-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WXaDrs+6iyOuw3BUji1Q5a/eMXdF93I/K9GefCUWVpETq0NdQKe4uFaAY3FqtaKA tn5FX5r6DuaZ0IQ8PIZCCQ== 0000950124-06-004248.txt : 20060807 0000950124-06-004248.hdr.sgml : 20060807 20060807162921 ACCESSION NUMBER: 0000950124-06-004248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060807 DATE AS OF CHANGE: 20060807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUWARE CORP 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20900 FILM NUMBER: 061009326 BUSINESS ADDRESS: STREET 1: ONE CAMPUS MARTIUS CITY: DETROIT STATE: MI ZIP: 48226-5099 BUSINESS PHONE: 3132277300 MAIL ADDRESS: STREET 1: ONE CAMPUS MARTIUS CITY: DETROIT STATE: MI ZIP: 48226-5099 FORMER COMPANY: FORMER CONFORMED NAME: COMPUWARE CORPORATION DATE OF NAME CHANGE: 19940506 10-Q 1 k07492e10vq.txt QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- --------- COMMISSION FILE NUMBER 000-20900 COMPUWARE CORPORATION --------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2007430 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE CAMPUS MARTIUS, DETROIT, MI 48226-5099 (Address of principal executive offices including zip code) Registrant's telephone number including area code: (313) 227-7300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date: As of July 31, 2006, there were outstanding 372,520,796 shares of Common Stock, par value $.01, of the registrant. Page 1 of 32 pages
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2006 and March 31, 2006 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2006 and 2005 5 Notes to Condensed Consolidated Financial Statements 6 Report of Independent Registered Public Accounting Firm 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 Item 4. Controls and Procedures 29 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 6. Exhibits 31 SIGNATURES 32
2 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, MARCH 31, ASSETS 2006 2006 ---------- --------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 610,890 $ 612,062 Investments 285,699 265,131 Accounts receivable, net 391,016 418,745 Deferred tax asset, net 30,709 32,015 Income taxes refundable, net 72,923 77,956 Prepaid expenses and other current assets 27,606 24,455 Building - held for sale 13,000 14,816 ---------- ---------- Total current assets 1,431,843 1,445,180 ---------- ---------- INVESTMENTS 23,141 32,149 ---------- ---------- PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 391,730 395,653 ---------- ---------- CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION 66,983 61,918 ---------- ---------- OTHER: Accounts receivable 194,268 206,964 Deferred tax asset, net 13,781 13,983 Goodwill 334,594 320,082 Other 35,933 35,039 ---------- ---------- Total other assets 578,576 576,068 ---------- ---------- TOTAL ASSETS $2,492,273 $2,510,968 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 20,724 $ 24,468 Accrued expenses 148,223 170,590 Deferred revenue 374,930 350,349 ---------- ---------- Total current liabilities 543,877 545,407 DEFERRED REVENUE 319,612 343,246 ACCRUED EXPENSES 14,593 17,244 DEFERRED TAX LIABILITY, NET 28,380 25,572 ---------- ---------- Total liabilities 906,462 931,469 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock 3,737 3,779 Additional paid-in capital 759,962 763,420 Retained earnings 811,504 805,781 Accumulated other comprehensive income 10,608 6,519 ---------- ---------- Total shareholders' equity 1,585,811 1,579,499 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,492,273 $2,510,968 ========== ==========
See notes to condensed consolidated financial statements. 3 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------- 2006 2005 -------- -------- REVENUES: Software license fees $ 67,465 $ 68,022 Maintenance fees 110,317 107,374 Professional services fees 118,536 121,932 -------- -------- Total revenues 296,318 297,328 -------- -------- OPERATING EXPENSES: Cost of software license fees 6,585 5,687 Cost of professional services 107,615 106,245 Technology development and support 37,240 35,653 Sales and marketing 65,768 72,037 Administrative and general 46,228 48,229 -------- -------- Total operating expenses 263,436 267,851 -------- -------- INCOME FROM OPERATIONS 32,882 29,477 OTHER INCOME, NET 10,881 6,733 -------- -------- INCOME BEFORE INCOME TAXES 43,763 36,210 INCOME TAX PROVISION 14,442 11,587 -------- -------- NET INCOME $ 29,321 $ 24,623 ======== ======== Basic earnings per share $ 0.08 $ 0.06 ======== ======== Diluted earnings per share $ 0.08 $ 0.06 ======== ========
See notes to condensed consolidated financial statements. 4 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ------------------------ 2006 2005 --------- --------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $ 29,321 $ 24,623 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 13,393 12,842 Acquisition tax benefits 1,309 1,751 Stock option compensation 2,797 Deferred income taxes 4,700 7,280 Other (136) 4,469 Net change in assets and liabilities, net of effects from acquisitions: Accounts receivable 56,772 38,350 Prepaid expenses and other current assets (2,565) (2,705) Other assets 667 (680) Accounts payable and accrued expenses (32,393) (40,784) Deferred revenue (14,614) 6,461 Income taxes 4,626 (2,974) --------- --------- Net cash provided by operating activities 63,877 48,633 --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of: Businesses, net of cash acquired (20,484) (30,917) Property and equipment (2,663) (3,120) Capitalized software (5,486) (5,324) Proceeds from sale of property 2,016 Investments: Proceeds 125,816 100,904 Purchases (137,304) (79,077) --------- --------- Net cash used in investing activities (38,105) (17,534) --------- --------- CASH FLOWS USED IN FINANCING ACTIVITIES: Net proceeds from exercise of stock options 597 1,774 Contribution to stock purchase plans 1,504 2,405 Repurchase of common stock (32,839) (10,770) --------- --------- Net cash used in financing activities (30,738) (6,591) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,794 (4,912) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,172) 19,596 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 612,062 497,687 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 610,890 $ 517,283 ========= =========
See notes to condensed consolidated financial statements. 5 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at June 30, 2006, final amounts may differ from these estimates. In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2006 included in the Company's Annual Report to Shareholders on Form 10-K filed with the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet at March 31, 2006 has been derived from the audited financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. 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 consistent with 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 "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 its customers with a right to use its software perpetually (perpetual licenses) or during a defined term (term licenses). Perpetual license fee revenue is recognized using the residual method, under which the fair value, based on vendor specific objective evidence ("VSOE") of all undelivered elements of the agreement (e.g., maintenance and professional services) is deferred. VSOE 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 delivery 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 VSOE, the Company recognizes the license fee revenue on a ratable basis over the term of the license agreement or when all elements have been delivered depending on the nature of the undelivered elements. The Company offers flexibility to customers purchasing licenses for its products and related maintenance. Terms of these transactions range from standard perpetual license sales that 6 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) include one year of maintenance to large multi-year (generally two to five years), 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 successful collection history for deferred payments, the license fee 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 receivable. 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 license agreements for up to one year. 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 - Professional services fees are generally based on hourly or daily rates; therefore, revenues from professional services are recognized in the period the services are performed, provided that collection of the related receivable is deemed probable. However, for development 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 as the customer derives value from the services, consistent with the proportional performance method. Capitalized Software - 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 in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". 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. 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 of current gross revenues compared with 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. 7 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) Goodwill and Other Intangibles - Goodwill that is allocated to each operating segment and those intangible assets with indefinite lives are tested for impairment annually and/or when events or circumstances indicate that their fair value may have been reduced below carrying value. The Company evaluated its goodwill as of March 31, 2006 and determined there was no impairment. 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. Stock-Based Compensation - Effective April 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of fiscal 2007 includes compensation expense for all stock-based compensation awards ("awards") granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock-based compensation expense for all awards granted after April 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes these compensation costs net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of five years. In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123(R) and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). See Note 5 to the condensed consolidated financial statements for a further discussion on stock-based compensation including the impact on net income during the period. Prior to the adoption of SFAS No. 123(R), the Company measured compensation expense for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Awards were granted at current market prices at the date of grant. Therefore, no compensation cost was recognized for the Company's fixed stock option plans or its stock purchase plans. The Company applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure", as if the fair-value-based method had been applied in measuring compensation expense. Recently Issued Accounting Pronouncements - In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109", which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management is currently considering the impact this Interpretation will have on the Company's financial statements. 8 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 2 - ACQUISITION In April 2006, the Company acquired SteelTrace Limited, a privately held provider of requirements management products that align application delivery to business needs through a structured, visual approach to the management of enterprise application requirements, for approximately $20.0 million in cash. The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141, "Business Combinations" and, accordingly, the assets and liabilities acquired have been recorded at preliminary fair value as of the acquisition date. The purchase price exceeded the fair value of the acquired assets and liabilities by $14.2 million and was recorded to goodwill. Intangible assets subject to amortization totaled $6.5 million of which $4.7 million and $1.5 million related to purchased software and customer relationships with a useful life of five and three years, respectively. The remaining intangible assets subject to amortization have a useful life of one year. NOTE 3 - COMPUTATION OF EARNINGS PER COMMON SHARE Earnings per common share data were computed as follows (in thousands, except for per share data):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- BASIC EARNINGS PER SHARE: Numerator: Net income $ 29,321 $ 24,623 -------- -------- Denominator: Weighted-average common shares outstanding 376,759 388,243 -------- -------- Basic earnings per share $ 0.08 $ 0.06 ======== ======== DILUTED EARNINGS PER SHARE: Numerator: Net income $ 29,321 $ 24,623 -------- -------- Denominator: Weighted-average common shares outstanding 376,759 388,243 Dilutive effect of stock options 768 1,680 -------- -------- Total shares 377,527 389,923 -------- -------- Diluted earnings per share $ 0.08 $ 0.06 ======== ========
During the three months ended June 30, 2006 and 2005, stock options to purchase a total of approximately 50,112,000 and 58,121,000 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. 9 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 4 - COMPREHENSIVE INCOME Other comprehensive income includes unrealized gains and losses on marketable securities and foreign currency translation gains and losses that have been excluded from net income and reflected in equity. Total comprehensive income is summarized as follows (in thousands):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- Net income $ 29,321 $ 24,623 Unrealized gain on marketable securities, net of tax 58 Foreign currency translation adjustment, net of tax 4,031 (2,216) -------- -------- Total comprehensive income $ 33,410 $ 22,407 ======== ========
NOTE 5 - STOCK BENEFIT PLANS AND STOCK-BASED COMPENSATION Employee Stock Purchase Plan - During fiscal 2002, the shareholders approved international and domestic employee stock purchase plans under which the Company was authorized to issue up to 15 million shares of common stock to eligible employees. Effective April 1, 2005, the offering periods were based on a three month period. 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 employee. Effective April 1, 2006, the purchase price is 95% of the last day's average high and low price for each offering period consistent with the non-compensatory requirements of SFAS 123(R). 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. 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. Fifty percent of the option shares granted under these plans become exercisable on the third year anniversary of the date of grant, and 25 percent of the option shares vest on each of the fourth year and fifth year anniversaries of the date of grant. 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, as shareholder approval was not required at the time. 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. Option shares granted under the Broad Based Stock Option Plan either vest every six months over a four year period or fifty percent of the option shares become exercisable on the third year anniversary of the date of grant, and 25 percent of the option shares vest on each of the fourth year and fifth year anniversaries of the date of grant. 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 a director. 10 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) 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. The following is a summary of the status of fixed stock option grants under Compuware's stock-based compensation plans as of June 30, 2006 and changes during the three months ended June 30, 2006 (intrinsic values and shares in thousands):
Three Months Ended June 30, 2006 ----------------------------------------------------- Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Options Price Term Value (1) --------- -------- ----------- --------- Options outstanding as of April 1, 2006 55,710 $ 11.66 Granted 611 7.58 Exercised (134) 3.68 $ 514 Forfeited (346) 6.67 Cancelled/expired (1,529) 10.78 --------- -------- Options outstanding as of June 30, 2006 54,312 $ 11.69 ========= ======== Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2006 52,957 $ 11.80 3.79 $ 3,128 Options exercisable as of June 30, 2006 46,853 $ 12.41 3.25 $ 1,497
