would constitute a breach by Covisint of any of its
representations and warranties, including Fees and Costs (whether prior to or at
trial or in appellate proceedings).
9.2 Indemnification by Buyer. Upon the terms and subject to the
conditions of Article 9, Buyer will indemnify and hold Covisint and its
directors, officers, employees, agents, consultants, representatives, Affiliates
and members harmless against any Loss which any of them may incur arising out
of:
(a) any breach by Buyer of any of Buyer's representations,
warranties, covenants or agreements made in this Agreement or any Related
Agreement or the Exhibits or Schedules to this Agreement or any Related
Agreement, including without limitation, Buyer's obligations to pay and perform
the Assumed Liabilities; or
(b) any action, suit, proceeding, investigation, assessment or
judgment relating to any of the matters indemnified against in this Section 9.2,
or any third-party claim which if proven true would constitute a breach by Buyer
of any of its representations and warranties, including Fees and Costs (whether
prior to or at trial or in appellate proceedings).
9.3 Claims for Indemnification.
(a) Whenever any claim is made for indemnification (other than a
Tax claim) under this Article 9, the person claiming such indemnification (the
"Claimant") will give notice to the party against whom indemnification is sought
(the "Indemnifying Party") promptly after the Claimant has actual knowledge of
any event which might give rise to a claim for indemnification under this
Agreement; provided that if the Claimant receives a complaint, petition or any
other pleading in connection with a claim which requires the filing of an answer
or other responsive pleading, it will furnish the Indemnifying Party with a copy
of such pleading as soon as possible after receipt.
(b) The failure by the Claimant to give notice of a claim as
required in Section 9.3(a) above or a delay in giving such notice will not
affect the validity or amount of such claim and the indemnification obligations
of the Indemnifying Party will remain in effect as to such claim, except to the
extent that the Indemnifying Party has been prejudiced or adversely affected
thereby.
(c) If, after the amount of the claim of Loss (other than a Tax
claim) is specified by Claimant, and Claimant gives notice with respect thereto
to the Indemnifying Party (the "Claim Notice"), the Indemnifying Party objects
to any such claim or amount set forth in the Claim Notice, it may give notice to
Claimant advising Claimant of its objection within thirty (30) days of the
Indemnifying Party's receipt of the Claim Notice. If no such notice is timely
given by the Indemnifying Party to Claimant, then subject to the limitations on
indemnification set forth in Section 9.5, Claimant will be entitled to payment
from the Indemnifying Party pursuant to this Agreement. If the Indemnifying
Party advises Claimant within such period that it objects to the claim, Claimant
and the Indemnifying Party will promptly meet and use their reasonable efforts
to settle the dispute in writing. If Claimant and the Indemnifying Party are
unable to reach agreement within sixty (60) days after the Indemnifying Party
objects to the claim, then either party may bring an action to determine the
disputed portion of such claim of Loss.
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(d) The giving of the notice by Buyer to Covisint with respect to
any particular claim in accordance with Section 9.3 within the period of
survival of any representations or warranties will toll said survival period
(but only with respect to such claim to the extent of the claim of Loss with
respect to such claim) until any liability under said notice is finally resolved
and determined.
9.4 Third-Party Claims.
(a) If the facts giving rise to the right of indemnification under
Sections 9.1 or 9.2 above involve any actual or threatened claim or demand by
any third party against the Claimant or any possible claim by the Claimant
against any third party ("Third-Party Claim"), the Indemnifying Party may
undertake, at its own expense, the defense or prosecution of such Third-Party
Claim.
(b) So long as the Indemnifying Party has assumed and is
conducting the defense of the Third-Party Claim in accordance with this Section
9.4, the Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third-Party Claim without the
prior written consent of Claimant (which consent will not be unreasonably
withheld, conditioned or delayed) unless the judgment or proposed settlement
involves only the payment of money damages by the Indemnifying Party and does
not impose an injunction or other equitable relief upon Claimant.
(c) If the Indemnifying Party fails to undertake the defense or
prosecution of a Third-Party Claim, (1) the Claimant will be entitled to defend
or prosecute such Third-Party Claim with counsel of its own choice (the
reasonable Fees and Costs of such defense or prosecution being indemnified under
this Article 9), (2) the Indemnifying Party at its own expense may nevertheless
participate with the Claimant in the defense or prosecution of such Third-Party
Claim and any settlement negotiations with respect thereto, and (3) except as
provided herein, the Claimant may settle the Third-Party Claim on such terms as
it may choose, although it will not reach such a settlement until it has
consulted in good faith with the Indemnifying Party.
(d) An Indemnifying Party's defense or prosecution of, or
participation in, a Third-Party Claim will not in any manner relieve the
Indemnifying Party of its obligations to indemnify the Claimant under this
Article 9. The Indemnifying Party and the Claimant will cooperate in good faith
with each other in connection with the defense or settlement of any Third-Party
Claim and will make available to each other all information necessary or useful
to the defense or settlement of such matter.
9.5 Limits on Indemnification.
(a) The representations and warranties of Covisint set forth in
this Agreement will survive only for a period of two calendar years after the
Closing Date, and any claim for indemnification under Section 9.1 must be
asserted by notice to the Indemnifying Party within two calendar years after the
Closing Date, or the same will be null and void; provided, however, that the
representations, warranties and covenants made by Covisint under Sections 4.1,
4.20 and 4.21 shall survive indefinitely, and the representations, warranties
and covenants made by Covisint under Sections 4.12, 4.13(c) and (l), and 6.1(f)
and (g), 9.1 (with respect to Taxes), 9.6,
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and 10.13 of this Agreement (specifically relating to Taxes) will survive until
sixty days after the expiration of the applicable statutes of limitations
(including any waivers or extensions) on assessment and collection of the Tax to
which such representation, warranty or covenant relates. If any claims for
indemnification have been made pursuant to Sections 9.1, 9.6, and 10.13 and the
same are still pending or unresolved at the expiration of the survival period,
such claims will continue to be subject to the indemnification provisions of
this Agreement.
(b) Any covenant or agreement by the parties hereto which by its
terms contemplates performance after the Closing Date will survive the Closing
Date.
(c) The Indemnifying Party will not be obligated to indemnify the
Claimant under Article 9 unless and until the aggregate of Losses for which
indemnity is provided under Article 9 reaches Eighty Thousand Dollars ($80,000),
in which event the Indemnifying Party will be obligated to indemnify the
Claimant for the full amount of all Losses; provided, however, that the
indemnification threshold of $80,000 will not apply to the indemnification
obligations related to a breach of Sections 4.1(a) and (b), 4.21, 6.1(a), 6.13
or 10.10 or indemnification obligations under Article 9 and 10.13 specifically
relating to Taxes nor will any amounts paid in respect of Sections Article 9 and
10.13 specifically relating to Taxes reduce such indemnification threshold as
the same may apply to any other claims for indemnification. In no event will an
Indemnifying Party be obligated to indemnify a Claimant under Article 9 for
Losses (excluding Losses in connection with third party Claims relating to
Proprietary Rights being transferred or purporting to be transferred pursuant to
this Agreement) in excess of four million dollars ($4,000,000) in the aggregate.
(d) The Indemnified Party will use all reasonable efforts,
consistent with normal practices and policies and good commercial practice, to
mitigate such Losses.
(e) Notwithstanding anything herein to the contrary, Losses will
not include special, indirect, consequential or punitive damages.
Notwithstanding anything herein to the contrary, Losses will not include "lost
profits" or "lost revenues", unless "lost profits" or "lost revenues" are
included in claims of third parties against Buyer. Notwithstanding the preceding
sentence, for purposes of this Article 9, "lost profits" or "lost revenues"
means a negative impact on future revenues or profits of Buyer arising as an
indirect or secondary consequence of a breach of a representation, warranty,
covenant or agreement but "lost profits" or "lost revenues" will be included in
Losses to the extent they are the direct consequence of a breach of a
representation, warranty or covenant.
(f) The parties agree that any indemnification payment made by
Covisint under Sections 9.1, 9.6 or 10.13 to Buyer is an adjustment to the
Purchase Price, and Covisint agrees to consistently so treat any such payment on
any Tax Return or claim for refund that it files, in any administrative or
appeals procedure, judicial proceedings, or any other situation in which a
characterization of such a payment is made.
(g) Each party hereby acknowledges and agrees that, from and after
the Closing Date, its sole and exclusive remedy with respect to any and all
claims relating to the subject matter of this Agreement will be pursuant to the
provisions set forth in this Article 9 and Section 10.13 below. In furtherance
of the foregoing, but subject to the exceptions set forth in the immediately
proceeding sentence, each party hereby waives, from and after the Closing Date,
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to the fullest extent permitted under applicable law, any and all claims, rights
and causes of action (other than claims of fraud and claims arising under this
Article 9 and Section 10.13 below) it may have relating to the subject matter of
this Agreement arising under or based upon any federal, state, local or foreign
statute, law, ordinance, rule or regulation or otherwise.
9.6 Tax Indemnification Procedure. Notwithstanding anything else in this
Agreement to the contrary:
(a) Subject to the participation and cooperation provisions of
subsections (a) and (b) of this Section 9.6, whenever any claim is made for
indemnification in respect of Taxes claimed under this Article 9, the person
claiming such indemnification (the "Tax Claimant") will give notice to the party
against whom indemnification is sought (the "Tax Indemnifying Party") promptly
after the Tax Claimant has actual knowledge of any event which might give rise
to a claim for indemnification in respect of Taxes under this Agreement, and
will permit the participation of the Tax Indemnifying Party at its expense in,
any investigation, audit, examination, controversy, litigation or other
proceeding (a "Tax Proceeding") by or with a Tax Authority empowered to
administer or enforce such Tax and will not consent to the settlement or Final
Determination in such proceeding without the prior written consent of the Tax
Indemnifying Party, which will not be unreasonably withheld, conditioned or
delayed; provided, however, that at the election of the Tax Claimant, the Tax
Indemnifying Party shall provide the Tax Claimant with an opinion in form and
substance reasonably acceptable to the Tax Claimant that there is substantial
authority for the position that the Tax Indemnifying Party is taking with
respect to such Tax Proceeding and the Tax Claimant need not and the Tax
Indemnifying Party shall not take any such position until such opinion is
delivered to the Tax Claimant. Subject to the participation and cooperation
provisions of subsections (a) and (b) of this Section 9.6 (including the
preceding sentence), Covisint will have full responsibility for and discretion
in handling any Tax Proceeding relating to Covisint; provided, however, that
neither Buyer nor Covisint shall enter into any settlement of a Tax Proceeding
which would have an adverse effect on the other party or its Affiliates without
the other party's written consent which will not be unreasonably withheld.
(b) (1) Buyer, on the one hand, and Covisint, on the other hand,
will (A) use reasonable efforts to keep the other advised as to the status of
any Tax Proceeding, (B) promptly furnish to the other a copy of any inquiry,
request for information, notice of proposed adjustment, revenue agent's report
or similar report, or notice of deficiency together with all relevant documents
and memos related to the foregoing documents, notices or reports from any Tax
Authority concerning any Tax Proceeding, (C) timely notify the other regarding
any proposed written communication to any such Tax Authority with respect to
such Tax Proceeding, (D) give the other the reasonable opportunity to review and
comment in advance on all written submissions, filings and any other information
relevant to indemnifiable issues, and (E) consider in good faith any suggestions
made by the other to submit documentation or attend those portions of any
meetings and proceedings that relate to such Tax Proceeding. Notwithstanding the
foregoing, Buyer may make appropriate redactions in any information provided to
Covisint to the extent reasonably required to preserve the confidentiality of
such information as to issues that are not directly related to indemnifiable Tax
claims.
(2) In the event that a Tax Claimant or its Affiliates is
required to pay any Tax, file any bond or deposit any amount in
order to undertake or defend a
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Tax Proceeding, the Tax Indemnifying Party will loan to the Tax
Claimant no later than three business days before such payment is
required to be made, without interest and until a Final
Determination with respect to such Tax Proceeding has occurred, one
hundred percent of the amount required to be paid. Within three
business days of the receipt by the Tax Claimant or its Affiliates
of a refund of any amount loaned to it by the Tax Indemnifying Party
(including any interest received by the Tax Claimant or its
Affiliates), the Tax Claimant or its Affiliates will pay such
refunded amount to the Tax Indemnifying Party net of any Tax cost
and Fees and Costs incurred by the Tax Claimant or its Affiliates as
a result of such refund.
(c) The failure by a Tax Claimant to give notice of a claim as
required in Section 9.6(a) above or a delay in giving such notice will not
affect the validity or amount of such claim and the indemnification obligations
of the Tax Indemnifying Party will remain in effect as to such claim (except to
the extent that such failure or delay shall have adversely affected the Tax
Indemnifying Party's ability to defend against any liability or claim for Taxes
that the Tax Indemnifying Party is obligated to pay hereunder).