(1) For options exercised during the three months ended June 30, 2006, the aggregate intrinsic value represents the difference between the Company's closing stock price on the date the option was exercised and the exercise price, multiplied by the number of options exercised. For options vested and expected to vest, net of estimated forfeitures and options exercisable as of June 30, 2006, the aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the first quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had the vested options been exercised on June 30, 2006. This amount changes based upon changes in the fair market value of the Company's stock. SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, and risk free interest rates. The volatility is based on historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on the "short-cut" method as described in SAB 107. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our awards. The dividend yield assumption is based on the Company's history and expectation of dividend payouts. As of June 30, 2006, $17.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options is expected to be recognized over a weighted-average period of approximately 1.97 years. 11 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) The weighted-average fair value of stock options granted during the three months ending June 30, 2006 was determined utilizing the following assumptions:
Three Months Ended June 30, 2006 ------------------ Expected volatility 69.77% Risk-free interest rate 5.16% Expected lives at date of grant (in years) 6.9 Weighted-average fair value of the options granted $ 5.28
For the three months ending June 30, 2006 stock-based compensation expense was allocated as follows (in thousands):
Three Months Ended June 30, 2006 ------------------ Stock-based compensation classified as: Cost of professional services $ 419 Technology development and support 251 Sales and marketing 1,378 Administrative and general 749 ------------------ Total stock-based compensation expense before income taxes 2,797 Income tax benefit (923) ------------------ Total stock-based compensation expense after income taxes $ 1,874 ==================
12 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards using the intrinsic value method in accordance with APB 25. Under the intrinsic value method, no stock based compensation expense had been recognized in the results of operations for stock-based awards because the exercise price of the stock options granted equaled the fair market value of the underlying stock at the date of grant. By electing the modified prospective transition method allowed under SFAS 123(R), the Company's Consolidated Statements of Operations prior to fiscal 2007 have not been restated to reflect, and do not include, the impact of SFAS 123(R). If compensation cost for the Company's stock-based compensation plans had been determined based on the fair value at the grant dates for the three months ended June 30, 2005 consistent with the method prescribed by SFAS No. 123(R), the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below (in thousands, except earnings per share data):
Three Months Ended June 30, 2005 ------------------ Net income: As reported $ 24,623 Compensation cost, net of tax (2,494) ------------------ Pro forma $ 22,129 ================== Earnings per share: As reported: Basic earnings per share $ 0.06 Diluted earnings per share 0.06 Pro forma: Basic earnings per share 0.06 Diluted earnings per share 0.06
The fair value of each option granted during the three months ended June 30, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Three Months Ended June 30, 2005 ------------------ Expected volatility 74.27% Risk-free interest rate 3.61% Expected lives at date of grant (in years) 5.0 Weighted average fair value of the options granted $ 4.32
Dividend yields were not a factor as the Company has never issued cash dividends and does not anticipate issuing cash dividends in the future. 13 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 6 -- GOODWILL AND INTANGIBLE ASSETS The components of the Company's intangible assets were as follows (in thousands):
June 30, 2006 ------------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Unamortized intangible assets: Trademarks (1) $ 5,853 $ 5,853 ============== ============ ============ Amortized intangible assets: Capitalized software (2) $ 306,545 $ (239,562) $ 66,983 Customer relationship agreements (3) 9,799 (2,810) 6,989 Non-compete agreements (3) 2,280 (1,422) 858 Other (4) 7,747 (6,167) 1,580 -------------- ------------ ------------ Total amortized intangible assets $ 326,371 $ (249,961) $ 76,410 ============== ============ ============
March 31, 2006 ------------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Unamortized intangible assets: Trademarks (1) $ 5,853 $ 5,853 ============== ============ ============ Amortized intangible assets: Capitalized software (2) $ 295,996 $ (234,078) $ 61,918 Customer relationship agreements (3) 8,250 (2,251) 5,999 Non-compete agreements (3) 2,057 (1,164) 893 Other (4) 7,366 (5,775) 1,591 -------------- ------------ ------------ Total amortized intangible assets $ 313,669 $ (243,268) $ 70,401 ============== ============ ============
(1) Certain trademarks were acquired as part of the Covisint, LLC ("Covisint") and Changepoint Corporation ("Changepoint") acquisitions in fiscal 2004 and 2005. These trademarks are deemed to have an indefinite life and therefore are not being amortized. (2) Amortization of capitalized software is primarily included in "cost of software license fees" in the consolidated statements of operations. Capitalized software is generally amortized over five years. (3) Customer relationship agreements and non-compete agreements were acquired as part of recent acquisitions. The customer relationship agreements are being amortized over periods up to five years. The non-compete agreements are being amortized over periods up to three years. (4) Other amortized intangible assets include trademarks associated with product acquisitions and Covisint customer contracts. The trademarks are being amortized over periods up to ten years. The Covisint customer contracts are being amortized over three years. 14 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) Changes in the carrying amounts of goodwill are summarized as follows (in thousands):
Goodwill Products Services Total --------- --------- --------- Balance at March 31, 2006, net $ 178,910 $ 141,172 $ 320,082 Acquisition 14,175 14,175 Adjustments to previously recorded purchase price 2 2 Effect of foreign currency translation (57) 392 335 --------- --------- --------- Balance at June 30, 2006, net $ 193,030 $ 141,564 $ 334,594 ========= ========= =========
NOTE 7 -- PROPERTY AND EQUIPMENT During fiscal 2006, the Company implemented a plan to market and sell the former distribution center located in West Bloomfield, Michigan. The building was classified in current assets as held for sale with a carrying value of $1.8 million at March 31, 2006. This building was sold during the first quarter of fiscal 2007 for approximately $2.0 million. During fiscal 2005, the Company implemented a plan to market and sell the former headquarters building located in Farmington Hills, Michigan. The Company has been unable to reach an agreement with a buyer to dispose of the building. Nothing has come to the Company's attention that would warrant an adjustment to the carrying value at this time. The building is classified in current assets as held for sale with a carrying value of $13.0 million at June 30, 2006. 15 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 8 - SEGMENTS The Company operates in two business segments in the technology industry: products and professional services. The Company provides software products and professional services to IT organizations that help IT professionals efficiently develop, implement and support the applications that run their businesses. Financial information for the Company's business segments is as follows (in thousands):
Three Months Ended June 30, ------------------------ 2006 2005 --------- --------- Revenues: Products: Mainframe $ 119,741 $ 123,376 Distributed systems 58,041 52,020 --------- --------- Total product revenue 177,782 175,396 Professional services 118,536 121,932 --------- --------- Total revenues $ 296,318 $ 297,328 ========= ========= Operating expenses: Products $ 109,593 $ 113,377 Professional services 107,615 106,245 Corporate expenses 46,228 48,229 --------- --------- Total operating expenses $ 263,436 $ 267,851 ========= ========= Income (loss) from operations before other income: Products $ 68,189 $ 62,019 Professional services 10,921 15,687 Corporate expenses (46,228) (48,229) --------- --------- Income from operations before other income 32,882 29,477 Other income 10,881 6,733 --------- --------- Income before income taxes $ 43,763 $ 36,210 ========= =========
Financial information regarding geographic operations is presented in the table below (in thousands):
Three Months Ended June 30, ----------------------- 2006 2005 --------- --------- Revenues: United States $ 202,632 $ 199,481 Europe and Africa 67,472 75,483 Other international operations 26,214 22,364 --------- --------- Total revenues $ 296,318 $ 297,328 ========= =========
16 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED) NOTE 9 - RESTRUCTURING ACCRUAL In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan to reorganize its operating divisions, primarily the professional services segment. These changes were designed to increase profitability by better aligning cost structures with current market conditions. The restructuring plan included a reduction of professional services staff at certain locations, the closing of entire professional services offices and a reduction of sales support personnel, lab technicians and related administrative and financial staff. Approximately 1,600 employees worldwide were terminated as a result of the reorganization. The following table summarizes the restructuring accrual as of March 31, 2006, and charges against the accrual during the first three months of fiscal 2007 (in thousands):
Charges and adjustments against Balance at the accrual during Balance at March 31, the quarter ended June 30, 2006 June 30, 2006 2006 ---------- ------------------- ---------- Facilities costs (primarily lease abandonments) $ 5,950 $ 378 $ 5,572
NOTE 10 - DEBT The Company has no long term debt. As of June 30, 2006, the Company held a $100 million revolving credit facility maturing on July 27, 2006. 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 (8.25% at June 30, 2006), at the Company's option. 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. On July 27, 2006, the Company amended the credit agreement extending the maturity to July 26, 2007. The amended credit agreement eliminated the liquidity and net worth covenants and no longer restricts merger and acquisition activity when the Company is the continuing or surviving entity. Interest is payable at 1% over the Eurodollar rate or at the prime rate. 17 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Compuware Corporation Detroit, Michigan We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and subsidiaries (the "Company"), as of June 30, 2006, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended June 30, 2006 and 2005. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the condensed consolidated financial statements, effective April 1, 2006, the Company changed its method of accounting for stock based compensation to conform to Statement of Financial Accounting Standards No. 123R, Share-Based Payment. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and subsidiaries as of March 31, 2006, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated May 15, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Detroit, Michigan August 2, 2006 18 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 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. A summary of the material risks and uncertainties that we believe affect us are highlighted below and have not materially changed since the end of fiscal 2006 (see Item 1A Risk Factors in our 2006 10-K for a more detailed explanation of each risk). These risks and uncertainties are not the only ones we face. Additional risks and uncertainties that we are not aware of or focused on or currently deem immaterial may also impair business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment. There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by applicable law, we do not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report. - - The majority of our software products revenue is dependent on our customers' continued use of International Business Machines Corp. ("IBM") and IBM-compatible products, and on the acceptance of our pricing structure for software licenses and maintenance. - - Our software and technology may infringe the proprietary rights of others. - - Our results could be adversely affected if our operating margins decline. - - Our results could be adversely affected by increased competition, pricing pressures and technological changes. - - The market for professional services is highly competitive, fragmented and characterized by low barriers to entry. - - We must develop or acquire product enhancements and new products to succeed. - - Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected. - - We are exposed to exchange rate risks on foreign currencies and to other international risks which may adversely affect our business and results of operations. - - A further decline in the U.S. domestic automotive manufacturing business could adversely affect our professional services business. - - Current laws may not adequately protect our proprietary rights. - - The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business. 19 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - - Our quarterly financial results vary and may be adversely affected by a number of unpredictable factors. - - Maintenance revenue could decline. - - Unanticipated changes in our operating results or effective tax rates, or exposure to additional income tax liabilities, could affect our profitability. - - Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers which could adversely affect our business, financial condition and operating results. - - Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect. OVERVIEW In this section, we discuss our results of operations on a segment basis for each of our financial reporting segments. We operate in two business segments in the technology industry: products and professional services. We evaluate segment performance based primarily on segment contribution before corporate expenses. References to years are to fiscal years ended March 31. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year ended March 31, 2006, particularly "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations". We deliver value to businesses worldwide by providing software products and professional services that increase the efficiency and effectiveness of the entire IT organization. Originally founded in 1973 as a professional services company, in the late 1970's we began to offer mainframe productivity tools for fault management and diagnosis, file and database management, and application debugging. In the 1990's, the IT industry moved toward distributed and web-based platforms. Our solutions portfolio grew in response, and we now market a comprehensive portfolio of IT solutions across the full range of enterprise computing platforms that help: - - Develop and deliver high quality, high performance enterprise business applications in a timely and cost-effective manner. - - Measure and manage application service using business-relevant metrics, and maintain consistent, high levels of service delivery. - - Provide executive visibility, decision support and process automation across the entire IT organization to enable all available resources to be harnessed in alignment with business priorities. Additionally, to be competitive in today's global economy, enterprises must securely share applications, information and business processes. We address this market need through our Covisint offerings, which help manage the supply chain through the integration of vital business information and processes between partners, customers and suppliers. 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. 20 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following occurred during the first quarter of 2007: - - Acquired SteelTrace Limited ("SteelTrace"), a privately held provider of requirements management products. - - Announced authorization by the Board of Directors to repurchase an additional $125 million of common stock of which approximately 4.5 million shares of our common stock was repurchased at an average price of $7.24 per share. - - Improved the products contribution margin to 38.4% in the first quarter of 2007 from 35.4% in the first quarter of 2006 due to continued distributed product revenue growth and reductions in sales and marketing expenditures. - - Achieved an 11.6% increase in distributed product revenue compared to the first quarter of 2006. The increase was a reflection of our continued focus on promoting our distributed products and an expanding maintenance base for those products. - - Incurred a 2.9% decrease in mainframe product revenue compared to the first quarter of 2006 primarily related to a decline in license revenue. - - Released 3 mainframe and 12 distributed product updates designed to increase the productivity of the IT departments of our customers. - - Hosted the Compuware Partner Summit, 2006, which highlighted collaboration between Compuware, its partners and their joint customers, focusing on innovations that drive business growth. - - Experienced a decrease in professional services contribution margin to 9.2% in the first quarter of 2007 from 12.9% in the first quarter of 2006. The change is primarily due to reductions in professional services revenue and higher subcontract costs. 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". 21 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operational data from the consolidated statements of operations as a percentage of total revenues and the percentage change in such items compared to the prior period:
Percentage of Total Revenues ------------------ Three Months Ended June 30, Period- ------------------ to-Period 2006 2005 Change ------ ------ --------- REVENUE: Software license fees 22.8% 22.9% (0.8)% Maintenance fees 37.2 36.1 2.7 Professional services fees 40.0 41.0 (2.8) ------ ------ Total revenues 100.0 100.0 (0.3) ------ ------ OPERATING EXPENSES: Cost of software license fees 2.2 1.9 15.8 Cost of professional services 36.3 35.8 1.3 Technology development and support 12.6 12.0 4.5 Sales and marketing 22.2 24.2 (8.7) Administrative and general 15.6 16.2 (4.1) ------ ------ Total operating expenses 88.9 90.1 (1.6) ------ ------ Income from operations 11.1 9.9 11.6 Other income 3.7 2.3 61.6 ------ ------ Income before income taxes 14.8 12.2 20.9 Income tax provision 4.9 3.9 24.6 ------ ------ Net income 9.9% 8.3% 19.1% ====== ======
SOFTWARE PRODUCTS REVENUE Our products are designed to enhance the effectiveness of key disciplines throughout the IT organization from application development and delivery to service management and IT portfolio management supporting all major enterprise computing platforms. Product revenue, which consists of software license fees and maintenance fees, comprised 60.0% and 59.0% of total revenue during the first quarter of 2007 and 2006, respectively. Distributed software product revenue increased $6.0 million or 11.6% during the first quarter of 2007 to $58.0 million from $52.0 million during the first quarter of 2006. The increase was primarily due to license revenue growth related to our Vantage product line resulting from increased customer demand for performance-related software and the enhancement of Vantage to include agentless monitoring through software acquired in the fiscal 2006 acquisition of Adlex, Incorporated. Mainframe software product revenue decreased $3.6 million or 2.9% during the first quarter of 2007 to $119.8 million from $123.4 million during the first quarter of 2006. The decline was primarily reflected in lower license revenue due to decreased demand for capacity in our European operations. 22 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) License revenue decreased $500,000 or 0.8% during the first quarter of 2007 to $67.5 million from $68.0 million during the first quarter of 2006. The decline was due to the reduction of $4.4 million in mainframe license revenue offset by the increase in distributed license revenue. Maintenance fees increased $2.9 million or 2.7% to $110.3 million during the first quarter of 2007 from $107.4 million during the first quarter of 2006. The increase was primarily due to an increase in distributed maintenance revenue related to our Vantage and QACenter product lines. Product revenue by geographic location is presented in the table below (in thousands):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- United States $100,426 $ 94,866 Europe and Africa 52,672 59,278 Other international operations 24,684 21,252 -------- -------- Total product revenue $177,782 $175,396 ======== ========
PRODUCT CONTRIBUTION AND EXPENSES Financial information for the products segment is as follows (in thousands):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- Revenue $177,782 $175,396 Expenses 109,593 113,377 -------- -------- Product contribution $ 68,189 $ 62,019 ======== ========
The product segment generated contribution margins of 38.4% and 35.4% during the first quarter of 2007 and 2006, respectively. Product expenses include cost of software license fees, technology development and support costs and sales and marketing expenses. These expenses are discussed below. Cost of software license fees includes amortization of capitalized software, the cost of duplicating and disseminating products to customers including associated hardware costs and the cost of author royalties. For the first quarter of 2007, cost of software license fees increased $900,000 or 15.8% to $6.6 million from $5.7 million in the first quarter of 2006. The change in cost of software license fees was primarily due to an increase in amortization expense related to internally developed software products and amortization expense associated with capitalized software purchased in recent acquisitions. As a percentage of software license fees, costs of software license fees were 9.8% and 8.4% in the first quarter of 2007 and 2006, respectively. 23 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 20.9% and 20.3% in the first quarter of 2007 and 2006, respectively. Capitalization of internally developed software products begins when technological feasibility of the product is established. Total technology development and support costs incurred internally and capitalized in the first quarter of 2007 and 2006 were as follows (in thousands):
Three Months Ended June 30, ---------------------- 2006 2005 -------- -------- Technology development and support costs incurred $ 42,722 $ 40,499 Capitalized technology development and support costs (5,482) (4,846) -------- -------- Technology development and support costs reported $ 37,240 $ 35,653 ======== ========
Before the capitalization of internally developed software products, total technology development and support expenditures for the first quarter of 2007 increased $2.2 million or 5.5%, to $42.7 million from $40.5 million in the first quarter of 2006. The change in expense is primarily due to higher compensation and benefit costs resulting from increased employee headcount, primarily programming personnel, in order to meet new product initiatives. Sales and marketing costs consists primarily of personnel related costs associated with product sales and sales support and marketing for all our offerings. For the first quarter of 2007, sales and marketing costs decreased $6.2 million or 8.7% to $65.8 million from $72.0 million in the first quarter of 2006. The change in sales and marketing costs was primarily attributable to higher severance expense being incurred during the first quarter of 2006 in our European operations due to a worldwide sales realignment that occurred during the quarter. There was no such initiative in the first quarter of 2007. In addition, compensation and bonus costs were lower during the first quarter of 2007 due to the decrease in headcount that resulted from the realignment. As a percentage of product revenue, sales and marketing costs were 37.0% and 41.1% in the first quarter of 2007 and 2006, respectively. PROFESSIONAL SERVICES REVENUE We offer a broad range of IT services to help businesses make the most of their IT assets. Some of these services include outsourcing and co-sourcing, application management, product solutions, project management, enterprise resource planning and customer relationship management services. Revenue from professional services decreased $3.4 million or 2.8% during the first quarter of 2007 to $118.5 million compared to $121.9 million in the first quarter of 24 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 2006. The decrease in revenue was primarily due to cost cutting initiatives adopted by certain domestic customers within the automotive sector reducing the spending on certain IT programs. Professional services revenue by geographic location is presented in the table below (in thousands):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- United States $102,206 $104,615 Europe and Africa 14,800 16,205 Other international operations 1,530 1,112 -------- -------- Total professional services revenue $118,536 $121,932 ======== ========
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES Financial information for the professional services segment is as follows (in thousands):
Three Months Ended June 30, --------------------- 2006 2005 -------- -------- Revenue $118,536 $121,932 Expenses 107,615 106,245 -------- -------- Professional services contribution $ 10,921 $ 15,687 ======== ========
During the first quarter of 2007, the professional services segment generated a contribution margin of 9.2%, compared to 12.9% during the first quarter of 2006. Cost of professional services consists primarily of personnel-related costs of providing services, including billable staff, subcontractors and sales personnel. Cost of professional services increased $1.4 million or 1.3% during the first quarter of 2007 to $107.6 million compared to $106.2 million in the first quarter of 2006. The change was primarily attributable to higher subcontractor costs to meet a European customer's increased demand for our services. CORPORATE AND OTHER EXPENSES Administrative and general expenses primarily consist of costs associated with the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, administrative and general expenses include all facility-related costs, such as rent, building depreciation, maintenance, utilities, etc., associated with worldwide sales and professional services offices. Administrative and general expenses decreased $2.0 million or 4.1% during the first quarter of 2007 to $46.2 million from $48.2 million during the first quarter of 2006. The decrease in cost was primarily attributable to an impairment charge of $3.9 million in the first quarter of 2006 related to a purchased software application that management, at that time, did not have plans to utilize. There was no significant impairment charge incurred during the first quarter of 2007. This was offset by approximately 25 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $2.2 million in foreign currency losses incurred in the first quarter of 2007 related to inter-company balances with our wholly owned subsidiaries. Other income, net ("other income") consists primarily of interest income realized from investments, interest earnings on deferred customer receivables and income/losses generated from our investments in partially owned companies. Other income increased $4.2 million or 61.6% during the first quarter of 2007 to $10.9 million compared to $6.7 million in the first quarter of 2006. The change in income was primarily attributable to an increase in investment interest income due to higher interest rates earned on investments during the respective periods of 2007 compared to 2006. Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. The income tax provision was $14.4 million in the first quarter of 2007 and $11.6 million for the first quarter of 2006, which represents an effective tax rate of 33% and 32%, respectively. The increase in the effective tax rate from 2006 to 2007 is primarily due to expected increases in income before income taxes reducing the effect of certain tax benefits compared to the prior year and in the domestic/foreign composition of revenue. RESTRUCTURING ACCRUAL 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 by better aligning cost structures with current market conditions. See Note 9 to the Condensed Consolidated Financial Statements for changes in the restructuring accrual for the first three months of 2007. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at June 30, 2006. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the year ended March 31, 2006 are considered by management to be the most important to an understanding of the financial statements, because their application places the most significant demands on management's judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2006. 26 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2006, cash and cash equivalents and investments totaled approximately $919.7 million. During the first three months of 2007 and 2006, cash flow from operations was $63.9 million and $48.6 million, respectively. The increase was due to a decrease in cash paid to vendors, primarily legal services, and to a decrease in cash paid for salaries and benefits due to lower headcount, primarily within the professional services and sales and marketing segments. During the first three months of 2007 and 2006, capital expenditures including property and equipment and capitalized research and software development totaled $8.1 million and $8.4 million, respectively. We hold a $100 million revolving credit facility that would have matured on July 27, 2006 (see Note 9 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended March 31, 2006 for a description of the facility). On July 27, 2006, we amended the credit agreement extending the maturity to July 26, 2007 (see Note 10 to the Condensed Consolidated Financial Statements for more details regarding amendments to the terms of the facility). No borrowings have occurred under this facility since inception. During fiscal 2005, we implemented a plan to market and sell the former headquarters building located in Farmington Hills, Michigan. We have been unable to reach an agreement with a buyer to dispose of the building. Nothing has come to our attention that would warrant an adjustment to the carrying value at this time. The building is classified in current assets as held for sale with a carrying value of $13.0 million at June 30, 2006. During fiscal 2006, we implemented a plan to market and sell the former distribution center located in West Bloomfield, Michigan. This building was sold during the first quarter of fiscal 2007 for approximately $2.0 million. On April 13, 2006, we announced that 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. During the first three months of 2007, we repurchased approximately 4.5 million shares of our common stock under this program at an average price of $7.24 per share and a total cost of $32.8 million. Approximately $92.2 million remains for future purchases under this program. In April 2006, we acquired SteelTrace Limited, a privately held provider of requirements management products that align application delivery to business needs through a structured, visual approach to the management of enterprise application requirements, for approximately $20.0 million in cash. The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141, "Business Combinations" and, accordingly, the assets and liabilities acquired have been recorded at preliminary 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. 27 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Recently Issued Accounting Pronouncements In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109", which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management is currently considering the impact this Interpretation will have on the financial statements. CONTRACTUAL OBLIGATIONS Our contractual obligations are described in "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended March 31, 2006. Except as described elsewhere in this report on Form 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the end of fiscal 2006. 28 COMPUWARE CORPORATION AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed primarily to market risks associated with movements in interest rates and foreign currency exchange rates. There have been no material changes to our foreign exchange risk management strategy or our investment standards subsequent to March 31, 2006, therefore the market risks remain substantially unchanged since we filed the Annual Report on Form 10-K for the fiscal year ending March 31, 2006. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, at the reasonable assurance level, to cause the material information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No changes in our internal control over financial reporting occurred during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 29 COMPUWARE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth, the repurchases of common stock for the quarter ended June 30, 2006:
Total number of shares Approximate repurchased as dollar value of part of publicly shares that may Total number of Average price announced yet be purchased shares paid per repurchase plans under the plan or Period repurchased (a) share (a) or program (a) program (a) ------ --------------- ------------- ---------------- ----------------- As of March 31, 2006 $ 125,000,000 April 1, 2006 - April 30, 2006 125,000,000 May 1, 2006 - May 31, 2006 1,326,141 $ 7.38 1,326,141 115,210,000 June 1, 2006 - June 30, 2006 3,207,406 7.19 4,533,547 92,161,000 --------------- ------------- Total 4,533,547 $ 7.24 =============== =============
(a) On April 13, 2006, we announced that the Board of Directors has authorized the repurchase of $125 million of the Company's common stock. Our purchases of stock may occur on the open market or in negotiated or block transactions based upon market and business conditions. Unless terminated earlier by resolution of our Board of Directors, the share repurchase program will expire when we have repurchased all shares authorized for repurchase thereunder. 30 COMPUWARE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. EXHIBITS Exhibit Number Description of Document 4.7 Amendment No. 2, dated as of May 9, 2006, To Rights Agreement, dated as of October 25, 2000, between Compuware Corporation and Equiserve Trust Company, N.A. (now known as Computershare Trust Company, N.A.) (1) 4.8 Amended and Restated Credit Agreement Dated May 2, 2003 as of July 27, 2006 (4) 10.98 2005 Non-Employee Directors' Deferred Compensation Plan (2) 10.99 Executive Incentive Plan -- Corporate, as of May 31, 2006 (3) 10.101 Fifth Amendment to the Compuware Corporation ESOP/401(k) Plan (4) 15 Independent Registered Public Accounting Firm's Awareness Letter (4) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (4) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (4) 32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act. (4) (1) Incorporated by reference to the first Form 8-K filed by the Company on May 11, 2006. (2) Incorporated by reference to the second Form 8-K filed by the Company on May 11, 2006. (3) Incorporated by reference to the Form 8-K filed by the Company on June 6, 2006. (4) Filed herewith. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPUWARE CORPORATION Date: August 2, 2006 By: /s/ Peter Karmanos, Jr. --------------- ----------------------- Peter Karmanos, Jr. Chief Executive Officer (duly authorized officer) Date: August 2, 2006 By: /s/ Laura L. Fournier --------------- ----------------------- Laura L. Fournier Senior Vice President Chief Financial Officer Treasurer 32 Exhibit Index Exhibit Number Description of Document 4.7 Amendment No. 2, dated as of May 9, 2006, To Rights Agreement, dated as of October 25, 2000, between Compuware Corporation and Equiserve Trust Company, N.A. (now know as Computershare Trust Company, N.A.) (1) 4.8 Amended and Restated Credit Agreement Dated May 2, 2003 as of July 27, 2006 (4) 10.98 2005 Non-Employee Directors' Deferred Compensation Plan (2) 10.99 Executive Incentive Plan -- Corporate, as of May 31, 2006 (3) 10.101 Fifth Amendment to the Compuware Corporation ESOP/401(k) Plan (4) 15 Independent Registered Public Accounting Firm's Awareness Letter (4) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (4) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (4) 32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act. (4) (1) Incorporated by reference to the first Form 8-K filed by the Company on May 11, 2006. (2) Incorporated by reference to the second Form 8-K filed by the Company on May 11, 2006. (3) Incorporated by reference to the Form 8-K filed by the Company on June 6, 2006. (4) Filed herewith. EX-4.8 2 k07492exv4w8.txt AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 4.8 EXECUTION COPY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMPUWARE CORPORATION AMENDED AND RESTATED CREDIT AGREEMENT DATED MAY 2, 2003 AS OF JULY 27, 2006 COMERICA BANK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS SCHEDULES Schedule 2.4 List of Officers Authorized to Make Telephone Requests Schedule 6.5 Employee Pension Benefit Plans Schedule 6.8 Subsidiaries Schedule 6.9 Environmental Matters Schedule 8.1 Existing Debt Schedule 8.4 Permitted Liens Schedule 8.7 Non-Arms Length Transactions with Affiliates
TABLE OF CONTENTS (Continued) EXHIBITS EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF SUBSIDIARY GUARANTY EXHIBIT C FORM OF REQUEST FOR ADVANCE
CREDIT AGREEMENT THIS CREDIT AGREEMENT, made as of the 27th day of July, 2006, by and between COMPUWARE CORPORATION, a Michigan corporation (herein called "Company") and COMERICA BANK, a Michigan banking corporation, of Detroit, Michigan (herein called "Bank"). RECITALS A. Company and Bank are parties to the Credit Agreement dated as of May 2, 2003, as amended by the Amendment No. 1 dated as of April 30, 2004, the Amendment No. 2 dated as of July 29, 2004 and the Amendment No. 3 dated as of July 28, 2005 (the "Prior Credit Agreement"). B. Company and Bank wish to amend and restate the Prior Credit Agreement as provided herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency is acknowledged, Bank and Company agree that the Prior Credit Agreement is hereby amended and restated in its entirety as follows: W I T N E S S E T H 1. DEFINITIONS For the purposes of this Agreement the following terms have the following meanings: "Advance" shall mean a borrowing requested by Company and made by Bank under Section 2 of this Agreement, including any refunding or conversions of such borrowings pursuant to Section 3.3 hereof, and shall include a Eurodollar-based Advance and a Prime-based Advance. "Affiliate" shall mean, with respect to any Person (other than, with respect to Company, a Wholly-Owned Subsidiary), any other Person directly or indirectly Controlling (including but not limited to all directors and officers of such Person), Controlled by, or under direct or indirect common Control with such Person. A Person shall be deemed to Control a corporation for the purposes of this definition if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors or managers of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Alternate Base Rate" shall mean for any day a rate per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%) equal to the Federal Funds Effective Rate in effect on such day plus one percent (1%). "Applicable Eurodollar Margin" shall mean one percent (1%). "Business Day" shall mean any day on which commercial banks are open for domestic and international business (including dealings in foreign exchange) in Detroit and London. "Capitalized Lease" shall mean any lease of any property (whether real, personal or mixed) by any Person as lessee which, in conformity with GAAP, is, or is required to be accounted for as, a capital lease on the balance sheet of such Person, together with any renewals of such leases (or entry into new leases) on substantially similar terms. "Change of Control" shall mean (i) any Person or "group" (within the meaning of Sections 13(d) and 14(d) under the Securities Exchange Act, as in effect on the Restatement Date), shall have (A) acquired beneficial ownership (as such term is used in Rule 13d-3 under the Securities Exchange Act, as in effect of the Restatement Date) of 33% or more on a fully diluted basis of the voting interest in the Company's voting capital stock or (B) obtained the power (whether or not exercised) to elect a majority of the Company's directors or (ii) the Board of Directors of the Company shall cease to consist of a majority of Continuing Directors. "Commitment" shall mean One Hundred Million Dollars ($100,000,000), subject to reduction or termination under Section 2 and Section 3. "Consolidated" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amounts signified by such term for all such Persons determined on a consolidated basis in accordance with GAAP. Unless otherwise specified herein, references to Consolidated financial statements or data of the Company shall be deemed to mean the financial statements and data of the Company in consolidation with its Subsidiaries in accordance with GAAP. "Continuing Directors" shall mean the directors of the Company on the Restatement Date and each other director if such director's nomination for election to the Board of Directors of the Company is recommended by a majority of the then Continuing Directors. "Debt" shall mean as to any Person, without duplication (a) all Funded Debt of such Person, (b) all Guarantee Obligations of such Person, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (d) all indebtedness of such Person arising in connection with any interest rate swap transaction, basis swap transaction, forward rate transaction, commodity swap transaction, equity transaction, equity index transaction, foreign exchange transaction, cap transaction, floor transaction (including any option with respect to any of these transactions and any combination of any of the foregoing) entered into by such Person and (e) any items which would be classified as liabilities on the balance sheet of such Person. Unless the context otherwise requires, as used in this Agreement, the term Debt refers to Debt of Company or its Subsidiaries. "Default" shall mean any condition or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default under this Agreement. "Domestic Subsidiary" shall mean each Subsidiary of the Company that is incorporated under the laws of the United States or any State thereof. 2 "Effective Date" shall mean May 2, 2003. "Environmental Laws" shall mean all federal, state and local laws including statutes, regulations, ordinances, codes, rules, and other governmental restrictions and requirements, relating to environmental pollution, contamination or other impairment of the environment or any hazardous or toxic substances of any nature, including but not be limited to the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, and the Federal Superfund Amendments and Reauthorization Act of 1986, each as amended from time to time. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor act or code. "Eurodollar-based Advance" shall mean an Advance which bears interest at the Eurodollar-based Rate. "Eurodollar-based Rate" shall mean a per annum interest rate which is the Applicable Eurodollar Margin plus the quotient of: (a) the per annum interest rate at which Bank's Eurodollar Lending Office offers deposits to prime banks in the eurodollar market in an amount comparable to the relevant Eurodollar-based Advance and for a period equal to the relevant Interest Period at approximately the time Company requests such Advance on the first day of such Interest Period; divided by (b) a percentage equal to 100% minus the maximum rate on such date at which Bank is required to maintain reserves on "Euro-currency Liabilities" as defined in and pursuant to Regulation D of the Board of Governors of the Federal Reserve System or, if such regulation or definition is modified, and as long as Bank is required to maintain reserves against a category of liabilities which includes eurodollar deposits or includes a category of assets which includes eurodollar loans, the rate at which such reserves are required to be maintained on such category; all as conclusively determined by Bank, such sum to be rounded upward, if necessary, to the nearest whole multiple of 1/100th of 1%. "Eurodollar Lending Office" shall mean Bank's office located at Grand Cayman, British West Indies or such other branch of Bank, domestic or foreign, as it may hereafter designate as its Eurodollar Lending Office by notice to Company. "Event of Default" shall mean any of the events of default specified in Section 9 hereof. "Federal Funds Effective Rate" shall mean, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the 3 Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank from three Federal funds brokers of recognized standing selected by it. "Foreign Subsidiary" shall mean each Subsidiary of Company that is not a Domestic Subsidiary. "Funded Debt" of any Person shall mean (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services as of such date (other than operating leases and trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices and equipment purchased for which the purchase price is due and payable less than one year from the date the equipment is delivered to such Person) or which is evidenced by a note, bond, debenture or similar instrument, (b) the principal component of all obligations of such Person under Capitalized Leases, (c) all reimbursement obligations (actual, contingent or otherwise) of such Person in respect of letters of credit, acceptances or similar obligations issued or created for the account of such Person and which are the functional equivalent of indebtedness for borrowed money, (d) all liabilities secured by any consensual liens on any property owned by such Person as of such date even though such Person has not assumed or otherwise become liable for the payment thereof, in each case determined in accordance with GAAP; provided however that so long as such Person is not personally liable for such liabilities, the amount of such liability shall be deemed to be the lesser of the fair market value at such date of the property subject to the lien securing such liability and the amount of the liability secured, and (e) all Guarantee Obligations in respect of any liability which constitutes Funded Debt; provided, however that Funded Debt shall not include any interest rate swap transaction, basis swap transaction, forward rate transaction, commodity swap transaction, equity transaction, equity index transaction, foreign exchange transaction, cap transaction, floor transaction (including any option with respect to any of these transactions and any combination of any of the foregoing) entered into by such Person prior to the occurrence of a termination event with respect thereto. "GAAP" shall mean, as of any applicable date of determination, generally accepted accounting principles consistently applied in the United States of America. "Guarantee Obligations" shall mean as to any Person (the "guaranteeing person") any obligation of the guaranteeing person in respect of any obligation of another Person (including, without limitation, any bank under any letter of credit), the creation of which was induced by a reimbursement agreement, counter indemnity or similar obligation issued by the guaranteeing person, in either case guaranteeing or in effect guaranteeing any Debt, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any 4 such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by Company in good faith. "Guarantors" shall mean each Material Wholly-Owned Domestic Subsidiary which is required to guarantee the obligations of the Company hereunder and under the other Loan Documents and any other Domestic Subsidiary which has executed and delivered (including by execution and delivery of a joinder agreement) the Guaranty, and "Guarantor" shall mean any one of them. "Guaranty" shall mean that certain guaranty of all outstanding Indebtedness by the Guarantors (whether by execution thereof or by execution of a joinder agreement thereto) substantially in the form attached as Exhibit "B." "Hazardous Materials" shall mean and include any hazardous, toxic or dangerous waste, substance or material defined as such in (or for purposes of) the Environmental Laws. "Hedging Transaction" shall mean each interest rate swap transaction, basis swap transaction, forward rate transaction, commodity swap transaction, equity transaction, equity index transaction, foreign exchange transaction, cap transaction, floor transaction (including any option with respect to any of these transactions and any combination of any of the foregoing) entered into by Company or any Subsidiary from time to time; provided that such transaction is entered into for risk management purposes and not for speculative purposes. "Indebtedness" shall mean all loans, advances, indebtedness, obligations and liabilities of Company and its Subsidiaries to Bank under this Agreement or any of the other Loan Documents or under any hedging agreements with the Bank, together with all other indebtedness, obligations and liabilities whatsoever of Company and its Subsidiaries to Bank arising under or in connection with this Agreement, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising. "Interest Period" shall mean a period of one (1), two (2) or three (3) months as selected by Company pursuant to the provisions of this Agreement commencing on the day a Eurodollar-based Advance is made, or on the effective date of an election of the Eurodollar-based Rate made under Section 3.1. "Inventory" shall have the meaning assigned to it in the Michigan Uniform Commercial Code on the date of this Agreement. 5 "Loan Documents" shall mean collectively, this Agreement, the Note, the Guaranty and any other instruments or agreements executed at any time pursuant to or in connection with any such documents, and any and all amendments, renewals, replacements, substitutions, extensions or other modifications of any of the foregoing. "Loan Parties" shall mean collectively Company and any or all of the Guarantors, and "Loan Party" shall mean any one of them, as the context indicates or otherwise requires. "Material Adverse Effect" shall mean a material adverse effect on (a) the business or financial condition of Company and its Subsidiaries taken as a whole, (b) the ability of Company and the Guarantors to perform their respective obligations under this Agreement, the Note (if issued) or any other Loan Document to which any of them is a party, or (c) the validity or enforceability of this Agreement, the Note (if issued) or any of the other Loan Documents or the rights or remedies of the Bank hereunder or thereunder. "Material Wholly-Owned Domestic Subsidiary" shall mean each Wholly-Owned Domestic Subsidiary of Company which, together with its Subsidiaries, account for at least ten percent (10%) of the consolidated assets of the Company and its Subsidiaries at the most recently ended fiscal quarter of Company. "Maturity Date" shall mean July 26, 2007. "Note" shall mean the note described in Section 2.1 hereof made by Company to Bank in the form annexed to this Agreement as Exhibit "A" as such note may be amended or supplemented from time to time, or any other note issued in substitution, replacement or renewal thereof from time to time. "PBGC" is defined in Section 6.6. "Pension Plan" is defined in Section 6.5. "Permitted Liens" shall mean with respect to any Person: (a) liens for taxes not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued, provided that provision for the payment of all such taxes has been made on the books of such Person as may be required by GAAP; (b) mechanics', materialmen's, banker's, carriers', warehousemen's and similar liens and encumbrances arising in the ordinary course of business and securing obligations of such Person that are not overdue for a period of more than 60 days or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any proceedings commenced for the enforcement of such liens and encumbrances shall have been duly suspended; and (ii) such provision for the payment of such liens and encumbrances has been made on the books of such Person as may be required by GAAP; 6 (c) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits and similar statutory obligations which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any proceedings commenced for the enforcement of such liens shall have been duly suspended; and (ii) such provision for the payment of such liens has been made on the books of such Person as may be required by GAAP; (d)(i) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States government or any agency thereof entered into in the ordinary course of business and (ii) liens incurred or deposits made in the ordinary course of business to secure the performance of statutory obligations, bids, leases, fee and expense arrangements with trustees and fiscal agents and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money, any lease-purchase arrangements or the payment of the deferred purchase price of property), provided that full provision for the payment of all such obligations set forth in clauses (i) and (ii) has been made on the books of such Person as may be required by GAAP, consistently applied; and (e) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which do not materially interfere with the business of such Person. "Person" or "person" shall mean any individual, corporation, partnership, joint venture, limited liability company, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency, or other entity. "Prime Rate" shall mean the per annum interest rate established by Bank as its prime rate for its borrowers as such rate may vary from time to time, which rate is not necessarily the lowest rate on loans made by Bank at any such time. "Prime-based Advance" shall mean an Advance which bears interest at the Prime-based Rate. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Pension Plan other than those events as to which the thirty-day notice period is waived under subsection 22, 23, 25, 27, 28 or 29 of PBGC Regulation Section 4043. "Request for Advance" shall mean a Request for Advance issued by Company under this Agreement in the form annexed to this Agreement as Exhibit "C." "Restatement Date" shall mean the date on which all the conditions precedent set forth in Sections 5.1 through 5.7 have been satisfied. "SEC" is defined in Section 7.1(a). 7 "Securities Act" shall mean the Securities Act of 1933, as amended and the rules promulgated under it. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated under it. "Subsidiary(ies)" shall mean any other corporation, association, joint stock company, business trust, limited liability company or any other business entity of which more than fifty percent (50%) of the outstanding voting stock, share capital, membership or other interests, as the case may be, is owned either directly or indirectly by any Person or one or more of its Subsidiaries, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by any Person and/or its Subsidiaries. Unless otherwise specified to the contrary herein or the context otherwise requires, Subsidiary(ies) shall refer to the Subsidiary(ies) of the Company. "Wholly-Owned Domestic Subsidiary" shall mean each Domestic Subsidiary of the Company that is also a Wholly-Owned Subsidiary of the Company. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person (other than director's qualifying shares) and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. 2. THE INDEBTEDNESS: Revolving Credit 2.1 Subject to the terms and conditions of this Agreement (including without limitation Section 2.3 hereof), Bank agrees to make Advances to Company at any time and from time to time from the Restatement Date until the Maturity Date, in an aggregate principal amount not to exceed at any one time outstanding the Commitment. All of the Advances under this Section 2 shall be evidenced by the Note under which Advances, repayments and readvances may be made, subject to the terms and conditions of this Agreement. 2.2 The Note shall mature on the Maturity Date and each Advance from time to time outstanding thereunder shall bear interest at its Applicable Interest Rate. The amount and date of each Advance, its Applicable Interest Rate, its Interest Period, if applicable, and the amount and date of any repayment shall be noted on Bank's records, which records will be conclusive evidence thereof absent manifest error. 2.3 Company may request an Advance under this Section 2 upon the delivery to Bank of a Request for Advance executed by an authorized officer of Company, subject to the following: (a) each such Request for Advance shall set forth the information required on the Request for Advance form annexed hereto as Exhibit "C"; (b) each such Request for Advance shall be delivered to Bank by 3:00 p.m. (Detroit time) on the proposed date of Advance with respect to Prime-based Advances, 8 and by 12:00 p.m. (Detroit time) three (3) Business Day prior to the proposed date of Advance with respect to Eurodollar-based Advances; (c) the principal amount of such Advance, plus the amount of any outstanding indebtedness to be then combined therewith having the same Applicable Interest Rate and Interest Period, if any, shall be, in the case of Prime-based Advances at least $100,000 and, in the case of a Eurodollar-based Advance, at least $1,000,000 or any larger amount in $100,000 increments; (d) on the proposed date of such Advance, after giving effect to all Advances requested on that day, the principal amount of such Advance, plus the sum of the amount of all other outstanding Advances under this Section 2, shall not exceed the Commitment; (e) a Request for Advance, once delivered to Bank, shall not be revocable by Company. (f) each Request for Advance shall constitute a certification by Company, as of the date hereof: (i) both before and after such Advance, the obligations of the Loan Parties set forth in this Agreement and the other Loan Documents to which such Persons are parties are valid, binding and enforceable obligations of such Persons; (ii) all conditions to Advances have been satisfied and shall remain satisfied to the date of such Advance (both before and after giving effect to such Advance); (iii) there is no Default or Event of Default in existence, and none will exist upon the making of such Advance (both before and after giving effect to such Advance); (iv) the representations and warranties contained in this Agreement and the other Loan Documents are true and correct in all material respects and shall be true and correct in all material respects as of the making of such Advance (both before and after giving effect to such Advance), other than any representation or warranty that expressly speaks only as of a different date; and (v) the execution of such Request for Advance will not violate the material terms and conditions of any material contract, agreement or other borrowing of Company. 2.4 Bank may also, at its option, lend under this Section 2 upon the telephone request of an authorized officer of Company and, in the event Bank makes any such advance upon a telephone request, the requesting officer shall fax to Bank, on the same day as such telephone request, a Request for Advance in the form attached as Exhibit "C." Company hereby authorizes 9 Bank to disburse Advances under this Section 2 pursuant to the telephone instructions of any person purporting to be an authorized officer of Company and, notwithstanding any provision of this Agreement to the contrary, Company shall bear all risk of loss resulting from disbursements made upon any telephone request. Each telephone request for an Advance shall constitute a certification of the matters set forth in clause (f) of Section 2.3. Company certifies that Schedule 2.4 lists all Company officers authorized to request Advances by telephone. Only those officers specified on Schedule 2.4 (as amended or supplemented in a writing or writings executed by Company and delivered by Company to Bank in accordance with this Agreement), and no others, are authorized to make such telephone requests. Any Advance made pursuant to such telephone request shall only be deposited by Bank into Company's corporate bank account, Comerica Bank Account Number 1840278004. 2.5 Company may prepay all or part of the outstanding balance of the Prime-based Advance(s) under the Note at any time. Upon three (3) Business Days' prior notice to Bank, Company may prepay all or part of any Eurodollar-based Advance, provided that the amount of any such partial prepayment shall be at least $100,000 and the unpaid portion of such Advance which is refunded or converted under Section 3.3 shall be subject to the limitations of Section 2.3(c) hereof. Any prepayment of a Prime-based Advance or a Eurodollar-based Advance made in accordance with this Section shall be without premium, penalty or prejudice to Company's right to reborrow under the terms of this Agreement subject, in the case of Eurodollar-based Advances, to the provisions of Section 4.1 hereof. 2.6 Proceeds of Advances under the Note shall be used for general corporate purposes, including working capital. 2.7 (a) Provided that no Default or Event of Default has occurred and is continuing, Company may, upon at least three (3) Business Days' prior written notice to Bank, permanently reduce the Commitment in whole at any time, or in part from time to time, without premium or penalty, provided that each partial reduction of the Commitment shall be in an aggregate amount equal to at least Ten Million Dollars ($10,000,000) or the aggregate remaining principal amount of the Commitment, whichever is less. (b) If the Commitment is reduced under Sections 2.7(a) above, Company must prepay in accordance with the terms hereof the amount, if any, by which the aggregate unpaid principal amount of Advances exceeds the amount of the Commitment, taking into account the aforesaid reductions thereof, together with accrued but unpaid interest on the principal amount of such prepaid Advances to the date of prepayment. If the termination or reduction of the Commitment requires the prepayment of a Eurodollar-based Advance on a day other than the last day of the then current Interest Period applicable to such Advance, so long as no Default or Event of Default has occurred and is continuing, Company, rather than immediately prepaying the Advance, may deposit with the Bank cash collateral acceptable to the Bank in an amount equal to the prepayment and required interest payments (to the end of the then current Interest Payment) to be applied to the Advance at the end of that Interest Period. Reductions of the Commitment will not be available for reinstatement by or readvance to the Company and shall be permanent and irrevocable. If the Company permanently reduces the 10 Commitment to zero and has satisfied all of its obligations under this Agreement, this Agreement shall terminate (except for any provisions which, by their terms, explicitly survive the termination of this Agreement and the payment of obligations hereunder). 3. INTEREST, INTEREST PERIODS, CONVERSIONS, PREPAYMENTS. 