(d) Within 60 days of any Final Determination of Tax in a Tax
Proceeding, or the written acquiescence of a Tax Indemnifying Party with respect
to a Tax Proceeding, the Tax Claimant will provide a written notice to the Tax
Indemnifying Party explaining the calculation of the amount of such Tax claim.
The Tax Indemnifying Party will pay such amount of Tax (and all other related
amounts indemnifiable hereunder) to the Tax Claimant within five (5) business
days after receipt of such notice.
(e) If a Tax Indemnifying Party for any reason fails or refuses to
perform fully its obligations or indemnifications under this Section 9.6, in
addition to its other rights under this Agreement, the Tax Claimant will have
the right of offset with respect to any payments which are due or will become
due under this Agreement or any Related Agreement. The foregoing provisions of
this Section 9.6(e) are permissive, and a failure by the Tax Claimant to
exercise its rights under this Section 9.6(e) will not affect its right to
indemnification under this Agreement.
(f) Except as otherwise specifically provided in this Agreement,
each party will bear its own Fees and Costs incurred in connection with a Tax
liability issue for which such party and its Affiliates are liable, and not
entitled to indemnification, under this Agreement.
(g) The provisions of this Section 9.6 will not be governed by any
limitations in Article 9 (except this Section 9.6) and, to the extent of any
inconsistency between this Section 9.6 and Article 9 (except this Section 9.6),
the provisions of this Section 9.6 will control.
10. Miscellaneous.
10.1 Notices. Any notice required or permitted to be given under this
Agreement must be in writing and sent by recognized overnight courier (such as
Airborne or Federal Express) or by certified or registered mail, postage
prepaid, or delivered by hand, addressed as follows:
39
<PAGE>
(a) To Buyer: Compuware Corporation
One Campus Martius
Detroit, Michigan 48226
Attention: President
(b) With a copy to: Compuware Corporation
One Campus Martius
Detroit, Michigan 48226
Attention: General Counsel
(c) To Covisint: Covisint, LLC
20921 Lahser Road
Southfield, Michigan 48034
Attention: President
With a copy to: Honigman Miller Schwartz and Cohn LLP
2290 First National Building
660 Woodward Avenue
Detroit, Michigan 48226
Attention: John P. Kanan
Addresses for notices may be changed by notice given pursuant to this Section
10.1. Notice will be deemed given on the date delivered if delivered by hand.
Notice sent by recognized overnight courier will be deemed given on the business
day following delivery to such recognized overnight courier. Notice mailed as
provided herein will be deemed given on the third (3rd) business day following
the date so mailed.
10.2 No Waiver. No waiver of any breach of any provision of this
Agreement will be deemed a waiver of any preceding or succeeding breach or of
any other provision of this Agreement. No extension of time for performance of
any obligations or acts will be deemed an extension of the time for performance
of any other obligations or acts.
10.3 Successors and Assigns. This Agreement will bind and inure to the
benefit of the parties and their successors and assigns; provided that neither
Buyer nor Covisint may assign this Agreement, any Related Agreement or any
rights under this Agreement or any Related Agreement to any other person without
the prior written consent of Covisint, in the case of an assignment by Buyer, or
Buyer in the case of an assignment by Covisint. Notwithstanding the foregoing,
Buyer will have the right to assign all or a portion of its rights under this
Agreement and the Related Agreements to any direct or indirect wholly-owned
subsidiary of Buyer, including a limited liability company the sole member of
which is Buyer; provided that no such assignment shall relieve Buyer of its
duties hereunder.
10.4 Severability. The provisions of this Agreement will be deemed
severable, and if any provision or part of this Agreement is held illegal, void
or invalid under applicable Laws, such provision or part may be changed to the
extent reasonably necessary to make the provision or part, as so changed, legal,
valid and binding. If any provision of this Agreement is held illegal, void or
invalid in its entirety, the remaining provisions of this Agreement will not in
any way be affected or impaired but will remain binding in accordance with their
terms.
40
<PAGE>
10.5 Entire Agreement; Amendment.
(a) This Agreement, the Related Agreements and the Schedules and
the Exhibits attached to this Agreement and the Related Agreements contain the
entire agreement of the parties with respect to the transactions contemplated by
this Agreement and the Related Agreements, and no representations or warranties
made by any party or its representatives, whether made orally or in writing, may
be relied on unless set forth in this Agreement, the Related Agreements or in
the Exhibits and Schedules to this Agreement and the Related Agreements and no
representation or warranty made prior to the date of this Agreement by any party
will survive the execution and delivery of this Agreement.
(b) Subject to applicable law, at any time prior to the
consummation of the transactions contemplated by this Agreement, Covisint and
Buyer may, by action authorized by their Managing Member or Boards of Directors,
as the case may be (1) mutually amend this Agreement, (2) extend the time for
the performance of any of the obligations or other acts of any other person or
entity, (3) waive any inaccuracies in the representations or warranties
contained in the Agreement, or (4) waive compliance with any of the agreements
or conditions contained herein. This Agreement may not be amended except by a
writing signed by all of the parties by persons authorized to execute such
writing. Any agreement of a party to any extension or waiver will be valid only
if set forth in a writing signed on behalf of such party by a person authorized
to execute such writing, but any waiver or failure to insist on strict
compliance with any obligation, covenant, agreement or condition will not
operate as a waiver of or estoppel with respect to, any subsequent or other
failure.
10.6 Cost of Litigation. If any party breaches this Agreement or any
Related Agreement and if counsel is employed to enforce this Agreement or a
Related Agreement, the successful party will be entitled to Fees and Costs
associated with such enforcement, subject to the applicable limits on
indemnification set forth in Article 9.
10.7 Interpretation.
(a) This Agreement and the Related Agreements are being entered
into among competent and experienced business persons, represented by counsel,
and have been reviewed by the parties and their counsel. Therefore, any
ambiguous language in this Agreement or any Related Agreement will not
necessarily be construed against any particular party as the drafter of such
language. The headings contained in this Agreement are solely for the purposes
of reference, are not part of the agreement of the parties and will not in any
way affect the meaning or interpretation of this Agreement.
(b) For purposes of this Agreement and to the Related Agreements,
the knowledge of Covisint and similar references shall be deemed to be the
knowledge of Robert Paul, Paul Kothari, Michael O'Rourke, David McGuffie and
Mark Baughman after due and reasonable inquiry.
(c) Unless the context of this Agreement otherwise requires: (1)
words of any gender include each other gender; (2) words using the singular or
plural number also include the plural or singular number, respectively; (3) the
terms "hereof", "herein", "hereby", "hereto" and similar words refer to this
entire Agreement and not any particular Article, Section, Clause,
41
<PAGE>
Exhibit, Appendix or Schedule or any other subdivision of this Agreement; (4)
references to "Article", "Section", "Clause", "Exhibit", "Appendix" or
"Schedule" are to the Articles, Sections, Clauses, Exhibits, Appendices and
Schedules, respectively, of this Agreement; (5) the words "include" or
"including" will be deemed to be followed by "without limitation" or "but not
limited to" whether or not they are followed by such phrases or words of like
import; and (6) references to "this Agreement" or any other agreement or
document will be construed as a reference to such agreement or document as
amended, modified or supplemented and in effect from time to time and will
include a reference to any document which amends, modifies or supplements it, or
is entered into, made or given pursuant to or in accordance with its terms. All
accounting terms used herein and not expressly defined herein will have the
meanings given to them under generally accepted accounting principles as in
effect on the Closing Date.
(d) Disclosure of any item or information in a Schedule is not an
admission that such item or information is material or is of a nature that would
cause a material adverse effect with respect to any Person or is necessarily
required to be disclosed in such Schedule. The disclosure of one item in a
Schedule will not by inference suggest that any other item not so disclosed is
material.
10.8 Counterparts. This Agreement may be executed in counterparts, each
of which, when taken together, will be deemed an original of this Agreement.
10.9 Applicable Law; Choice of Forum.
(a) This Agreement and any dispute arising hereunder or related
hereto will be construed in accordance with and governed by the laws of the
State of Michigan, without giving effect to the choice of law provisions
thereof.
(b) Any litigation based hereon, or arising out of, under, or in
connection with this Agreement will be brought and maintained exclusively in the
courts of the State of Michigan or in the United States District Court for the
Eastern District of Michigan. Each party to this Agreement hereby expressly and
irrevocably submits to the jurisdiction of the courts of the State of Michigan
and of the United States District Court for the Eastern District of Michigan for
the purpose of any such litigation as set forth in the preceding sentence. Each
party to this Agreement further irrevocably consents to the service of process
by registered mail, postage prepaid, or by personal service within or without
the State of Michigan.
(c) Each party to this Agreement hereby expressly and irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of venue of any such litigation brought in any
such court referred to above and any claim that any such litigation has been
brought in an inconvenient forum. To the extent that any party to this Agreement
has or hereafter may acquire any immunity from jurisdiction of any court or from
any legal process (whether through service or notice or otherwise) such party
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement.
10.10 Expenses. Each party will bear its own expenses in connection with
the transactions contemplated by this Agreement, including costs of its
respective brokers, financial advisors, attorneys and accountants, regardless of
whether any of the transactions contemplated by this Agreement are consummated.
42
<PAGE>
10.11 Press Releases. On or before the Closing Date, no party will issue
or authorize to be issued any press release or similar announcement concerning
the Agreement, the consideration to be paid hereunder, or any of other terms or
the transactions contemplated by this Agreement without the prior approval of
the other party; provided, however, that Buyer will be permitted to make such
disclosures as necessary to comply with any applicable securities laws or Nasdaq
National Market rules and policies.
10.12 Further Assurances. At any time and from time to time after the date
of this Agreement (including after the Closing Date), the parties agree to
cooperate in all reasonable respects with each other, to execute and deliver
such other documents, instruments of assignment, books and records, and do all
such further acts and things as may be reasonably required to carry out the
transactions contemplated hereby.
10.13 Certain Tax Matters.
(a) The parties will cooperate in all reasonable respects with
each other in a timely manner in the preparation and filing of any Tax Returns,
payment of any Taxes, and the conduct of any audit or other proceeding, in each
case in accordance with the terms of this Agreement. Each party will execute and
deliver such powers of attorney and make available such other documents as are
necessary to carry out the intent of this Agreement.
(b) [reserved]
(c) [Reserved]
(d) Upon request, each of the parties will use their reasonable
efforts to obtain any certificate or other document from any Tax Authority or
any other person as may be reasonably requested by the other party (including,
but not limited to, with respect to the matters contemplated by this Agreement
or the transactions contemplated by this Agreement).
(e) All transfer, documentary, stamp and other such Taxes and fees
(including any penalties and interest) incurred in connection with this
Agreement (including all such Taxes imposed by any state or political
subdivision thereof) will be paid by Covisint.
10.14 Post-Termination Confidentiality Requirements. In the event this
Agreement is terminated pursuant to Section 8.2, for a period of 12 months after
such termination, each party hereto will keep confidential all non-public,
confidential and proprietary information of the other party, except to the
extent such information (a) becomes generally available to the public other than
through a breach of this Agreement, (b) was previously available to such party,
(c) becomes available on a non-confidential basis from a source other than the
other party, or (d) is required by Law to be disclosed.
10.15 No Third Party Beneficiaries. This Agreement, the Related
Agreements, and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits and the
Schedules, are not intended to confer upon any person other than the parties to
such agreements (or their permitted assignees) any rights or remedies under this
Agreement or any other agreement.
43
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth in the introductory paragraph of this Agreement.
COMPUWARE CORPORATION,
a Michigan corporation
By: /s/ Peter Karmanos, Jr.
----------------------------------------
Its: Chief Executive Officer
COVISINT, LLC,
a Delaware limited liability company
By: /s/ Robert C. Paul
----------------------------------------
Its: Chief Executive Officer
44
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.4
<SEQUENCE>3
<FILENAME>k85711exv2w4.txt
<DESCRIPTION>SHARE PURCHASE AGREEMENT
<TEXT>
<PAGE>
\
EXHIBIT 2.4
--------------------
AMENDED AND RESTATED
SHARE PURCHASE AGREEMENT
--------------------
Among
3087769 NOVA SCOTIA COMPANY
and
COMPUWARE CORPORATION
and
CHANGEPOINT CORPORATION
and
EACH OF THE SELLERS
Dated as of April 27, 2004
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
DEFINITIONS
SECTION 1.01. CERTAIN DEFINED TERMS............................................. 1
SECTION 1.02. DEFINITIONS....................................................... 7
SECTION 1.03. SCHEDULES......................................................... 9
SECTION 1.04. KNOWLEDGE......................................................... 10
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. PURCHASE AND SALE OF THE SHARES................................... 10
SECTION 2.02. PURCHASE PRICE.................................................... 10
SECTION 2.03. CLOSING........................................................... 10
SECTION 2.04. CLOSING DELIVERIES BY EACH OF THE SELLERS......................... 10
SECTION 2.05. CLOSING DELIVERIES BY PARENT AND THE PURCHASER.................... 11
SECTION 2.06. ESCROW............................................................ 11
SECTION 2.07. TRANSFER AND DISBURSEMENT AGENT................................... 11
SECTION 2.08. COMPANY OPTIONS................................................... 12
SECTION 2.09. ARTEMIS ADJUSTMENT................................................ 12
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS
SECTION 3.01. ORGANIZATION AND AUTHORITY........................................ 13
SECTION 3.02. NO CONFLICT....................................................... 13
SECTION 3.03. OWNERSHIP AND POSSESSION OF SHARES................................ 14
SECTION 3.04. GOOD TITLE CONVEYED............................................... 14
SECTION 3.05. COMPANY SHAREHOLDERS AGREEMENT.................................... 14
SECTION 3.06. LITIGATION........................................................ 14
SECTION 3.07. COMPLIANCE WITH LAWS.............................................. 14
SECTION 3.08. BROKERS........................................................... 15
SECTION 3.09. FULL DISCLOSURE................................................... 15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.01. ORGANIZATION AND QUALIFICATION.................................... 15
SECTION 4.02. SUBSIDIARIES...................................................... 15
SECTION 4.03. AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS............. 16
SECTION 4.04. CAPITALIZATION.................................................... 17
SECTION 4.05. FINANCIAL STATEMENTS.............................................. 18
SECTION 4.06. ABSENCE OF CERTAIN CHANGES OR EVENTS.............................. 18
SECTION 4.07. ASSETS; PROPERTIES................................................ 20
SECTION 4.08. PERMITS; COMPLIANCE............................................... 21
SECTION 4.09. CONTRACTS AND COMMITMENTS......................................... 21
SECTION 4.10. INTELLECTUAL PROPERTY............................................. 23
SECTION 4.11. ABSENCE OF LITIGATION............................................. 25
SECTION 4.12. CUSTOMERS......................................................... 25
SECTION 4.13. EMPLOYEE BENEFIT PLANS............................................ 25
SECTION 4.14. LABOUR............................................................ 28
SECTION 4.15. INSURANCE......................................................... 30
SECTION 4.16. TAXES............................................................. 30
SECTION 4.17. ENVIRONMENTAL MATTERS............................................. 32
SECTION 4.18. RELATED PARTY TRANSACTIONS........................................ 32
SECTION 4.19. RECEIVABLES....................................................... 33
SECTION 4.20. PRODUCT LIABILITY................................................. 33
SECTION 4.21. BROKERS........................................................... 33
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
SECTION 5.01. ORGANIZATION AND AUTHORITY........................................ 33
SECTION 5.02. NO CONFLICT....................................................... 34
SECTION 5.03. GOVERNMENTAL CONSENTS AND APPROVALS............................... 34
SECTION 5.04. INVESTMENT PURPOSE................................................ 34
SECTION 5.05. FINANCING......................................................... 34
SECTION 5.06. LITIGATION........................................................ 34
SECTION 5.07. BROKERS........................................................... 35
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. CONDUCT OF BUSINESS PRIOR TO THE CLOSING.......................... 35
SECTION 6.02. ACCESS TO INFORMATION............................................. 37
SECTION 6.03. CONFIDENTIALITY................................................... 37
SECTION 6.04. REGULATORY AND OTHER AUTHORIZATIONS; NOTICES AND CONSENTS......... 38
SECTION 6.05. NOTICE OF DEVELOPMENTS............................................ 39
SECTION 6.06. NO SOLICITATION OR NEGOTIATION.................................... 39
SECTION 6.07. VOTING............................................................ 40
SECTION 6.08. NO DISPOSITION OR ENCUMBRANCE OF THE SHARES BY THE SELLERS........ 40
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 6.09. COMPANY BOARD REPRESENTATION...................................... 40
SECTION 6.10. ADDITIONAL PARTIES................................................ 41
SECTION 6.11. OBLIGATIONS OF THE PURCHASER...................................... 41
SECTION 6.12. SECURITIES OF THE PARENT.......................................... 41
SECTION 6.13. NON-COMPETITION................................................... 41
SECTION 6.14. SECTION 116 CERTIFICATES.......................................... 41
SECTION 6.15. CONVERSION OF CLASS A SHARES...................................... 42
SECTION 6.16. PRE-CLOSING TRANSACTION........................................... 43
SECTION 6.17. FURTHER ACTION.................................................... 43
SECTION 6.18. DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE.............. 43
SECTION 6.19. DISCLOSURE SCHEDULES.............................................. 44
ARTICLE VII
CONDITIONS TO CLOSING
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH OF THE SELLERS.................. 44
SECTION 7.02. CONDITIONS TO OBLIGATIONS OF PARENT AND THE PURCHASER............. 44
ARTICLE VIII
INDEMNIFICATION
SECTION 8.01. SURVIVAL.......................................................... 46
SECTION 8.02. INDEMNIFICATION BY THE SELLERS.................................... 46
SECTION 8.03. INDEMNIFICATION PROCEDURES........................................ 48
SECTION 8.04. DISTRIBUTIONS FROM THE INDEMNITY ESCROW FUND...................... 49
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. TERMINATION....................................................... 49
SECTION 9.02. EFFECT OF TERMINATION............................................. 50
SECTION 9.03. AMENDMENT......................................................... 50
SECTION 9.04. WAIVER............................................................ 50
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. EXPENSES......................................................... 50
SECTION 10.02. NOTICES.......................................................... 50
SECTION 10.03. PUBLIC ANNOUNCEMENTS............................................. 52
SECTION 10.04. SEVERABILITY..................................................... 52
SECTION 10.05. ENTIRE AGREEMENT................................................. 52
SECTION 10.06. ASSIGNMENT....................................................... 52
SECTION 10.07. NO THIRD PARTY BENEFICIARIES..................................... 53
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 10.08. GOVERNING LAW.................................................... 53
SECTION 10.09. WAIVER OF JURY TRIAL............................................. 53
SECTION 10.10. SELLERS' REPRESENTATIVE.......................................... 53
SECTION 10.11. HEADINGS......................................................... 54
SECTION 10.12. COUNTERPARTS..................................................... 54
</TABLE>
SCHEDULES
Schedule A - Name of Sellers *
Schedule B - Issued Capital *
Schedule 2.02 - Allocation of the Aggregate Purchase Price *
Schedule 2.06 - Form of Escrow Agreement *
Schedule 2.08 - Form of Non-Competition Agreement *
Disclosure Schedule *
* - The Company will furnish supplementally a copy of any omitted schedule to
the Commission upon request.
iv
<PAGE>
SHARE PURCHASE AGREEMENT
THIS AMENDED AND RESTATED SHARE PURCHASE AGREEMENT (the "AGREEMENT"), dated as
of April 27, 2004
AMONG 3087769 NOVA SCOTIA COMPANY, an unlimited liability
corporation incorporated under the laws of Nova Scotia (the
"PURCHASER")
AND COMPUWARE CORPORATION, a corporation incorporated under the
laws of Michigan (the "PARENT")
AND CHANGEPOINT CORPORATION, a corporation incorporated under the
laws of Ontario (the "COMPANY")
AND EACH OF THE SELLERS (as defined herein).
WHEREAS, each Seller is (a) the record holder and beneficial owner of the number
of (i) Common Shares without nominal or par value (each, a "COMMON SHARE") of
the Company, (ii) Class A Preferred Shares without nominal or par value (each, a
"CLASS A SHARE"), and (iii) Class B Preferred Shares without nominal or par
value (each, a "CLASS B SHARE" and, together with the Class A Shares and Common
Shares the "SHARES") of the Company, all as set forth next to such Seller's name
on SCHEDULE A, to this Agreement; and
WHEREAS, the Sellers wish to sell, or cause to be sold, to the Purchaser, and
the Purchaser wishes to purchase from the Sellers, all the equity interests in
the Company upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the promises and the mutual agreements and
covenants hereinafter set forth, each of the Sellers, the Company, the Parent
and the Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. CERTAIN DEFINED TERMS. For purposes of this Agreement:
"ACTION" means any inquiry, investigation, claim, proceeding, action, suit or
arbitration by or before any Governmental Authority.
"ACQUISITION EXPENSES" means, collectively, the fees and expenses of the Company
or any Company Subsidiary incurred in connection with the structuring,
negotiation, preparation, execution and performance of this Agreement and the
Escrow Agreement, including but not limited to the premium with respect to the
directors and officers insurance rider referenced in Section 6.18.
1
<PAGE>
"AFFILIATE" means, with respect to any specified Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person.
"AGGREGATE PURCHASE PRICE" means US$100,000,000 in cash less the Acquisition
Expenses.
"ARTEMIS ESCROW AMOUNT" means the amount referenced in SCHEDULE 1.01.
"ARTEMIS ESCROW FUND" means the Artemis Escrow Amount deposited with the Escrow
Agent, as such sum may be increased or decreased as provided in the Escrow
Agreement.
"ARTEMIS SETTLEMENT" means the acquisition for cash consideration by the Parent
or any of its Affiliates of the interests in Changepoint France Sarl not
currently owned by the Company, free and clear of any encumbrances.
"ARTEMIS SETTLEMENT AMOUNT" means the amount equal to the sum of (i) the cash
consideration payable to Artemis to effect the Artemis Settlement, and (ii) any
other reasonable costs and expenses incurred (including external legal counsel
or consultants fees and expenses) suffered or incurred by the Parent or any of
its Affiliates in relation to or arising out of, or with respect to, the Artemis
Settlement.
"ARTEMIS SETTLEMENT DATE" means the date upon which the Artemis Settlement
occurs.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday or other day on
which banks are required or authorized by Law to be closed in Nova Scotia,
Ontario or Michigan.
"CANADIAN GAAP" means Canada generally accepted accounting principles and
practices in effect as of the date of the applicable financial statements,
applied consistently throughout the periods involved.
"CRA" means the Canada Revenue Agency.
"CLAIMS" means any and all judicial, quasi-judicial, administrative or
quasi-administrative investigations, notices of noncompliance or violation,
demand letters, claims, proceedings, actions, suits, petitions, appeals, liens,
consent orders or consent agreements.
"CLOSING CONSIDERATION" means the Aggregate Purchase Price less the Escrow
Amount.
"CODE" means the United States Internal Revenue Code of 1986, as amended through
the date hereof.
"COMPANY ACCOUNTANTS" means KPMG LLP, Chartered Accountants.
"COMPANY MATERIAL ADVERSE EFFECT" means any event, circumstance, change or
effect that, individually or in the aggregate with all other events,
circumstances, changes or effects, is or is reasonably likely to be materially
adverse to the business, operations, assets or liabilities or results of
operations of the Company and the Company Subsidiaries taken as a whole, except
for any event, circumstance, change or effect that arises on account of, or
results from (a) any
2
<PAGE>
changes in economic or political conditions generally, (b) any loss of
customers, suppliers or employees by the Company or the Company Subsidiaries
that results from the public announcement of the transactions contemplated by
this Agreement and (d) any action taken by Parent or any of its Affiliates.
"COMPANY SHAREHOLDERS AGREEMENT" means the Third Amended and Restated Unanimous
Shareholders Agreement made as of May 26, 2000, among the Company and the
Sellers or their respective predecessors.
"COMPANY SOFTWARE" means all Software (a) material to the operation of the
Company or any Company Subsidiary or (b) manufactured, distributed, sold,
licensed or marketed by the Company or any Company Subsidiary.
"COMPETITION ACT" means the Competition Act (Canada), as amended.
"CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"),
with respect to the relationship between or among two or more Persons, means the
possession, directly or indirectly or as trustee, personal representative or
executor, of the power to direct or cause the direction of the affairs or
management of a Person, whether through the ownership of voting securities, as
trustee, personal representative or executor, by contract, credit arrangement or
otherwise.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto, dated as of
the date hereof, delivered by the Company to Parent and the Purchaser in
connection with this Agreement.
"ENCUMBRANCE" means any third party right (including, without limitation,
adverse claim, option, equity, right of pre-emption, power of sale), security
interest, hypothec, pledge, mortgage, charge, lien, prior claim (including,
without limitation, environmental and tax liens), ownership or title retention
agreement, conditional sale agreement, lease, leasing, sale and leaseback,
license, and any other agreement that in substance secures payment or
performance of an obligation, preferential arrangement, restrictive covenant,
condition or restriction of any kind, including, without limitation, any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership.
"ENVIRONMENTAL LAWS" means all Laws, now or hereafter in effect and as amended,
and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, guideline,
directive or policy document, relating to the environment, health, safety,
natural resources or Hazardous Materials.