3.1 Interest. The Note and the Advances thereunder shall bear interest from the date thereof on the unpaid principal balance thereof from time to time outstanding, at a rate per annum equal to the Prime-based Rate or the Eurodollar-based Rate, as the Company may elect subject to the provisions of this Agreement. With respect to each Prime-based Advance, interest shall be payable quarterly in arrears on the first Business Day of each March, June, September and December, commencing on the first such Business Day following the month during which such Advance is made, and at maturity (whether by acceleration or otherwise). With respect to each Eurodollar-based Advance, interest shall be payable on the last day of each Interest Period applicable thereto. Notwithstanding the foregoing, from and after the occurrence of any Event of Default and during the continuation thereof, the interest shall be payable on demand, at a rate per annum equal to: (i) in the case of Prime-based Advances, two percent (2%) above the Prime-based Rate; and (ii) in the case of a Eurodollar-based Advance, two percent (2%) above the rate which would otherwise be applicable under this Section 3.1 until the end of the then current Interest Period, at which time such Advance shall bear interest at the rate provided for in clause (i) of this Section 3.1. Interest on all Eurodollar-based Advances shall be calculated on the basis of a 360-day year for the actual number of days elapsed. Interest on all Prime-based Advances shall be calculated on the basis of a 365 or 366 day year, as the case may be, for the actual number of days elapsed. The interest rate with respect to any Prime-based Advance shall change on the effective date of any change in the Prime-based Rate. 3.2 Interest Periods. Each Interest Period for a Eurodollar-based Advance shall commence on the date such Eurodollar-based Advance is made or is converted from an Advance of another type pursuant to Section 3.3 hereof or on the last day of the immediately preceding Interest Period for such Eurodollar-based Advance, and shall end on the date one, two or three months thereafter, as the Company may elect as set forth below, subject to the following: (i) no Interest Period shall extend beyond the Maturity Date; and (ii) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless the next succeeding Business Day falls in another calendar month, in which case, such Interest Period shall end on the immediately preceding Business Day and when an Interest Period begins on a day which has no numerically corresponding day in the calendar month during which such Interest Period is to end, it shall end on the last Business Day of such calendar month. The Company shall elect the initial Interest Period applicable to a Eurodollar-based Advance by its Request for Advance given to the Bank pursuant to Section 2.3 or by its notice of conversion given to the Bank pursuant to Section 3.3, as the case may be. Provided that no Default or Event 11 of Default shall have occurred and be continuing, the Company may elect to continue an Advance as a Eurodollar-based Advance by giving irrevocable written, telephonic or telegraphic notice thereof to the Bank, before 12:00 noon on the third Business Day before the last day of the then current Interest Period applicable to such Eurodollar-based Advance, specifying the duration of the succeeding Interest Period therefor. If the Bank does not receive timely notice of the election and the Interest Period elected by the Company, the Company shall be deemed to have elected to convert such Eurodollar-based Advance to a Prime-based Advance at the end of the then current Interest Period. 3.3 Conversion of Advances. Provided that no Default or Event of Default shall have occurred and be continuing, the Company may, on any Business Day, convert any outstanding Advance into an Advance of another type in the same aggregate principal amount, provided that any conversion of a Eurodollar-based Advance shall be made only on the last Business Day of the then current Interest Period applicable to such Advance. If the Company desires to convert an Advance, it shall give the Bank written, telephonic or telegraphic notice, specifying the date of such conversion, the Advances to be converted, the type of Advance elected and, if the conversion is into a Eurodollar-based Advance, the duration of the first Interest Period therefor, which notice shall be given not later than 12:00 noon on the third Business Day before the applicable date of conversion. Each notice of conversion described in this Section 3.3 shall constitute and include a certification by the Company as of the date hereof as to the matters set forth in clause (f) of Section 2.3. 3.4 Prime-based Advance in Absence of Election or Upon Default. If, (a) as to any outstanding Eurodollar-based Advance, Bank has not received payment of all outstanding principal and accrued interest on the last day of the Interest Period applicable thereto, or does not receive a timely Request for Advance meeting the requirements of Section 2 hereof with respect to the refunding or conversion of such Advance, or (b) subject to Section 3.1 hereof, if on such day a Default or an Event of Default shall have occurred and be continuing, then the principal amount thereof which is not then prepaid in the case of a Eurodollar-based Advance shall be converted automatically to a Prime-based Advance and the Bank shall thereafter promptly notify the Company of said action. 4. SPECIAL PROVISIONS, CHANGES IN CIRCUMSTANCES AND YIELD PROTECTION. 4.1 If Company makes any payment of principal with respect to any Eurodollar-based Advance on any day other than the last day of the Interest Period applicable thereto (whether voluntarily, by acceleration, or otherwise), or if Company fails to borrow any Eurodollar-based Advance after notice has been given by Company to Bank in accordance with the terms hereof requesting such Advance, or if Company fails to make any payment of principal or interest when due in respect of a Eurodollar-based Advance, Company shall reimburse Bank on demand for any resulting loss, cost or expense incurred by Bank as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties, whether or not Bank shall have funded or committed to fund such Advance. Such amount payable by Company to Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of 12 such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant Interest Period, at the applicable rate of interest for said Advance(s) over (b) the amount of interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. Calculation of any amounts payable to Bank under this paragraph shall be made as though Bank shall have actually funded or committed to fund the relevant Eurodollar-based Advance through the purchase of an underlying deposit in an amount equal to the amount of such Advance and having a maturity comparable to the relevant Interest Period; provided, however, that Bank may fund any Eurodollar-based Advance in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Upon the written request of Company, Bank shall deliver to Company a certificate setting forth the basis for determining such losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. 4.2 For any Interest Period for which the Applicable Interest Rate is the Eurodollar-based Rate, if Bank shall designate a Eurodollar Lending Office which maintains books separate from those of the rest of Bank, Bank shall have the option of maintaining and carrying the relevant Advance on the books of such Eurodollar Lending Office. 4.3 If with respect to any Interest Period Bank reasonably determines that, by reason of circumstances affecting the foreign exchange and interbank markets generally, deposits in Eurodollars in the applicable amounts are not being offered to the Bank for such Interest Period, then Bank shall forthwith give notice thereof to the Company. Thereafter, until Bank notifies Company that such circumstances no longer exist, the obligation of Bank to make Eurodollar-based Advances, and the right of Company to convert an Advance to or refund an Advance as a Eurodollar-based Advance shall be suspended. 4.4 If, after the date hereof, the introduction or implementation of, or any change in, any applicable law, rule or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by Bank (or its Eurodollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, shall make it unlawful or impossible for the Bank (or its Eurodollar Lending Office) to honor its obligations hereunder to make or maintain any Advance, Bank shall forthwith give notice thereof to Company. Thereafter (a) the obligations of Bank to make Eurodollar-based Advances and the right of Company to convert an Advance or refund an Advance as a Eurodollar-based Advance shall be suspended and thereafter Company may select only the Prime-based Rate as the Applicable Interest Rate, and (b) if Bank may not lawfully continue to maintain a Eurodollar-based Advance to the end of the then current Interest Period applicable thereto, the Prime-based Rate shall be the Applicable Interest Rate for the remainder of such Interest Period. 4.5 If the adoption or implementation after the date hereof, or any change after the date hereof in, any applicable law, rule or regulation of any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its Eurodollar Lending Office) with any request or directive (whether or not having the force of law) made by any such authority, central bank or comparable agency after the date hereof: 13 (a) shall subject Bank (or its Eurodollar Lending Office) to any tax, duty or other charge with respect to any Advance or the Note or shall change the basis of taxation of payments to Bank (or its Eurodollar Lending Office) of the principal of or interest on any Advance or the Note or any other amounts due under this Agreement in respect thereof (except for changes in the rate of tax on the overall net income of Bank or its Eurodollar Lending Office imposed by any jurisdiction in which Bank is organized or engaged in business); or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Bank (or its Eurodollar Lending Office) or shall impose on Bank (or its Eurodollar Lending Office) or the foreign exchange and interbank markets any other condition affecting any Advance or the Note; and the result of any of the foregoing is to increase the costs to Bank of maintaining any part of the indebtedness hereunder or to reduce the amount of any sum received or receivable by Bank under this Agreement or under the Note, by an amount deemed by the Bank to be material, then Bank shall promptly notify Company of such fact and demand compensation therefor and, within fifteen (15) days after demand by Bank, Company agrees to pay to Bank such additional amount or amounts as will compensate Bank for such increased cost or reduction. Bank will promptly notify Company of any event of which it has knowledge which will entitle Bank to compensation pursuant to this Section. Bank will deliver a certificate to Company setting forth the basis for determining such additional amount or amounts necessary to compensate Bank, which certificate shall be conclusively presumed to be correct save for manifest error. Bank agrees that, as promptly as practical after it becomes aware of the occurrence of any event or the existence of a condition that will cause Bank to be entitled to compensation under this Section, it will, to the extent not inconsistent with Bank's internal policies, use reasonable efforts to make, fund or maintain any affected Eurodollar-based Advance through another lending office of Bank if as a result thereof the additional monies which would otherwise be required to be paid in respect of such Eurodollar-based Advance would be materially reduced and if, as determined by Bank, in its reasonable discretion, the making, funding or maintaining of such Eurodollar-based Advance through such other lending office would not materially adversely affect such Advance or Bank. Company shall pay all reasonable expenses incurred by Bank in utilizing another lending office pursuant to this Section. 4.6 In the event that at any time after the date of this Agreement any change in law such as described in Section 4.5 hereof, shall, in the reasonable opinion of Bank require that the credit provided under Section 2 of this Agreement be treated as an asset or otherwise be included for purposes of calculating the appropriate amount of capital to be maintained by Bank or any corporation controlling Bank and such change has or would have the effect of reducing the rate of return on Bank's or Bank's parent's capital or assets as a consequence of Bank's obligations hereunder to a level below that which Bank or Bank's parent would have achieved but for such change, then Bank shall notify Company and demand compensation therefor and, within five (5) days after demand by Bank, Company agrees to pay to Bank such additional amount or amounts as will compensate Bank for such reduction. Bank will promptly notify Company of any event of 14 which it has knowledge which will entitle Bank to compensation pursuant to this Section. A certificate of Bank setting forth the basis for determining such additional amount or amounts necessary to compensate Bank shall be conclusively presumed to be correct save for manifest error. 5. CONDITIONS 5.1 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on Company's furnishing to Bank, in form and substance to be reasonably satisfactory to Bank, (i) certified copies of resolutions of the boards of directors or partners, as applicable, of each Loan Party evidencing approval of the transactions contemplated hereunder and authorizing the execution and delivery of the Loan Documents, and in the case of the Company, the requests of Advances hereunder, including incumbency and signatures of authorized officers of the applicable Loan Party; (ii) a certificate of good standing from the state of each Loan Party's organization and from the state(s) in which any of them are required to be qualified to do business; (iii) copies of each Loan Party's articles of incorporation and bylaws or other constitutional documents, as in effect on the Restatement Date (or, to the extent applicable, the certificate of an officer of the applicable Loan Party that the applicable constitutional documents have not been amended or otherwise modified since the Effective Date and continue in full force and effect). and (iv) such other documents and instruments as Bank may reasonably require. 5.2 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on Company's furnishing, executing and delivering to Bank, or causing to be furnished, executed and delivered to Bank, the Guaranty, in form to be satisfactory to Bank and supported by appropriate resolution in certified form authorizing same. 5.3 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on Company's payment to Bank of a $150,000 facility fee. 5.4 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on the Bank's receiving evidence satisfactory to it that the Company and the Subsidiaries have obtained the insurance policies required by Section 7.3 hereof and that such insurance policies are in full force and effect. 5.5 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on the Loan Parties (and any of their respective Subsidiaries or Affiliates) having each performed and complied in all material respects with all agreements and conditions contained in this Agreement, other Loan Documents, or any agreement or other document executed thereunder and required to be performed or complied with by each of them (as of the applicable date) and none of such parties shall be in material default in the performance or compliance with any of the terms or provisions hereof or thereof. 5.6 The effectiveness of this Agreement and the Bank's obligation to make any Advances under it are conditioned on the Loan Parties' furnishing to Bank opinions of counsel to the Loan Parties, dated the Restatement Date and covering such matters as reasonably required by and otherwise reasonably satisfactory in form and substance to the Bank. 15 5.7 The effectiveness of this Agreement and the Bank's obligation to make the initial Advance under it are conditioned on the Bank's having received, a certificate of an authorized officer of the Company dated the date of the making such Advance hereunder, stating that to the best of his or her knowledge after due inquiry, (a) the conditions set forth in this Section 5 have been satisfied; (b) the representations and warranties made by Loan Parties in this Agreement or any of the other Loan Documents, shall have been true and correct in all material respects when made and shall be true and correct in all material respects on and as of the Restatement Date; (c) no Default or Event of Default shall have occurred and be continuing; and (d) since March 31, 2006 or the date of the most recent fiscal year end for which Bank has received the financial statements required to be delivered under Section 7.1(a), whichever is later, nothing shall have occurred which the Bank shall reasonably determine has had, or could reasonably be expected to have, a Material Adverse Effect. 5.8 Reserved. 5.9 The obligations of the Bank to make Advances (including the initial Advance) under this Agreement shall be subject to the occurrence of the Effective Date and to the continuing conditions that: (a) No Default or Event of Default shall exist as of the date of the Advance; (b) Company and its Subsidiaries shall be in compliance with the Negative Covenants set forth in Section 8 at the time of and after giving effect to the Advance, it being understood that failure to so comply is not a Default or an Event of Default so long as no Indebtedness is outstanding under this Agreement; and (c) Each of the representations and warranties contained in this Agreement and in each of the other Loan Documents shall be true and correct in all material respects as of the date of the Advance as if made on and as of such date (other than any representation or warranty that expressly speaks only as of a different date). 