"ENVIRONMENTAL PERMITS" means all permits, approvals, identification numbers,
licenses and other authorizations required under or issued pursuant to any
applicable Environmental Law.
"ESCROW AGENT" means the Royal Bank of Canada.
"ESCROW AMOUNT" means the sum of the Artemis Escrow Amount and the Indemnity
Escrow Amount.
3
<PAGE>
"ESCROW FUND" means the Escrow Amount deposited with the Escrow Agent as such
sum may be increased or decreased as provided in the Escrow Agreement.
"ETA" means Part IX of the Excise Tax Act (Canada), as amended.
"FT ACT" means the Fair Trading Act 1973 of the United Kingdom, as amended.
"FT ACT APPROVAL" means an indication from the United Kingdom Office of Fair
Trading, on terms and conditions reasonably satisfactory to the Purchaser, that
it is not the intention of the Secretary of State for Trade and Industry to
refer the transaction or any matter arising therefrom to the United Kingdom
Competition Commission (in so far as the transaction is a merger qualifying for
investigation by the Competition Commission under the FT Act).
"GOVERNMENTAL AUTHORITY" means any Canadian, United States, United Kingdom,
France, Barbados or other federal, national, supranational, state, provincial,
territorial, local, or similar government, governmental or administrative
authority, agency or commission or any judicial, quasi-judicial, administrative
or quasi-administrative tribunal or arbitral body.
"GOVERNMENTAL ORDER" means any order, writ, judgment, injunction, decree,
stipulation, determination or award entered by or with any Governmental
Authority.
"HAZARDOUS MATERIALS" means (a) petroleum and petroleum products, radioactive
materials, asbestos-containing materials, urea formaldehyde foam insulation,
transformers or other equipment that contain polychlorinated biphenyls and radon
gas, (b) any other chemicals, materials or substances defined as or included in
the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic
substances", "toxic pollutants", "contaminants" or "pollutants", or words of
similar import, under any applicable Environmental Law, and (c) any other
chemical, material or substance which is regulated by any Environmental Law.
"HSR ACT" means the United States Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
"INDEBTEDNESS" means, with respect to the Company, (a) all indebtedness of the
Company and the Company Subsidiaries, contingent or otherwise, for borrowed
money, (b) all obligations of the Company and the Company Subsidiaries evidenced
by notes, bonds, debentures or other similar instruments, including accrued and
unpaid interest, and (c) all obligations of the Company and the Company
Subsidiaries as lessee under leases that have been or should be, in accordance
with Canadian GAAP, recorded as capital leases.
"INDEMNITY ESCROW AMOUNT" means US$10,250,000.
"INDEMNITY ESCROW FUND" means the Indemnity Escrow Amount deposited with the
Escrow Agent, as such sum may be increased or decreased as provided in the
Escrow Agreement.
"INTELLECTUAL PROPERTY" means (a) patents, patent applications, and statutory
invention registrations, (b) trademarks, service marks, domain names, trade
dress, logos, trade names, corporate names, and other identifiers of source or
goodwill, including registrations and
4
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applications for registration thereof, together with the goodwill associated
therewith (c) mask works and copyrights, including copyrights in Software, and
registrations and applications for registration thereof, (d) confidential and
proprietary information, including trade secrets, know-how and invention rights
and (e) rights in designs.
"INVESTMENT CANADA ACT" means the Investment Canada Act (Canada), as amended.
"INVESTMENT CANADA ACT APPROVAL" means that the Minister shall have determined,
or have been deemed to have determined, that the transactions contemplated by
this Agreement are of net benefit to Canada on terms and conditions satisfactory
to the Purchaser.
"IRS" means the United States Internal Revenue Service.
"ITA" means the Income Tax Act (Canada), as amended.
"LAW" means any Canadian, United States, European Union, United Kingdom or other
federal, national, supranational, state, provincial, territorial, local or
similar constitution, code, statute, law, ordinance, regulation, rule, order,
requirement or rule of law (including, without limitation, common law).
"LEASED REAL PROPERTY" means the immovable and real property leased by the
Company or any Company Subsidiary, in each case, as tenant, together with, to
the extent leased by the Company or any Company Subsidiary, all buildings and
other structures, facilities or improvements currently or hereafter located
thereon, all fixtures, systems, equipment and items of movable and personal
property of the Company or any Company Subsidiary attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating to the
foregoing.
"LIABILITIES" means any and all debts, liabilities and obligations, whether
accrued or fixed, absolute or contingent, matured or unmatured or determined or
determinable, including, without limitation, those arising under any Law
(including, without limitation, any Environmental Law), Action or Governmental
Order and those arising under any contract, agreement, arrangement, commitment
or undertaking.
"LICENSED INTELLECTUAL PROPERTY" means all Intellectual Property licensed to the
Company or any Company Subsidiary.
"LICENSES" means all (a) agreements governing licenses of Intellectual Property
by the Company or any Company Subsidiary to third parties, (b) agreements
governing licenses of Intellectual Property by third parties to the Company or
any Company Subsidiary and (c) agreements between the Company and third parties
relating to the development or use of Intellectual Property.
"MINISTER" means the Canadian Minister responsible for the Investment Canada
Act.
"OWNED INTELLECTUAL PROPERTY" means all Intellectual Property owned by the
Company or any Company Subsidiary.
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"PARENT SECURITIES" means any shares of the Parent or any other securities that
are convertible into, exchangeable for or which derive their value from shares
of the Parent.
"PER SELLER CLOSING CONSIDERATION" shall mean that portion of the Closing
Consideration payable to a Seller hereunder, less any amount withheld pursuant
to SECTION 6.14, if applicable,
"PERMITTED ENCUMBRANCES" means such of the following as to which no enforcement,
collection, execution, levy or foreclosure proceeding shall have been commenced,
or where such proceeding has been commenced, is being contested in good faith by
the Company or any Company Subsidiary through proceedings provided for by
applicable Law, and as to which neither the Company nor any Company Subsidiary
is otherwise subject to any liability under applicable Law due to its existence,
unless such liability is being contested in good faith by the Company or any
Company Subsidiary through proceedings provided for by applicable Law: (a) liens
for Taxes, assessments and governmental charges or levies not yet due and
payable; (b) Encumbrances imposed by Law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's liens and other similar liens arising in
the ordinary course of business securing obligations that (i) are not overdue
for a period of more than 30 days and (ii) are not in excess of US$10,000 in the
case of a single property or US$50,000 in the aggregate at any time; (c) pledges
or deposits to secure obligations under workers' compensation laws or similar
legislation or to secure public or statutory obligations; (d) minor survey
exceptions, reciprocal easement agreements and other customary encumbrances on
title to immovable and real property that (i) were not incurred in connection
with any Indebtedness, (ii) do not render title to the property encumbered
thereby unmarketable and (iii) do not, individually or in the aggregate,
materially adversely affect the value of or the use of such property for its
current and anticipated purposes; (e) encumbrances incurred in the ordinary
course of business consistent with past practices that do not in the aggregate
affect assets with a value in excess of US$10,000; and (f) encumbrances against
the property and assets of the Company or any Company Subsidiary described in
SECTION 1.01 of the DISCLOSURE SCHEDULE.
"PERSON" means any individual, partnership, firm, corporation, limited liability
company, association, trust, unincorporated organization or other entity, as
well as any syndicate or group that would be deemed to be a person under Section
13(d)(3) of the United States Securities Exchange Act of 1934, as amended.
"PURCHASE PRICE BANK ACCOUNT" means the bank account(s) to be designated by the
Sellers' Representative in a written notice to the Purchaser and the Transfer
and Disbursement Agent.
"PURCHASER'S ACCOUNTANTS" means Deloitte & Touche LLP, independent accountants
of Parent and its Affiliates.
"RECEIVABLES" means any and all accounts receivable arising from the conduct by
the Company and the Company Subsidiaries of their business before the Closing
Date, together with any unpaid financing charges accrued thereon.
"REGULATIONS" means the Treasury Regulations (including Temporary Regulations)
promulgated by the United States Department of Treasury with respect to the Code
or other federal tax statutes.
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"SEC" means the United States Securities and Exchange Commission.
"SELLER" means each Person listed on the signature pages hereof.
"SERIES" means a series of transactions or events, for purposes of paragraph
88(1)(c)(vi) of the ITA, that includes the acquisition of the Shares by the
Purchaser.
"SELLERS' REPRESENTATIVE" means Greg Treger or such other Person appointed
pursuant to SECTION 10.10.
"SOFTWARE" means computer software, programs and databases in any form,
including Internet web sites, web content and links, source code, object code,
operating systems and specifications, data, databases, database management code,
utilities, graphical user interfaces, menus, images, icons, forms, methods of
processing, software engines, platforms, and data formats, all versions,
updates, corrections, enhancements and modifications thereof, and all related
documentation, developer notes, comments and annotations.
"TAX" or "TAXES" means any and all taxes, fees, levies, duties, tariffs,
imposts, assessments, reassessments and other charges of any kind, whether
direct or indirect (together with any and all interest, penalties, additions to
tax and additional amounts imposed with respect thereto) imposed by any
government or taxing authority, including, without limitation, taxes or other
charges on or with respect to income, franchises, windfall or other profits,
gross receipts, capital, immovable and real and movable and personal property,
land transfer, use, share capital, wage, payroll, employment, employer health,
social security, workers' compensation, unemployment compensation and retirement
contributions, or net worth; corporation tax; taxes or other charges in the
nature of customs or excise, withholding, ad valorem, stamp, transfer, turnover
or value added, sales and use, goods and services, harmonized sales or gains
taxes; license, registration and documentation fees; and customs' duties,
tariffs, and similar charges.
"TAX AUTHORITY" means a Governmental Authority having jurisdiction with respect
to Taxes.
"TAX RETURNS" means any and all returns, schedules, information statements,
reports, and forms required to be filed with a Governmental Authority with
respect to Taxes.
"TRANSFER AND DISBURSEMENT AGENT" means the Escrow Agent or such other third
party, reasonably satisfactory to the Parties, acting as intermediary between,
on one side, the Purchaser and the Parent and, on the other side, the Company
and the Sellers, for the purpose of facilitating the completion of the Closing.
SECTION 1.02. DEFINITIONS The following terms have the meanings set forth in the
Sections set forth below:
<TABLE>
<CAPTION>
Definition Location
---------- --------
<S> <C>
"ACQUISITION PROPOSAL" 6.06
"ADJUSTABLE AMOUNT" 2.08
"AGREEMENT" Preamble
"AGGREGATE PER SELLER PURCHASE PRICE" 2.04
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Definition Location
---------- --------
<S> <C>
"AUDITED FINANCIAL STATEMENTS" 4.05(a)
"CANADIAN ENTITIES" 4.15(d)
"CANADIAN PENSION PLANS" 4.13(b)
"CANADIAN PLANS" 4.13(a)
"CLASS A SHARE" Recitals
"CLASS B SHARE" Recitals
"COMMON SHARE" Recitals
"CLOSING" 2.03
"CLOSING DATE" 2.03
"COMPANY" Preamble
"COMPANY ARTICLES" 4.01
"COMPANY OPTIONS" 2.08
"COMPANY PERMITS" 4.08(a)
"COMPANY STOCK OPTION PLANS" 2.08
"COMPANY SUBSIDIARY" 4.02
"COMPANY WARRANT" Recitals
"CONFIDENTIALITY AGREEMENT" 6.02
"CUSTOMERS" 4.12
"ERISA" 4.13(a)
"EXCHANGE ACT" 4.20(a)
"FINANCIAL STATEMENTS" 4.05(a)
"INDEMNIFIED PARTY" 8.02(a)
"INDEMNIFYING PARTY" 8.02(a)
"INTERIM FINANCIAL STATEMENTS" 4.05(a)
"LEASES" 4.07(b)
"LOSS" 8.02(a)
"MATERIAL CONTRACTS" 4.09(a)
"NON-CANADIAN RESIDENT" 6.15(a)
"NON COMPETITION AGREEMENT" 6.14
"PARENT" Preamble
"PLANS" 4.13(k)
"PRE-CLOSING TRANSACTION" 6.17
"PROCEEDINGS" 4.13(d)
"PURCHASER" Preamble
"REMITTANCE DATE" 6.15(b)
"RESIGNATION" 6.09
"RESTRICTIVE AGREEMENT" 4.09(a)(vii)
"SCHEDULE A" Recitals
"SECTION 116 CERTIFICATE" 6.16(a)
"SECURITIES ACT" 4.20(a)
"SHARES" Recitals
"U.K. PLANS" 4.13(a)
"FRENCH PLANS" 4.13(a)
"U.S. PLANS 4.13(a)
"WARN" 4.13A(f)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Definition Location
---------- --------
<S> <C>
"WITHHELD AMOUNT" 6.15(b)
</TABLE>
SECTION 1.03. SCHEDULES
SCHEDULES: The following schedules are attached to this Agreement
and are deemed to be a part of and incorporated in this Agreement:
- Schedule A - Name of Sellers
- Schedule B - Issued Capital
- Schedule 1.01 - Artemis Escrow Amount
- Schedule 2.02 - Allocation of the Aggregate Purchase Price
- Schedule 2.06 - Escrow Agreement
- Schedule 2.08 - Form of Non-Competition Agreement
- Disclosure Schedule
- Section 1.01 - Permitted Encumbrances
- Section 2.08 - Company Options
- Section 3.08 - Brokers
- Section 4.02 - Company Subsidiaries
- Section 4.03(c) - Authority - Required Third Party or
Governmental Authority Consents
- Section 4.06 - Absence of Certain Changes or Events since July
31, 2003
- Section 4.07(b) - Leased Real Property
- Section 4.08(a) - Exceptions to Company Permits
- Sections 4.09(a) - Material Contracts
- Section 4.10(a) - Intellectual Property
- Section 4.10(c) - Exceptions to Ownership of Intellectual
Property
- Section 4.10(i) - Open Source Materials
- Section 4.12 - Largest Customers
- Section 4.13(a) - Employees Benefit Plans
- Section 4.13(a)(v) - Employees and Independent Contractors
- Section 4.13(e) - Schedule of any separation, severance,
termination or similar-type benefits payable to any person
- Section 4.13(i) - Details of any Personal Pension Schemes as
defined in section 630 of the U.K. Income and Corporation
taxes Act 1988
- Section 4.14(d) - Labour - Non-Compliance Occupational Health
& Safety
- Section 4.15 - Insurance policies
- Section 4.16(a) - Tax Return Exceptions
- Section 4.16(a)(viii) - Taxation Years
- Section 4.16(f) - Non-arms length transactions for
consideration not at fair market value
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<PAGE>
- Section 4.16(i) - Elections under the ITA
- Section 4.16(j) - Non-resident Sellers
- Section 4.18 - Related Party Transactions
- Section 4.21 - Brokers and other Third Party Fees
- Section 6.13 - Persons to enter into Non-Competition
Agreements
- Section 8.02(e) - Parent Securities
SECTION 1.04. KNOWLEDGE"KNOWLEDGE" - an individual will be deemed to have
"Knowledge" of a particular fact or other matter if
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of
conducting a reasonably comprehensive investigation concerning the
existence of such fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, senior employee, partner, executor, or
trustee of such Person (or in any similar capacity) has, or at any time had,
Knowledge of such fact or other matter.
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. PURCHASE AND SALE OF THE SHARES Upon the terms and subject to the
conditions of this Agreement, at the Closing, each of the Sellers shall sell,
assign, transfer, convey and deliver, or cause to be sold, assigned,
transferred, conveyed and delivered, to the Purchaser, all of such Seller's
Shares, and the Purchaser shall purchase all of such Seller's Shares.
SECTION 2.02. PURCHASE PRICE The purchase price for the Shares shall be the
Aggregate Purchase Price. The Aggregate Purchase Price shall be allocated among
the Common Shares and Class B Shares, assuming the conversion of all of the
Class A Shares in accordance with SECTION 6.15, as set out in SCHEDULE 2.02
(such allocation hereinafter referenced as the "AGGREGATE PER SELLER PURCHASE
PRICE").
SECTION 2.03. CLOSING Subject to the terms and conditions of this Agreement, the
sale and purchase of the Shares contemplated by this Agreement shall take place
at a closing (the "CLOSING") to be held at the offices of Ogilvy Renault at
Suite 2100, Royal Trust Tower, TD Centre, Toronto, Ontario at 10:00 A.M. on the
fifth Business Day following the satisfaction or waiver of the conditions to the
obligations of the Parties set forth in SECTIONS 7.01(B) and 7.02(C) or at such
other place or at such other time or on such other date as the Company and the
Purchaser may mutually agree upon in writing (the day on which the Closing takes
place being the "CLOSING DATE").
SECTION 2.04. CLOSING DELIVERIES BY EACH OF THE SELLERS At the Closing, each of
the Sellers shall deliver or cause to be delivered to the Purchaser:
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<PAGE>
(a) stock certificates evidencing such Seller's Shares duly endorsed
in blank, or accompanied by stock powers duly executed in blank in form
and substance reasonably satisfactory to the Purchaser and with all
required stock transfer tax stamps affixed;
(b) a receipt for an amount equal to the Per Seller Closing
Consideration;
(c) if applicable, the Resignations contemplated by SECTION 6.09;
and
(d) the certificates and other documents required to be delivered
pursuant to SECTION 6.14 and SECTION 7.02.
In addition, the Sellers' Representative shall provide to the Purchaser an
estimate of the Acquisition Expenses ("ACQUISITION EXPENSES ESTIMATE").
SECTION 2.05. CLOSING DELIVERIES BY PARENT AND THE PURCHASER(a) At the Closing,
the Purchaser shall deliver to each of the Sellers:
(i) Per Seller Closing Consideration by wire transfer in immediately
available funds to the Purchase Price Bank Account for the benefit of such
Seller;
(ii) a receipt for such Seller's Shares; and
(iii) the certificates and other documents required to be delivered
pursuant to SECTION 7.01.
(b) At the Closing, the Purchaser shall deliver to the Escrow Agent, in
accordance with the Escrow Agreement, the Escrow Amount by wire transfer in
immediately available funds to the accounts designated therefor in the Escrow
Agreement.
(b) At the Closing, the Purchaser shall deliver to the Transfer and
Disbursement Agent a sum equivalent to the Acquisition Expenses Estimate and
directions to disburse such funds at the direction of the Sellers'
Representative. .
SECTION 2.06. ESCROW Prior to the Closing, each of the Sellers and the Purchaser
shall enter into an Escrow Agreement with the Escrow Agent substantially in the
form of SCHEDULE 2.06 (the "ESCROW AGREEMENT"). In accordance with the terms of
the Escrow Agreement, the Purchaser shall deposit the Artemis Escrow Amount and
the Indemnity Escrow Amount to be managed and paid out by the Escrow Agent in
accordance with the terms of the Escrow Agreement.
SECTION 2.07. TRANSFER AND DISBURSEMENT AGENT(a) All deliveries to be made by
each of the Sellers pursuant to SECTION 2.04 shall be made, on their behalf by,
and all deliveries to be made to the Sellers pursuant to SECTION 2.05 shall be
made, for their benefit to, the Transfer and Disbursement Agent.
(b) The Parent and the Purchaser shall be responsible for payment of the
agency fees of the Transfer and Disbursement Agent associated with the
disbursement of the Aggregate Purchase Price to the Sellers.
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<PAGE>
(c) The Sellers shall be obligated for payment of all Acquisition Expenses.
The Sellers' Representative shall provide the Transfer and Disbursement Agent
with instructions for disbursement.
SECTION 2.08. COMPANY OPTIONS Prior to Closing, the Company shall cause each
stock option, right or warrant convertible into or exercisable to purchase
Shares (collectively, the "COMPANY OPTIONS"), whether or not exercisable and
whether or not vested, granted under the Company's stock option plans or any
stock option agreement or employment agreement (the "COMPANY STOCK OPTION
PLANS") to be exercised pursuant to the terms thereof, unless otherwise
terminated. To the extent the Company pays an amount in respect of the
termination of the Company Options of an employee of a Company Subsidiary, such
Company Subsidiary shall reimburse the Company for such amount, and until paid
such liability to reimburse shall be reflected in the books and records of the
Company. All holders of Company Options whose options are terminated shall
execute appropriate releases of any claims they may have with respect to such
Company Options. Such releases shall be binding on such holders and shall inure
to the benefit of the Purchaser and the Parent. Any amounts payable with respect
to such terminated Company Options shall be reduced for applicable tax
withholding and the Company shall properly and timely pay to the proper Taxing
Authority any amounts so withheld. All holders of Company Options and the
amounts paid to such holders to cancel and terminate their options shall be set
out in SECTION 2.08 of the DISCLOSURE SCHEDULE.
SECTION 2.09. ARTEMIS ADJUSTMENT(a) Following Closing, the Parent shall cause
Gerry Smith, on behalf of the Parent, to lead the negotiations with respect to
the Artemis Settlement; provided, however, that in the event Gerry Smith shall
be unable or unwilling to lead such negotiations following the Closing, the
Sellers' Representative and the Parent shall, in good faith, appoint a
replacement to lead the negotiations with respect to the Artemis Settlement.
(b) The Parent shall provide the Sellers' Representative with written notice
of the Artemis Settlement Amount no later than 15 Business Days following the
Artemis Settlement Date. If the Artemis Escrow Fund is greater than the Artemis
Settlement Amount, then, in accordance with the terms of the Escrow Agreement,
the difference between the Artemis Escrow Fund and the Artemis Settlement Amount
shall be paid to the Sellers by the Escrow Agent from the Artemis Escrow Fund
and the Artemis Settlement Amount shall be paid to the Purchaser by the Escrow
Agent from the Artemis Escrow Fund. In the event that the Artemis Settlement
Amount is greater than the Artemis Escrow Fund, then, in accordance with the
terms of the Escrow Agreement, (i) the difference between the Artemis Settlement
Amount and the Artemis Escrow Fund shall be paid to the Purchaser by the Escrow
Agent from the Indemnity Escrow Fund, and (ii) the Artemis Escrow Fund shall be
paid to the Purchaser by the Escrow Agent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS
As an inducement to Parent and the Purchaser to enter into this Agreement, each
of the Sellers, severally and not jointly, hereby represents and warrants to the
Parent and the Purchaser as follows:
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<PAGE>
SECTION 3.01. ORGANIZATION AND AUTHORITY(a) Such Seller, if he or she is a
natural person, has full legal capacity to execute and deliver this Agreement
and the Escrow Agreement, and to perform his, her or its obligations hereunder
and thereunder, and to consummate the transactions contemplated hereby and
thereby. This Agreement has been, and the Escrow Agreement shall be, duly and
validly executed and delivered by such Seller, and (assuming the due
authorization, execution and delivery by Parent and the Purchaser) this
Agreement constitutes, and the Escrow Agreement shall constitute, a legal, valid
and binding obligation of such Seller enforceable against such Seller in
accordance with its terms. The failure of the spouse, if any, of such Seller to
be a party or signatory to this Agreement or the Escrow Agreement shall not (i)
prevent such Seller from performing his or her obligations and from consummating
the transactions contemplated hereunder or thereunder or (ii) prevent this
Agreement or the Escrow Agreement from constituting the legal, valid and binding
obligation of such Seller enforceable against such Seller in accordance with its
terms.
(b) Such Seller, if it is a corporation or other legal entity, is duly
incorporated or organized, validly existing and in good standing under the Laws
of its jurisdiction of incorporation or organization and has all necessary
corporate or other power and authority to execute and deliver this Agreement and
the Escrow Agreement, and to perform its obligations hereunder and thereunder,
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Escrow Agreement by such
Seller, the performance by such Seller of its obligations hereunder and
thereunder, and the consummation by such Seller of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate or other action on the part of such Seller, and no other corporate or
other proceeding on the part of such Seller is necessary to authorize this
Agreement or the Escrow Agreement or the performance by such Seller of its
obligations hereunder or thereunder, or to consummate the transactions
contemplated hereby and thereby. This Agreement has been, and the Escrow
Agreement shall be, duly and validly executed and delivered by such Seller, and
(assuming due authorization, execution and delivery by Parent and the Purchaser)
this Agreement constitutes, and the Escrow Agreement shall constitute, a legal,
valid and binding obligation of such Seller enforceable against such Seller in
accordance with its terms.
SECTION 3.02. NO CONFLICT The execution, delivery and performance of this
Agreement and the Escrow Agreement by such Seller do not, and shall not:
(a) if it is a corporation or other legal entity, conflict with or violate the
organizational documents of such Seller;
(b) assuming that all filings and notifications described in SECTION 4.03(C)
have been made, conflict with or violate any Law or Governmental Order
applicable to such Seller; or
(c) conflict with, result in any breach of, or constitute a default (or an
event that with notice or lapse of time, or both, would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any Encumbrance on any of the
Shares owned by such Seller pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation, except for any such conflicts, violations, breaches, defaults or
other occurrences that would not
13
<PAGE>
prevent or materially delay consummation of the transactions contemplated by
this Agreement and the Escrow Agreement.