6. REPRESENTATIONS AND WARRANTIES Company represents and warrants and such representations and warranties shall be deemed to be made on the date of this Agreement, the date of each Request for Advance and the date of each Advance. 6.1 Each Loan Party is a corporation (or other business entity) duly organized and existing in good standing under the laws of the state of its organization; each Loan Party is in good standing in each jurisdiction in which it is required to be qualified to do business, except where the failure to be so qualified would not have a Material Adverse Effect. 6.2 Execution, delivery and performance of the applicable Loan Documents to which any such Loan Party is a party, are within its powers, having been duly authorized, are not in contravention of law or such Loan Party's organizational documents or of the unwaived terms of any indenture, agreement or undertaking to which such Loan Party is a party or by which it is bound, and do not require the consent or approval of any governmental body, agency or authority; and the Loan Documents and other documents and instruments required under 16 thereunder, when issued and delivered, will be valid and binding on such Loan Party in accordance with their terms. 6.3 No litigation or other proceeding before any court or administrative agency is pending, or to the knowledge of the officers of Company, is threatened against any Loan Party, the outcome of which would reasonably be expected to have a Material Adverse Effect. 6.4 There are no security interests in, liens, mortgages, or other encumbrances on any of Company's or any Subsidiary's assets, except to Bank or as otherwise permitted by this Agreement. 6.5 Neither Company nor any Subsidiary maintains or contributes to any employee pension benefit plan subject to Title IV of ERISA, except those set forth in attached Schedule 6.5 (each, a "Pension Plan"). There was no material unfunded past service liability of any Pension Plan maintained by the Company as of March 31, 2006, and there is no "accumulated funding deficiency" within the meaning of Section 302 of ERISA, or any existing material liability with respect to any Pension Plan owed to the Pension Benefit Guaranty Corporation ("PBGC") or any successor thereto, except any funding deficiency for which an application to the PBGC for waiver is pending or for which a waiver has been granted by the PBGC. 6.6 The financial statements of Company for the fiscal year ended March 31, 2006 as filed with the SEC and previously furnished by Company to Bank, fairly present in all material respects the financial condition of Company and its consolidated Subsidiaries as of such date; since said date there has been no material adverse change in the financial condition of Company and its consolidated Subsidiaries taken as a whole; to the best of the knowledge of Company's officers, Company does not have any material contingent obligations (including any liability for taxes) not disclosed by or reserved against those financial statements, and at the present time there are no material unrealized or anticipated losses from any present commitment of Company or any of its Subsidiaries. 6.7 All tax returns and tax reports of Company and its Consolidated Subsidiaries required by law to have been filed have been duly filed or extensions obtained, or requested within permitted deadlines and all taxes, assessments and other governmental charges or levies (other than those presently payable without penalty and those currently being contested in good faith for which adequate reserves have been established) upon Company and its consolidated Subsidiaries (or any of its or their properties) which are due and payable and for which the failure to pay would materially adversely affect its business or the value of its property or assets have been paid. The charges, accruals and reserves on the books of Company in respect of the Federal income tax for all periods are adequate in the opinion of Company. 6.8 As of the date of this Agreement the Company has no Subsidiaries other than those listed in Schedule 6.8. 6.9 Except as set forth in Schedule 6.9 and except for such matters as are not likely to have a Material Adverse Effect: (a) all facilities and property owned or leased by the Loan Parties or any of their respective Subsidiaries, are in material compliance with all Environmental Laws; 17 (b) to the best knowledge of the Company, there have been no unresolved and outstanding past, and there are no pending or threatened (i) claims, complaints, notices or requests for information received by any Loan Party or any of their respective Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii) written complaints, notices or inquiries to any Loan Party or any of their respective Subsidiaries regarding potential liability of the Loan Parties or any of their respective Subsidiaries under any Environmental Law; and (c) to the knowledge of the Company, no conditions exist at, on or under any property now or previously owned or leased by the Loan Parties or any of their respective Subsidiaries which, with the passage of time, or the giving of notice or both, would give rise to liability of the Loan Parties or any of their respective Subsidiaries under any Environmental Law. 6.10 Neither the Company nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Company is not engaged principally, or as one of its important activities, directly or indirectly, in the business of extending credit for the purpose of purchasing or carrying margin stock, and none of the proceeds of any of the loans hereunder will be used, directly or indirectly, for any purpose which would violate the provisions of Regulation U or X of the Board of Governors of the Federal Reserve System. Terms for which meanings are provided in Regulation U of the Board of Governors of the Federal Reserve System or any regulations substituted therefor, as from time to time in effect, are used in this paragraph with such meanings. 7. AFFIRMATIVE COVENANTS Company covenants and agrees that it will and, as applicable, it will cause its Subsidiaries to, so long as Bank may make any Advance under this Agreement (regardless of whether any Indebtedness is outstanding under this Agreement) and thereafter until the irrevocable final payment in full of the Indebtedness and the performance by the Loan Parties of all other obligations under this Agreement and the other Loan Documents: 7.1 Furnish Bank: (a) as soon as available, but in any event within ninety-five (95) days after the end of each fiscal year of the Company) a copy of the audited Consolidated financial statements of Company and its Subsidiaries as at the end of such year and the related audited statements of income, accumulated earnings, and cash flows for such year and underlying assumptions, setting forth in each case in comparative form the figures for the previous year, with an opinion satisfactory to the Bank and certified as being fairly stated in all material respects by a nationally recognized certified public accounting firm reasonably satisfactory to the Bank (including Company's current auditors, Deloitte & Touche, LLP), it being understood and agreed that the delivery by Company of the Company's form 10-K as filed with the Securities and Exchange Commission ("SEC") for the 18 respective fiscal year and within ninety (90) days after the close thereof shall satisfy the provisions of this clause (a) to the extent that such form 10-K contains the information and/or certification required to be delivered pursuant to this clause (a) and, to the extent that any such information and/or certification is not otherwise contained in such form 10-K, such information and/or certification shall be delivered together with the respective form 10-K; (b) as soon as available, but in any event not later than fifty (50) days after the end of each fiscal quarter of Company, Company prepared unaudited Consolidated financial statements of Company and its Subsidiaries as at the end of such fiscal quarter and the related unaudited statements of income, accumulated earnings and cash flows of Company and its Subsidiaries for the portion of the fiscal year through the end of such fiscal quarter, setting forth in each case in comparative form the figures for the previous year, and certified by Company; it being understood and agreed that the delivery by Company of the Company's form 10-Q as filed with the SEC for the respective fiscal quarter and within forty five (45) days after the close thereof shall satisfy the provisions of this clause (b) to the extent that such form 10-Q contains the information and/or certification required to be delivered pursuant to this clause (b) and, to the extent that any such information and/or certification is not otherwise contained in such form 10-Q, such information and/or certification shall be delivered together with the respective form 10-Q; (c) concurrently with the delivery of each of the financial statements required by Section 7.1(a) and (b) hereof, a statement prepared and certified by the chief financial officer of Company (or in such officer's absence, a responsible senior officer of Company) (i) stating that as of the date thereof, no condition or event which constitutes a Default hereunder or which with the running of time and/or the giving of notice would constitute an Event of Default hereunder has occurred and is continuing, or if any such event or condition has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by Company and (ii) stating that the signer has personally reviewed this Agreement and that such certificate is based on an examination sufficient to assure that such certificate is accurate; and (d) promptly, and in form to be reasonably satisfactory to Bank, such other information as Bank may reasonably request from time to time; all such financial statements required to be delivered under this Section 7.1 to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP throughout the periods reflected therein and consistent with prior periods (except as approved by such officer and disclosed therein). 7.2 Pay and discharge, and cause its Subsidiaries to pay and discharge, all taxes and other governmental charges, and all contractual obligations calling for the payment of money, 19 before the same shall become overdue except (i) where the failure to do so would not reasonably be expected to have a Material Adverse Effect or (ii) to the extent only that such payment is being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided upon the books of the Company, provided that, in any event, the Company will, and will cause its Subsidiaries to pay any such tax, charge or other obligation prior to the commencement of any proceeding to foreclose any lien securing the same. 7.3 (a) Keep all property material to its business in working order and (b) maintain, and cause its Subsidiaries to maintain, insurance coverage on their physical assets and against other business risks in such amounts and of such types as are consistent with past practice of Company and in the event of acquisition of additional property, real or personal, or of incurrence of additional risks of any nature, increase such insurance coverage in such manner and to such extent as prudent business judgment and present practice would dictate. 7.4 Upon reasonable advance notice (unless a Default or Event of Default has occurred and is continuing in which event such notice shall not be required) and during normal business hours, permit Bank, through its authorized attorneys, accountants and representatives, to examine Company's and each Subsidiary's books, accounts, records, ledgers and assets of every kind and description at all reasonable times upon oral or written request of Bank, and to visit all of their respective offices and discuss financial matters with their respective officers and independent certified public accountants. Company hereby authorizes such accountants to discuss the finances and affairs of the Loan Parties and to examine any of its or their books and other corporate records. 7.5 Promptly notify Bank of any condition or event which constitutes a Default or with the running of time and/or the giving of notice would constitute an Event of Default under this Agreement, and promptly inform Bank of the existence or occurrence of any condition or event (other than conditions having an effect on the economy in general) which could reasonably be expected to have a Material Adverse Effect. 7.6 Promptly notify Bank of any litigation or other proceeding before any court or administrative agency that arises, or to the knowledge of the officers of Company is threatened against any Loan Party after the Restatement Date, the outcome of which would reasonably be expected to have a Material Adverse Effect. 7.7 Maintain, and cause its Subsidiaries to maintain, in good standing all licenses required by their respective states of organization or any agency thereof, or other governmental authority that may be necessary or required for Company and its Subsidiaries to carry on its general business objects and purposes, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. 7.8 Continue to engage in the business as substantially now conducted by the Company and its Subsidiaries and businesses related thereto and preserve, renew and keep in full force and effect its existence and comply with all contractual obligations, except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 20 7.9 Comply, and cause its Subsidiaries to comply, in all material respects, with all material requirements imposed by ERISA as presently in effect or hereafter promulgated, including but not limited to, the minimum funding standards under Section 302 of ERISA with respect to any Pension Plan and promptly notify Bank after the occurrence thereof in writing of any of the following events: (a) the termination of a Pension Plan pursuant to Subtitle C of Title IV of ERISA or otherwise (other than any defined contribution plan not subject to Section 412 of the Internal Revenue Code of 1986, as amended and any multi-employer plan); (b) the appointment of a trustee by a United States District Court to administer a Pension Plan; (c) the commencement by the PBGC, or any successor thereto, of any proceeding to terminate a Pension Plan; (d) the failure of a Pension Plan to satisfy the minimum funding requirements for any plan year as established in Section 412 of the Internal Revenue Code of 1986, as amended; (e) the withdrawal of Company or any Subsidiary from a "multi-employer" plan, as so defined in Section 4001(a)(3) of ERISA; or (f) a reportable event, within the meaning of Title IV of ERISA. 7.10 Reserved. 7.11 (a) Use and operate all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations under Environmental Laws in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws except where the failure to do so would not reasonably be expected to have a Material Adverse Effect; (b) Promptly notify Bank and provide copies upon receipt of all written claims, complaints, notices or inquiries received by the Company or any of its Subsidiaries of a material nature relating to its facilities and properties or compliance with Environmental Laws, and shall promptly cure all violations of or noncompliance with all Environmental Laws to the extent that such violations could reasonably be likely to have a Material Adverse Effect and shall have dismissed with prejudice to the satisfaction of the Bank any actions and proceedings relating to compliance with Environmental Laws to which Company or any of its Subsidiaries is named a party, other than such actions or proceedings being contested in good faith and with the establishment of a reasonable reserve; (c) To the extent necessary to materially comply with Environmental Laws, remediate or monitor contamination arising from a release or disposal of Hazardous Material; and 21 (d) Provide such information and certifications which Bank may reasonably request from time to time to evidence compliance with this Section 7.11. 7.12 Use all Advances as set forth in Section 2.6. 7.13 Promptly after any Subsidiary (including any Subsidiary formed or acquired after the date of execution and delivery of this Agreement) that is not a Guarantor becomes a Material Wholly Owned Domestic Subsidiary of the Company, the Company must cause each such Subsidiary to execute and deliver to Bank a joinder to the Guaranty under which such Subsidiary becomes a Guarantor under the Guaranty, together with such other documentation as Bank may reasonably require, not later than the date upon which such transaction is consummated. 