SECTION 3.03. OWNERSHIP AND POSSESSION OF SHARES Such Seller (a) is the sole
record holder and beneficial owner of, and has good, valid and marketable title
to, all the Common Shares, Class A Shares and Class B Shares set forth next to
such Seller's name on SCHEDULE A and (b) holds the number of Company Options set
forth next to such Seller's name on SCHEDULE A. Such Seller's Shares and Company
Options are all the equity securities of the Company held or owned, either of
record or beneficially, by such Seller, and (other than such Seller's Company
Options held by such Seller, if any) such Seller does not have any option or
other right to acquire any other securities of the Company. Immediately prior to
the Closing, such Seller's Shares and, if applicable, such Seller's Company
Options, shall be the only equity securities of the Company held or owned,
either of record or beneficially, by such Seller, and such Seller shall not have
any option or other right to acquire any other securities of the Company. The
certificates representing such Common Shares, Class A Shares and Class B Shares
(including any Shares issued upon exercise of any Company Options) are now and
at all times during the term hereof shall be held by such Seller or by a nominee
or custodian for the sole and exclusive benefit of such Seller, free and clear
of all Encumbrances whatsoever, except for any Encumbrances created by this
Agreement or the Company Shareholder Agreement. Except as provided in the
Company Shareholder Agreement, such Seller has not appointed or granted any
proxy, which appointment or grant is still effective, with respect to such
Seller's Shares.
SECTION 3.04. GOOD TITLE CONVEYED The share certificates, stock powers,
endorsements, assignments and other instruments to be executed and delivered by
such Seller to the Purchaser at the Closing shall be valid and binding
obligations of such Seller, enforceable in accordance with their respective
terms.
SECTION 3.05. COMPANY SHAREHOLDERS AGREEMENT The Company Shareholder Agreement
is valid and binding on such Seller and is in full force and effect against such
Seller. Such Seller is not in breach of or default under (nor does there exist
any condition which upon the passage of time or the giving of notice would cause
such a breach of or default under) the Company Shareholder Agreement.
SECTION 3.06. LITIGATION As at the date hereof, there are no Actions by or
against such Seller or affecting any of such Seller's Shares or Company Options
pending before any Governmental Authority (or, to the knowledge of such Seller,
threatened to be brought by or before any Governmental Authority) which could
affect the legality, validity or enforceability of this Agreement or the Escrow
Agreement or the consummation of the transactions contemplated hereby or
thereby.
SECTION 3.07. COMPLIANCE WITH LAWS Except as would not adversely affect the
ability of such Seller to carry out its, his or her obligations under, and to
consummate the transactions contemplated by, this Agreement and the Escrow
Agreement, such Seller has not been and is not in conflict with, or in default
or violation of any Law or Governmental Order applicable to such Seller or
affecting such Seller's Shares or Company Options.
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SECTION 3.08. BROKERS Except as set out in SECTION 3.08 of the DISCLOSURE
SCHEDULE, no broker, finder, investment banker or any other third party is
entitled to any brokerage, finder's, consulting or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of such Seller, and no Person has, or as a
result of any of the transactions contemplated hereby shall have, as a result of
any commitment of such Seller towards such Person, any right, interest or claim
against or upon the Purchaser, the Parent, the Company or any of their
respective properties or the Shares for any commission, fee or other
compensation as broker, finder, investment banker or for services in any similar
capacity.
SECTION 3.09. FULL DISCLOSURE Such seller has made or caused to be made due
enquiry with respect to each of the representations and warranties of such
Seller contained in this Agreement or in any other agreement between the Parties
or certificates delivered pursuant to this Agreement, and none of the same
intentionally contains any untrue statement of a material fact or intentionally
omits to state a material fact necessary to make any of the representations or
warranties of such Seller contained herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
As an inducement to Parent and the Purchaser to enter into this
Agreement, the Company hereby represents and warrants to the Parent and the
Purchaser as follows:
SECTION 4.01. ORGANIZATION AND QUALIFICATION The Company is a corporate body
duly incorporated, validly existing and in good standing under the laws of the
Province of Ontario and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as it is now being
conducted. The Company is duly qualified or licensed as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary or desirable, except for such
failures to be so qualified or licensed and in good standing that would not have
a Company Material Adverse Effect. The Company has delivered to Parent prior to
the date of this Agreement a complete and correct copy of the Articles of
Amalgamation of the Company, as amended (the "COMPANY ARTICLES"). The Company
Articles have not been further modified or amended and are in full force and
effect. The Company is not in violation of any of the provisions of the Company
Articles.
SECTION 4.02. SUBSIDIARIES SECTION 4.02 of the DISCLOSURE SCHEDULE lists each
subsidiary of the Company and its place of organization or incorporation (each,
a "COMPANY SUBSIDIARY") and the current ownership of such shares or similar
ownership interests. Except for the Company Subsidiaries, neither the Company
nor any Company Subsidiary owns, or holds the right to acquire, any share of
capital, partnership interest, joint venture interest or other equity interest
in any other Person. Each Company Subsidiary is a corporation, limited liability
company or society of restricted liability duly incorporated or formed, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation and has all requisite organizational power and
authority and all necessary approvals of Governmental Authorities to
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own, lease and operate its properties and assets and to carry on its business as
it is now being conducted. Each Company Subsidiary is duly qualified or licensed
as a foreign corporation or limited liability company to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that would not have a Company Material Adverse Effect. The
Company has delivered to Parent prior to the date of this Agreement, a complete,
correct and up-to-date copy of the Articles of Incorporation (or equivalent
documents), as amended, of each Company Subsidiary. Each Company Subsidiary's
Articles of Incorporation (or equivalent documents) have not been further
modified or amended and are in full force and effect. The Company Subsidiaries
are not in violation of any of the provisions of their respective Articles of
Incorporation (or equivalent documents).
SECTION 4.03. AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS(a) The
Company has all necessary corporate power and authority to execute and deliver
this Agreement, and to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by the Company, the performance by the Company of its obligation hereunder, and
the consummation by the Company of the transactions contemplated hereunder, have
been duly and validly authorized by all necessary action on the part of the
Company, and no other corporate proceeding on the part of the Company is
necessary to authorize this Agreement or the performance by the Company of its
obligation hereunder or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by Parent and the
Purchaser, constitutes a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms. The Board of
Directors of the Company has adopted a resolution approving the transactions
contemplated by this Agreement.
(b) The execution, delivery and performance of this Agreement by the Company
do not, and shall not, (i) conflict with or violate any provision of the Company
Articles or any equivalent organizational documents of any Company Subsidiary,
(ii) assuming that all filings and notifications described in SECTION 4.03(c)
have been made, conflict with or violate any Law or Governmental Order
applicable to the Company or any Company Subsidiary or by which any property or
asset of the Company or any Company Subsidiary is bound or affected, or (iii)
conflict with, or result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in any payment becoming payable by the Company or any Company
Subsidiary to any third party, or result in the creation of any Encumbrance
(other than Permitted Encumbrances) on any material property or asset of the
Company or any Company Subsidiary pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation, except, with respect to clauses (ii) and (iii) of this
SECTION 4.03(b), for any such conflicts, violations, breaches, defaults or other
occurrences that would not have a Company Material Adverse Effect, and that
could not reasonably be expected to prevent or materially delay the consummation
of the transactions contemplated by this Agreement.
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(c) Except as set forth in SECTION 4.03(c) of the DISCLOSURE SCHEDULE, the
execution and delivery of this Agreement and the Escrow Agreement by the Sellers
and execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement and the Escrow Agreement by the Sellers and
performance of this Agreement by the Company shall not, require or make
desirable any material consent, approval, authorization or other order of,
action by, filing with, or notification to, any third party or Governmental
Authority, except for Investment Canada Act Approval, provided that the Company
makes no representation or warranty with respect to the pre-merger notification
requirements of the Competition Act (Canada), HSR Act and FT Act Approval.
SECTION 4.04. CAPITALIZATION The authorized capital of the Company consists of
(a) an unlimited number of Common Shares, (b) 5,983,962 Class A Shares and (c)
2,873,696 Class B Shares. As of the date hereof, (i) 10,423,684 Common Shares,
5,983,962 Class A Shares and 2,873,696 Class B Shares are issued and
outstanding, all of which are validly issued, fully paid and non-assessable and
(ii) 4,824,081 Shares are reserved for future issuance pursuant to the Company
Options. SCHEDULE B to this Agreement sets forth a complete and correct list of
all holders of Common Shares, Class A Shares, Class B Shares or Company Options
and the number of Shares or Company Options held by such Person. No Common
Share, Class A Share or Class B Share is held in the treasury of the Company or
by the Company Subsidiaries. Except for the Common Shares, Class A Shares, Class
B Shares and Company Options, there are no other shares of capital or securities
convertible into or exercisable or exchangeable for shares of capital of the
Company issued and outstanding. Except for the Company Shareholder Agreement and
the Company Options granted pursuant to the Company Stock Option Plans, there
are no options, warrants, convertible securities or other rights, agreements,
arrangements or commitments of any character (whether exercisable now or in the
future and whether contingent or not) relating to the issued or unissued shares
of capital of the Company or any Company Subsidiary or obligating the Company or
any Company Subsidiary to issue or sell any shares of capital, options, warrants
or convertible securities of, or other equity interests in, the Company or any
Company Subsidiary. All Common Shares, Class A Shares or Class B Shares subject
to issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and non-assessable. Other than the Company Articles
and the Company Shareholder Agreement, there are no outstanding contractual
obligations of the Company or any Company Subsidiary to repurchase, redeem or
otherwise acquire any shares of capital of the Company or any Company
Subsidiary. Except for Changepoint France Sarl, all the outstanding capital of
each Company Subsidiary is legally and beneficially owned directly or indirectly
by the Company and each outstanding share of capital of each Company Subsidiary
is duly authorized, validly issued, fully paid and non-assessable and each such
share owned by the Company or another Company Subsidiary is free and clear of
all Encumbrances on the Company's or such other Company Subsidiary's voting
rights and other Encumbrances of any nature whatsoever (other than Permitted
Encumbrances) and there is no agreement to give or create any such interest. The
share register of the Company accurately records: (i) the name and address of
each Person owning Common Shares, Class A Shares, Class B Shares, Company
Warrants or Company Options and (ii) the certificate number of each certificate
evidencing shares of capital issued by the Company, the number of shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. There are no material
outstanding contractual obligations of the Company or any Company Subsidiary to
provide funds
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to, or make any investment (in the form of a loan, capital contribution or
otherwise) in, any Company Subsidiary or any other Person.
SECTION 4.05. FINANCIAL STATEMENTS(a) True and complete copies of (i) the
audited consolidated balance sheet of the Company for each of the fiscal years
ended as of July 31, 2000, July 31, 2001, July 31, 2002, and July 31, 2003, and
the related audited consolidated statements of operations, shareholders' equity
(deficiency) and cash flows of the Company, together with all related notes and
schedules thereto, accompanied by the reports thereon of the Company Accountants
(collectively, the "AUDITED FINANCIAL STATEMENTS") and (ii) the unaudited
consolidated balance sheet of the Company as of March 31, 2004 (the "INTERIM
BALANCE SHEET"), and the related unaudited consolidated statements of operations
and cash flows for the period or periods from August 1, 2003 through March 31,
2004 of the Company, together with all related notes and schedules thereto
(collectively, the "INTERIM FINANCIAL STATEMENTS", and together with the Audited
Financial Statements, the "FINANCIAL STATEMENTS") have been delivered by the
Company to Parent prior to the date of this Agreement. The Financial Statements
(i) were prepared in accordance with the books of account and other financial
records of the Company and the Company Subsidiaries, (ii) present fairly in all
material respects the consolidated financial condition and consolidated results
of operations and cash flow of the Company as at the respective dates thereof
and for the respective periods indicated therein (subject, in the case of
unaudited statements, to normal and recurring year-end adjustments which did not
and would not have a Company Material Adverse Effect) and (iii) have been
prepared in accordance with Canadian GAAP applied on a basis consistent with the
past practices of the Company and the Company Subsidiaries.
(b) There are no material Liabilities of the Company or any Company Subsidiary
other than Liabilities (i) reflected or reserved against on the Interim Balance
Sheet, or (ii) incurred since the date of the Interim Balance Sheet in the
ordinary course of business consistent with past practice and which did not and
would not have a Company Material Adverse Effect.
(c) None of the Company or any Company Subsidiary has guaranteed the
indebtedness of any Person that is not a Company Subsidiary.
SECTION 4.06. ABSENCE OF CERTAIN CHANGES OR EVENTS Since July 31, 2003, except
as set out in SECTION 4.06 of the DISCLOSURE SCHEDULE, the business of the
Company and the Company Subsidiaries has been conducted in the ordinary course
and in a manner consistent with the practices applied during the periods
specified in the Financial Statements, and since the July 1, 2003 neither the
Company or any of the Company Subsidiaries has entered into any transaction
other than in the ordinary course and in a manner consistent with the practices
applied during the periods specified in the Financial Statements and there has
been no adverse change in the condition (financial or otherwise), liabilities,
retained earnings or operations of either of the Company or the Company
Subsidiaries (including relationships with suppliers, customers and others).
Without limiting the generality of the foregoing, except as set out in SECTION
4.06 of the DISCLOSURE SCHEDULE, other than in the ordinary course of business
since July, 1, 2003,
(i) neither the Company or the Company Subsidiaries has purchased or
redeemed directly or indirectly any share of its share capital;
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(ii) neither the Company or the Company Subsidiaries has issued or
sold or agreed to issue or sell any share of its share capital or any
option, warrant, conversion or other right to acquire any such share or
any securities convertible into or exchangeable for any such share, or
amended its organizational documents other than the Company Options issued
in accordance with the Company Stock Option Plans;
(iii) neither the Company or the Company Subsidiaries has declared
or paid any dividend or declared or made any other distribution on any of
the shares of its shares capital;
(iv) neither the Company or the Company Subsidiaries has incurred or
discharged any obligation or liability (whether accrued, absolute or
contingent) other than the obligations and liabilities reflected in the
Financial Statements or incurred since July 1, 2003 in the ordinary course
of and in a manner consistent with past practices;
(v) neither the Company or the Company Subsidiaries has waived,
cancelled or accelerated the collection of any of its accounts receivable
or claims or rights;
(vi) neither the Company or the Company Subsidiaries has postponed
or delayed the payment of any of its accounts payable, debts, obligations
or liabilities;
(vii) neither the Company or the Company Subsidiaries has entered
into any transaction, contract, agreement, indenture, instrument or
commitment other than in the ordinary course of and in a manner consistent
with past practices;
(viii) neither the Company or the Company Subsidiaries has acquired
or sold, assigned, transferred, licensed, terminated, leased or disposed
of the Owned Intellectual Property or the Company Software;
(ix) neither the Company or the Company Subsidiaries has suffered or
incurred any damage, destruction, loss or liability (whether or not
covered by any insurance), any strike, lock-out or other labour trouble
such as slow down or work stoppage, or any loss of any of its employees,
customers, suppliers, sales agents, sales representatives, distributors or
independent contractors that, either by itself or in the aggregate, has
affected adversely or may affect adversely either of the Company or the
Company Subsidiaries;
(x) neither the Company or the Company Subsidiaries has suffered any
material loss of, or material change with respect to, any contract or
agreement, whether written or oral, material to the Business;
(xi) neither the Company or the Company Subsidiaries has entered
into any employment agreement or made, promised or agreed to make any
change in the form or terms of compensatory remuneration payable or to
become payable to any of its employees, directors, officers, shareholders,
representatives, licensors, licensees, distributors, agents, suppliers or
independent contractors or to any other Person nor made, promised or
agreed to make any bonus or other incentive payment or arrangement with
any of its employees, directors, officers, shareholders, representatives,
licensors,
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licensees, distributors, agents, suppliers, customers or independent
contractors or any other Person, other than the amendments to the Company
Stock Option Plans authorized and approved by the board of directors of
the Company by resolutions dated April 27, 2004;
(xii) neither the Company or the Company Subsidiaries has made any
change in its accounting policies, principles and practices as utilized in
the preparation of the Audited Financial Statements;
(xiii) neither the Company or the Company Subsidiaries has made any
loan or advance, or assumed, guaranteed, endorsed or otherwise became
liable with respect to the liabilities or obligations of any other Person;
(xiv) neither the Company or the Company Subsidiaries has granted to
any customer any special allowance or discount or changed its pricing,
credit or payment policies;
(xv) neither the Company or the Company Subsidiaries has incurred
any indebtedness other than in the ordinary course of and in a manner
consistent with past practices;
(xvi) neither the Company or the Company Subsidiaries has modified
or changed its business relationship with its material suppliers,
customers or any other Person having business relations with it;
(xvii) neither the Company or the Company Subsidiaries has made any
payment to, or for the benefit of, any present or former employee,
director, officer, share-holder, representative, licensor, licensee,
distributor, agent, supplier, independent contractor or affiliate of
either of the Company or the Company Subsidiaries or any other Person,
otherwise than at the regular rates payable to them, by way of salary,
pension, bonus or other remuneration consistent with the practices applied
during the periods specified in the Financial Statements and provided that
all distributions to shareholders are set out in SCHEDULE 2.02;
(xix) neither the Company or the Company Subsidiaries has made any
capital expenditure other than expenditures which in the aggregate do not
exceed $100,000; or
(xxii)) neither the Company or the Company Subsidiaries has
authorized or agreed to any of the foregoing matters referred to in this
Section 4.06.
SECTION 4.07. ASSETS; PROPERTIES(a) The Company or a Company Subsidiary has
good, valid and marketable title to all of the movable and personal property
shown on or reflected in the Interim Balance Sheet and thereafter acquired, free
and clear of all Encumbrances, except for Permitted Encumbrances and except for
movable and personal property disposed of in the ordinary course of business
consistent with past practice since the date of the Interim Balance Sheet. The
Company or a Company Subsidiary owns, leases or has the legal right to use all
the material properties and assets, including the Leases, the Company Permits,
the Material Contracts and the Licenses, used or currently intended to be used
by the Company or a Company
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Subsidiary in the conduct of their business, and such properties, assets and
rights constitute all the properties, assets and rights as are necessary to
conduct the business of the Company and the Company Subsidiaries as conducted or
currently intended to be conducted. The properties and assets of the Company and
the Company Subsidiaries have been maintained in accordance with good business
practice, except where the failure to do so would not have a Company Material
Adverse Effect.
(b) SECTION 4.07(b) of the DISCLOSURE SCHEDULE contains a full and complete
list of the Leased Real Property. The leases for the Leased Real Property listed
in SECTION 4.07(b) of the DISCLOSURE SCHEDULE (the "LEASES") are in full force
and effect against the Company or a Company Subsidiary (and, to the Company's
knowledge, the other parties thereto), and the Company or a Company Subsidiary
holds a good, valid and existing leasehold interest under each of the Leases for
the term set forth in SECTION 4.07(b) of the DISCLOSURE SCHEDULE. The Company
has delivered or made available to Parent prior to the date of this Agreement
complete and accurate copies of each of the Leases, and none of the Leases has
been modified in any material respect. Neither the Company nor any Company
Subsidiary is in default in any material respect under any of the Leases.
(c) The Company does not own any real property. The Company is not a party to
any contract to purchase or acquire any real property.
SECTION 4.08. PERMITS; COMPLIANCE(a) Except as disclosed in SECTION 4.08(a) of
the DISCLOSURE SCHEDULE, each of the Company and the Company Subsidiaries is in
possession of all material franchises, grants, authorizations, licenses,
certifications, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Authority necessary for
the Company or any Company Subsidiary to own, lease and operate its properties
or to carry on its business as it is now being conducted (the "COMPANY PERMITS")
except where the failure to be in possession of such Company Permits would not
have a Company Material Adverse Effect, and no suspension or cancellation of any
of the Company Permits is pending or, to the knowledge of the Company,
threatened. No Company Permit has lapsed or expired.
(b) Neither the Company nor any Company Subsidiary has been or is in conflict
with, or in default or violation of, (i) any Law applicable to the Company or
any Company Subsidiary or by which any material property or asset of the Company
or any Company Subsidiary is bound or affected, (ii) any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any Company Subsidiary is a
party or by which the Company or any Company Subsidiary or any property or asset
of the Company or any Company Subsidiary is bound or affected or (iii) any
Company Permits, except with respect to clauses (i) and (ii) for any such
conflicts, defaults or violations that would not have a Company Material Adverse
Effect.
SECTION 4.09. CONTRACTS AND COMMITMENTS(a) SECTION 4.09(a) of the DISCLOSURE
SCHEDULE contains a complete list of the following contracts and agreements,
whether written or oral, to which the Company or any Company Subsidiary is a
party (such contracts and agreements, together with the Leases, the Licenses and
the Restrictive Agreements, being "MATERIAL CONTRACTS"):
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(i) any contract or agreement which (A) is likely to involve
consideration in excess of US$100,000 during the fiscal year ended as of
July 31, 2004 or (B) is likely to involve consideration in excess of
US$100,000 over the remaining term of such contract or agreement;
(ii) any contract or agreement which (A)(x) is likely to involve
consideration in excess of US$100,000 during the fiscal year ended as of
July 31, 2004 or (y) is likely to involve consideration in excess of
US$100,000 over the remaining term of such contract or agreement and (B)
cannot be cancelled by the Company or the Company Subsidiary, as
applicable, without penalty or further payment and without more than 60
days' notice;
(iii) all contracts relating to Indebtedness;
(iv) all swap, forward, future, option, hedge or similar
arrangements and agreements of a financial nature (including with respect
to currencies or interest rates);
(v) all contracts and agreements with any Governmental Authority,
except for contracts entered into in the ordinary course of the business
of the Company or any Company Subsidiary;
(vi) all contracts and agreements that (A) limit or purport to limit
the ability of the Company or any Company Subsidiary or any contracting
party to compete in any line of business or with any person or in any
geographic area or during any period of time, (B) require the Company or
any Company Subsidiary or any contracting party to use any supplier or
third party for all or substantially all of the Company's or the Company
Subsidiaries' or any contracting party's requirements or needs, (C) limit
or purport to limit the ability of the Company or any Company Subsidiary
or any contracting party to solicit any customers or clients of the other
parties thereto, (D) require the Company or any Company Subsidiary or any
contracting party to provide to the other parties thereto "most favored
nations" pricing or (E) require the Company or any Company Subsidiary or
any contracting party to purchase or order any minimum amount of supplies
or services (each, a "RESTRICTIVE AGREEMENT");
(vii) all joint venture contracts, partnership arrangements or other
agreements involving a sharing of profits, losses, costs or liabilities by
the Company or any Company Subsidiary with any third party;
(viii) all contracts and agreements which are not on an arm's length
basis; and
(ix) all offers, tenders, proposals and contracts to perform
services on a fix bid or fix price basis.
(b) Each Material Contract: (i) is valid and binding on the Company or a
Company Subsidiary, as the case may be, and, to the knowledge of the Company,
the other parties thereto, and is in full force and effect against the Company
or a Company Subsidiary and represents the entire agreement between or among the
parties thereto with respect to the subject matter thereof and (ii) upon
consummation of the transactions contemplated by this Agreement shall continue
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in full force and effect without penalty or other adverse consequence. None of
the Company or any Company Subsidiary or, to the knowledge of the Company, any
other party thereto is in material breach of, or default under (nor does there
exist any condition which upon the passage of time or the giving of notice would
cause such a breach of or default under), any Material Contract.
(c) Parent either has been supplied with, or has been given access to, a true
and correct copy of all written Material Contracts, together with all material
amendments, waivers or other changes thereto, and has been given a written
description of all oral contracts included in the Material Contracts.
(d) Except for the Material Contracts, there is no contract the termination of
which, prior to its expiration in accordance with its terms, will result in a
Company Material Adverse Effect.
SECTION 4.10. INTELLECTUAL PROPERTY(a) SECTION 4.10(a) of the DISCLOSURE
SCHEDULE sets forth a true and complete list of all (i) patents and patent
applications, rights in designs, unregistered or common law trademarks,
registered trademarks and trademark applications, unregistered or common law
copyrights, registered copyrights and copyright applications and Company
Software included in the Owned Intellectual Property, and (ii) material
Licenses. The Company has delivered or made available to Parent, prior to the
date of this Agreement, correct and complete copies of all the Licenses.
(b) The operation of the business of the Company and the Company Subsidiaries,
and the use of the Owned Intellectual Property and, to the knowledge of the
Company, Licensed Intellectual Property in connection therewith, do not conflict
with or infringe the Intellectual Property of any third party, and no claim is
pending or, to the knowledge of the Company, threatened and no notice has been
given to either the Company or any Company Subsidiary asserting that the
operation of such business, or such use of the Owned Intellectual Property or
Licensed Intellectual Property, does or may conflict with or infringe the
Intellectual Property of any third party.
(c) Except as disclosed in SECTION 4.10(c) of the DISCLOSURE SCHEDULE, the
Company or a Company Subsidiary owns all right, title and interest in and to the
Owned Intellectual Property and Licenses, and is entitled to use the Owned
Intellectual Property and Licensed Intellectual Property in the ordinary course
of the business of the Company and the Company Subsidiaries as presently
conducted. The Owned Intellectual Property and, to the knowledge of the Company,
the Licensed Intellectual Property are subsisting, valid and enforceable, and
have not been adjudged invalid or unenforceable in whole or in part.
(d) No Action has been asserted in writing, or is pending or threatened in
writing, against the Company or any Company Subsidiary (i) based upon or
challenging or seeking to deny or restrict the use by the Company or any Company
Subsidiary of any of the Owned Intellectual Property or Licensed Intellectual
Property or (ii) alleging that the Licensed Intellectual Property is being used
in conflict with the terms of any license or other agreement.
(e) To the knowledge of the Company, no person is infringing on the Owned
Intellectual Property or Licensed Intellectual Property. Neither the Company nor
any Company Subsidiary
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has granted any license or other right to any third party with respect to the
Owned Intellectual Property or Licensed Intellectual Property other than in the
ordinary course of business.
(f) To the knowledge of the Company, the Company Software (1) is free of all
material viruses, worms, trojan horses and other known contaminants which
prevent the operation of software programs or operating systems from being used
on a system-wide basis and for which there is no reasonable work-around solution
available; (2) is not the subject of an Action pending or, to the knowledge of
the Company, an Action threatened to be brought against the Company or any
Company Subsidiary, in respect thereof; and (3) is in substantial conformance
with the current documentation, whether electronically embedded, written or
otherwise, shipped with such Company Software, except for errors and bugs of the
type, scope and nature generally acceptable in the software industry for similar
types of software products. Except for licenses issued to distributors,
resellers, value-added resellers, strategic partners and the Company's escrow
agent(s) in the ordinary course, no rights in the Company Software have been
transferred to any third party except to the customers of the Company or the
Company Subsidiaries to whom the Company has licensed such Company Software in
the ordinary course of business.
(g) The Company has taken reasonable steps in accordance with normal industry
practice to maintain the confidentiality of its trade secrets and its other
confidential Intellectual Property. To the knowledge of the Company (i) there
has been no misappropriation of any material trade secrets or other material
Intellectual Property of the Company or any Company Subsidiary by any Person,
(ii) no employee, independent contractor or agent of the Company or any Company
Subsidiary has misappropriated any trade secrets of any other person in the
course of such performance as an employee, independent contractor or agent, and
(iii) no employee, independent contractor or agent of the Company or any Company
Subsidiary is in default or breach of any term of any employment agreement,
non-disclosure agreement, assignment of invention agreement or similar agreement
or contract relating in any way to the protection, ownership, development, use
or transfer of Intellectual Property.
(h) No Owned Intellectual Property, or, to the knowledge of the Company,
Licensed Intellectual Property, is subject to any outstanding decree, order,
injunction, judgment or ruling restricting the use of such Intellectual Property
or that would impair the validity or enforceability of such Intellectual
Property. The consummation of the transactions contemplated by this Agreement
will not result in the termination, loss or impairment of any of the Owned
Intellectual Property or the Licenses the losses of which would be materially
adverse to the Company.
(i) SECTION 4.10(i) of the DISCLOSURE SCHEDULE lists all software or other
material that is distributed as "free software," "open source software" or under
a similar licensing or distribution model (including but not limited to the GNU
General Public License, GNU Lesser General Public License, Sun Community Source
License (SCSL) or the Sun Industry Standards License (SISL)) ("OPEN SOURCE
MATERIALS") that is used by Company in any way and describes the manner in which
the Open Source Materials were used and, if appropriate, modified and
distributed by the Company. Except as set forth in SECTION 4.10(i) of the
DISCLOSURE SCHEDULE, Company has not (1) incorporated Open Source Materials
into, or combined Open Source Materials with, Company's Software or products,
(b) distributed Open Source Materials in conjunction with Company's Software or
products, or (c) used Open Source Materials that create, or purport to create,
obligations for Company with respect to Company's Owned
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Intellectual Property or Company Software or grant, or purport to grant, to any
third party, any rights or immunities under Company's Owned Intellectual
Property or Company Software (including using any Open Source Materials that
require, as a condition of use, modification or distribution of such Open Source
Materials that other software incorporated into, derived from or distributed
with such Open Source Materials be (i) disclosed or distributed in source code
form, (ii) be licensed for the purpose of making derivative works, or (iii) be
redistributable at no charge). No Owned Intellectual Property or Company
Software are subject to the terms of license of any such Open Source Materials.
SECTION 4.11. ABSENCE OF LITIGATION There is no material Action pending or, to
the knowledge of the Company, threatened to be brought against the Company or
any Company Subsidiary, or any property or asset of the Company or any Company
Subsidiary, before any Governmental Authority. Neither the Company nor any
Company Subsidiary nor any material property or asset of the Company or any
Company Subsidiary is subject to any Governmental Order, or any continuing order
of, consent decree, settlement agreement or other similar written agreement
with, or, to the knowledge of the Company, continuing investigation by, any
Governmental Authority.
SECTION 4.12. CUSTOMERS SECTION 4.12 of the DISCLOSURE SCHEDULE lists the 10
largest customers of the Company and the Company Subsidiaries by consolidated
revenue during the six-month period ended January 31, 2004 (the "CUSTOMERS").
Since January 31, 2004 through the date hereof, to the knowledge of the Company,
none of the Company or any Company Subsidiary has received any written notice
from any of the Customers to the effect that any such Customer intends to cease
or materially reduce the amount or size of orders placed with the Company or any
Company Subsidiary or otherwise reduce the amount of business conducted with the
Company or any Company Subsidiary.
SECTION 4.13. EMPLOYEE BENEFIT PLANS(a) For purposes of this Agreement, "PLANS"
are all the employee benefit plans, programs, arrangements and agreements
including, without limitation, any employee benefit plan as defined in Section
3(3) of the United States Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), each employee benefit plan for which the Company or any
Company Subsidiary could incur liability under Section 4069, 4201 or 4212 (c) of
ERISA and each retirement, pension, supplemental retirement, enhanced
retirement, savings, retirement savings, bonus, profit sharing, stock purchase,
stock option, phantom stock, restricted stock, share appreciation rights,
deferred compensation, severance or termination pay, redundancy policies, change
of control, insurance, medical, hospital, dental care, retiree medical or life
insurance, vision care, drug, sick leave, short term or long term disability,
salary continuation, unemployment benefits, vacation, incentive, compensation,
employment or other employee benefit plan, program, arrangement, policy or
practice whether written or oral, formal or informal, funded or unfunded,
registered or unregistered, insured or self-insured, that is maintained or
otherwise contributed to, or required to be contributed to, by or on behalf of
the Company or a Company Subsidiary for the benefit of current or former
employees, directors, officers, shareholders, independent contractors or agents
of the Company or a Company Subsidiary (collectively, the "PLANS"). SECTION
4.13(a)(i) of the DISCLOSURE SCHEDULE identifies all Plans covering employees of
the Company or any Company Subsidiary who are or were employed in Canada (the
"CANADIAN PLANS"). SECTION 4.13(a)(ii) of the DISCLOSURE SCHEDULE identifies all
Plans covering employees of the Company or any Company
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Subsidiary who are or were employed in the United States (the "U.S. PLANS").
SECTION 4.13(a)(iii) of the DISCLOSURE SCHEDULE identifies all Plans covering
employees of the Company or any Company Subsidiary who are or were employed in
the United Kingdom (the "U.K. PLANS"). SECTION 4.13(a)(iv) of the DISCLOSURE
SCHEDULE identifies all Plans covering employees of the Company or any Company
Subsidiary who are or were employed in France (the "FRENCH PLANS"). SECTION
4.13(a)(v) of the DISCLOSURE SCHEDULE lists all of the employees and independent
contractors of the Company and its subsidiaries. Other than as set out in the
DISCLOSURE SCHEDULE to this SECTION 4.13(a), there are no Plans covering
employees of the Company or any Company Subsidiary. The Company has furnished
the Parent with a complete and accurate copy of each Plan (and where no text
exists, a summary is provided) and a complete and accurate copy of each material
document prepared in connection with each such Plan, all as amended to the date
hereof, including, without limitation, with respect to the Canadian Plans, (A)
the entire historical documentation, (B) all materials or documents distributed
to new or existing members of the Canadian Plans during the last three years and
(C) the most recent annual information returns filed with any Governmental
Authority, and with respect to the U.K. Plans, a copy of each employee handbook
and material communication to employees, directors or officers. No fact,
condition or circumstances has occurred since the date of such documents which
would materially affect the information contained therein. Each Plan referenced
on SECTION 4.13(a) of the DISCLOSURE SCHEDULE is in writing.
(b) Each Plan has been maintained in all material respects in compliance with
its terms and with the requirements prescribed by all applicable Laws, and is in
good standing in respect of such applicable Laws, and each Plan that is required
to be registered under any applicable Laws is duly registered with the relevant
Governmental Authority. All contributions, premiums or payments required to be
paid, deducted or remitted and all obligations required to be performed by the
Company or a Company Subsidiary pursuant to the terms of any Plan or by
applicable Laws, have been paid, deducted, remitted or performed in a timely
fashion and there are no outstanding defaults or violations with regard to same.
All such contributions have been fully deducted for income tax purposes (and
where relevant, social security contribution purposes) and no such deduction has
been challenged or disallowed by any government entity and no fact or event
exists which could give rise to any such challenge or disallowance.
(c) No event has occurred, there exists no condition or set of circumstances,
and there has been no failure to act on the part of either the Company or a
Company Subsidiary or a trustee or an administrator of any Plan, that could
subject either the Company or a Company Subsidiary, a trustee or administrator
of any Plan, any Plan or any successor plan to the imposition of any tax,
penalty, penalty tax or other liability, whether by way of indemnity or
otherwise, under the terms of such Plan, ERISA, the Code or any other applicable
Law. There are no actions, suits, claims, trials, demands, investigations,
arbitration or other proceedings pending or, to the knowledge of the Company or
a Company Subsidiary, threatened with respect to the Plans (other than routine
claims for benefits) ("PROCEEDINGS") and no circumstances or event has occurred
that could result in a Proceeding.
(d) No promises or commitments have been made by the Company or a Company
Subsidiary to amend or terminate any Plan, to provide increased benefits
thereunder or to establish any new Plan, except as required by applicable Laws,
including, without limitation, ERISA or the Code.
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(e) Except as set forth in SECTION 4.13(e) of the DISCLOSURE SCHEDULE, none of
the Plans (i) provides or has provided for the payment of separation, severance,
termination or similar-type benefits to any person, (ii) obligates the Company
or a Company Subsidiary to pay separation, severance, termination or
similar-type benefits solely or partially as a result of any transaction
contemplated by this Agreement, (iii) provides for the acceleration, vesting or
increase in benefits solely or partially as a result of any transaction
contemplated by this Agreement or (iv) provides for payments that could result,
separately or in the aggregate, in the payment of any "excess parachute payment"
within the meaning of Section 280G of the Code. None of the Plans provides for
or promises retiree medical, disability or life insurance benefits to any
current or former employee, officer or director of the Company or a Company
Subsidiary. There are no termination policies (including, without limitation,
redundancy policies) whether or not contractual that have been applied to any of
the former employees of the Company or any of the Company Subsidiaries within
the period of five years ending with the date of this Agreement.
(f) None of Canadian Plans is a registered pension plan.
(g) None of the Canadian Plans requires or permits retroactive increases or
assessments in premiums or payments. Neither the Company nor any Company
Subsidiary contribute or are required to contribute to any multi-employer
pension or benefit plan. None of the Canadian Plans is a multiemployer pension
or benefit plan. All Canadian Plans can be amended or terminated without any
restrictions and the Company or a Company Subsidiary has the unrestricted power
to amend or terminate any of the Canadian Plans. There is no pending termination
or winding-up procedure in respect of any of the Canadian Plans, and no
circumstances or event has occurred under which any of the Canadian Plans could
be declared terminated or wound-up in whole or in part under the terms of such
Canadian Plans or any applicable Laws. The liabilities of the Company or any
Company Subsidiary under any unfunded Canadian Plan are properly accrued and
reflected in the financial statements of the Company and any Company Subsidiary.
(h) None of the U.K. Plans is an occupational pension scheme (as defined in
Section 1 of the U.K. Pension Schemes Act 1933) or provides or funds any
relevant benefits (as defined in Section 612(l) of the U.K. Income and
Corporation Taxes Act 1988 but as if the exception contained in that section
were omitted) for any past or present director, officer or employee, or for any
dependant of any such person, under or in connection with which the Company or
any Company Subsidiary has or may have any liability (actual or contingent,
present or future). Each of the U.K. Plans is a defined contribution pension
plan, the contribution(s) of the Company or a Company Subsidiary's is no more
than 5% of eligible pay of an employee, and that the Company or a Company
Subsidiary has no liability for termination or withdrawal penalties pursuant to
a UK Plan.
(i) SECTION 4.13(i) of the DISCLOSURE SCHEDULE sets forth details of those
U.K. Plans that are personal pension schemes (as defined in section 630 of the
U.K. Income and Corporation Taxes Act 1988) (the "PERSONAL PENSION SCHEMES") and
specifies the required rates for contributions by or on behalf of each director,
officer or employee and each of the Company and the Company Subsidiaries has
satisfied, and continues to satisfy, its obligations under Part I of the U.K.
Welfare Reform and Pensions Act 1999 in respect of its directors, officers and