8. NEGATIVE COVENANTS Company covenants and agrees that, so long as any Indebtedness remains outstanding under this Agreement, it will not, and will cause its Subsidiaries not to, without the prior written consent of Bank (it being understood that the Company shall not be obligated under this Section 8 at any time no Indebtedness is outstanding under this Agreement): 8.1 Create, incur, assume, suffer or permit to exist any Debt, except: (a) Indebtedness to Bank; (b) unsecured trade payables and accrued liabilities arising in the ordinary course of Company's business (including, without limitation, obligations under operating leases); (c) Debt described in the attached Schedule 8.1; (d) Debt under Hedging Transactions entered into with respect to Debt permitted under this Section 8.1; (e) Intercompany loans between the Company and the Guarantors or among any Guarantors to the extent permitted by Section 8.8(d); (f) Intercompany loans from Company or any Guarantor to any Foreign Subsidiary to the extent permitted by Section 8.8(e); (g) purchase money Debt incurred in connection with the acquisition of fixed assets in an aggregate amount not exceeding $25,000,000 at any time outstanding, and any renewals or refinancing of such Debt in amounts not exceeding the scheduled amounts (less any required amortization according to the terms thereof), on substantially the same terms as in effect on the Restatement Date and otherwise in compliance with this Agreement, provided that no Default or Event of Default has occurred and is continuing, both before and after giving effect to the incurrence thereof; 22 (h) Debt consisting of Guarantee Obligations of Company and its Subsidiaries of other Debt of the Company and its Subsidiaries otherwise permitted to be incurred under this Section 8.1; (i) Debt under Hedging Transactions (other than those permitted under clause (d) above) providing protection against fluctuations in currency values in connection with the Company's or any of its Subsidiaries' operations so long as management of the Company or such Subsidiary, as the case may be, has determined in good faith that the entering into of such Hedging Transactions are bona fide hedging activities and are not for speculative purposes; (j) Debt of a Subsidiary existing at the time of an acquisition thereof by the Company or a Subsidiary thereof (or Debt assumed at the time of such an acquisition of an asset securing such Debt), provided that such Debt was not incurred in connection with, or in contemplation of, such acquisition; (k) Debt arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business, so long as such Debt not otherwise constituting Debt permitted under this Section 8.1 is extinguished within five Business Days of the incurrence thereof; (l) Debt in respect of bid, performance, advance payment or surety bonds entered into in the ordinary course of business and consistent with past practices; (m) Debt resulting from mechanics', materialmen's and other similar liens that arise by operation of law in connection with goods and services delivered as part of the construction and furnishing of Company's new headquarters building, in Detroit, Michigan, provided, however, that the aggregate amount of such Debt with respect to any such goods and services does not exceed One Hundred Million Dollars ($100,000,000); and provided further that no more than Ten Million ($10,000,000) of such Debt is past due at any time, and that any such past due Debt is being contested in good faith with provision for adequate reserves; (n) Guarantee Obligations of Company or any Subsidiary in the ordinary course of business of the performance of third parties acting as subcontractors to Company or any Subsidiary under contracts between Company and its customers and/or contracts between any Subsidiary and its customers; 8.2 Enter into any merger or consolidation or sell, lease, assign, transfer, or dispose of all or substantially all, of its assets, except: (a) sales of inventory in the ordinary course of its business; (b) sale or other disposition of obsolete or worn out property, property no longer useful in the conduct of Company's or a Subsidiary's business or property from closed offices; and 23 (c) mergers or consolidations of any Subsidiary with or into Company (so long as Company shall be the continuing or surviving entity) or with or into any other Subsidiary, provided that such Subsidiary is a Wholly-owned Subsidiary and shall be the continuing or surviving entity. 8.3 Reserved. 8.4 Affirmatively pledge or mortgage any of its assets, whether now owned or hereafter acquired, or create, suffer or permit to exist any lien, security interest in, or encumbrance thereon, except: (a) to Bank; (b) Permitted Liens; (c) liens described in attached Schedule 8.4; (d) liens and security interests securing Debt permitted by Section 8.1(g) provided that (i) such liens are created upon fixed assets acquired by Company after the date of this Agreement (including by virtue of a Capitalized Lease); (ii) any such lien or security interest is created solely for the purpose of securing indebtedness representing, or incurred to finance, the cost of the item of property subject thereto; (iii) the principal amount of the indebtedness secured by such lien does not exceed 100% of the fair value of the property at the time it was acquired; (iv) the lien or security interest does not cover any property other than such item of property and (v) the aggregate amount of such liens and security interests does not at any time exceed $25,000,000; (e) leases or subleases granted to other Persons not materially interfering with the conduct of the business of the Company or any of its Subsidiaries; (f) Liens arising from precautionary UCC financing statement filings regarding operating leases; (g) Liens arising out of the existence of judgments or awards not constituting an Event of Default under Section 9.1(g), provided that the aggregate amount of all cash and the fair market value of all other property pledged or deposited to secure all such judgments or awards shall not exceed $25,000,000 at any time outstanding; (h) any lien existing on any property or asset prior to the acquisition thereof by the Company or any Subsidiary of the Company or existing on any property or asset of any Person that becomes a Subsidiary of the Company after the Restatement Date prior to the time such Person becomes a Subsidiary of the Company, provided that (i) such lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary of the Company, as the case may be, (ii) such lien shall not apply to any other property or assets of the Company or any Subsidiary of the Company and (iii) such Lien shall secure only 24 those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary of the Company, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (i) other liens incidental to the conduct of the business or the ownership of the assets of the Company or any Subsidiary that either (i) (a) were not incurred in connection with borrowed money and (b) do not secure obligations in excess of $10,000,000 in the aggregate for all such liens or (ii) were created by operation of law in connection with goods and services delivered as part of the construction of Company's new headquarters building. 8.5 Sell, assign, transfer or confer a security interest in any account, contract, note, trade acceptance or other receivable, except to Bank and except for sales of such accounts, contracts, notes, trade acceptances or other receivables, the collectability of which Company has determined to be impaired, as part of Company's commercially reasonable procedures for managing its collections. 8.6 Materially alter the character of its business from that conducted as of the date of this Agreement. 8.7 Enter into or allow to continue to exist any transaction or series of transactions with any Affiliate other than on terms and conditions as favorable to Company as would be obtainable in a comparable arms-length transaction with a Person other than an Affiliate; provided, however, that transactions with Affiliates described in the attached Schedule 8.7, in place on the date of this Agreement may continue to exist and may be extended or renewed by Company (or a subsidiary, as appropriate) on terms substantially the same as those currently in effect, notwithstanding the terms of this Section 8.7. 8.8 Reserved. 8.9 Enter into or become or remain subject to any agreement, other than this Agreement and any other agreement with respect to Debt permitted under Section 8.1(g) (but only with respect to assets acquired with such Debt), (i) prohibiting the creation or assumption of any lien or encumbrance upon the properties or assets of Company or any Subsidiary or (ii) requiring an obligation to become secured (or further secured) if another obligation is secured or further secured. 8.10 Directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on (a) the ability of any Subsidiary of the Company to pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by the Company or any Subsidiary of the Company, or pay any Debt owed to the Company or any Subsidiary of the Company, (b) the ability of any Subsidiary of the Company to make loans or advances to the Company or any Subsidiary of the Company, (c) the ability of any Subsidiary of the Company to transfer any of its properties or assets to the Company or any Subsidiary of the Company. 25 8.11 Amend, modify or otherwise alter any of the material terms and conditions of those documents or instruments evidencing or otherwise related to any Debt set forth on Schedule 8.1, or waive (or permit to be waived) any provision thereof in any material respect or allow any such amendment, modification or alteration to remain in effect, in each case without the prior written approval of Bank. 8.12 Make, permit or consent to any amendment or other modification to the constitutional documents of any of the Loan Parties except to the extent that any such amendment (i) does not violate the terms and conditions of this Agreement or any of the other Loan Documents, and (ii) could not reasonably be expected to have a Material Adverse Effect. 8.13 Permit the fiscal year of the Company to end on a day other than March 31. 9. EVENTS OF DEFAULT 9.1 The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) non-payment when due of (i) the principal or interest on the Indebtedness under this Agreement, or (ii) any fees or other amounts payable by Company hereunder, and in the case of interest payments and fees, continuance thereof for three (3) Business Days; (b) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in Sections 7.1(a) or (b), 7.2, 7.3(b), 7.4, 7.5, 7.6, 7.8, 7.12, 7.13 or Section 8 in its entirety it being understood, for the avoidance of doubt, that failure to comply with the terms of Section 8 at any time no Indebtedness is outstanding hereunder is not an Event of Default; (c) default in observance or performance of any of the conditions, covenants or agreements of Company herein set forth in Sections 7.3(a), 7.7 and continuance thereof for fifteen (15) days after notice or when a senior officer of the Company obtains knowledge thereof; (d) default in the observance or performance of any of the other conditions, covenants or agreements of Company herein set forth, and continuance thereof for a period of thirty (30) days after notice or when a senior officer of the Company obtains knowledge thereof; (e) any representation or warranty made by Company or any other Loan Party herein or in any instrument submitted pursuant hereto proves untrue in any material adverse respect when made or deemed made; (f) default in the payment of any other obligation of any Loan Party for borrowed money in an aggregate amount in excess of Twenty Five Million Dollars ($25,000,000) individually or in the aggregate when due (whether by acceleration or otherwise) and continuance thereof beyond any applicable period of cure, or in the observance or performance of any conditions, covenants or agreements related 26 or given with respect to any obligations for borrowed money in an aggregate amount in excess of Twenty Five Million Dollars ($25,000,000) individually or in the aggregate when due (whether by acceleration or otherwise) which continues beyond any applicable period of cure and which is sufficient to permit the holder thereof to accelerate the maturity of such obligation; (g) judgments for the payment of money in excess of the sum of Twenty Five Million Dollars ($25,000,000) in the aggregate shall be rendered against Company or any of its Subsidiaries and such judgments shall remain unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of twenty one (21) consecutive days from the date of its entry and such judgment is not covered by insurance from a solvent insurer who is defending such action without reservation of rights; (h) the occurrence of any event, which is determined by the PBGC to constitute grounds for termination by the PBGC of any Pension Plan of Company or any Subsidiary or for the appointment by the appropriate United States District Court of a trustee to administer such plan, and such event is not corrected and such determination is not revoked within sixty (60) days after notice thereof has been given to the plan administrator or Company or the applicable Subsidiary; or the institution of proceedings by the PBGC to terminate any such Pension Plan or to appoint a trustee to administer such plan; or the appointment of a trustee by the appropriate United States District Court to administer any such Pension Plan. (i) a Change of Control shall occur; (j) if the Guaranty is revoked or the validity, binding effect or enforceability of any provision thereof is challenged by any Loan Party; (k) any Loan Party shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered). If a creditors' committee shall have been appointed for the business of the any Loan Party; or if any Loan Party shall have made a general assignment for the benefit of creditors or shall have been adjudicated bankrupt and if not an adjudication based on a filing by Company it shall not have been dismissed within sixty (60) days, or shall have filed a voluntary petition in bankruptcy or for reorganization or to effect a plan or arrangement with creditors or shall fail to pay or admits in writing its inability or refusal to pay, its debts generally as such debts become due in the ordinary course of business (except as contested in good faith and for which adequate reserves are made in such party's financial statements); or shall file an answer to a creditor's petition or other petition filed against it, admitting the material allegations thereof for an adjudication in bankruptcy or for reorganization; or shall have applied for or permitted the appointment of a receiver or trustee or custodian for any of its property or assets; or such receiver, trustee or custodian shall have been appointed for any of its property or assets (other than upon application or consent of any Loan Party) and shall not have been removed within sixty (60) days; or if an order shall be entered approving any petition for reorganization of any Loan Party and shall not have been reversed or dismissed within sixty (60) days; or any Loan 27 Party shall take any action (corporate or other) authorizing or in furtherance any of the actions described above in this subsection; (l) any material provision of any Loan Document shall at any time for any reason cease to be valid, binding and enforceable against Loan Party or, (other than in accordance with the terms thereof), as applicable, or the validity, binding effect or enforceability thereof shall be contested by the any Loan Party or any Loan Party shall deny that it has any or further liability or obligation under any Loan Document, or any such Loan Document shall be terminated (other than in accordance with the terms thereof), invalidated, revoked or set aside or in any way cease to give or provide to the Bank the benefits purported to be created thereby. 9.2 If an Event of Default has occurred and is continuing hereunder: (a) the Bank may declare the Commitment terminated; (b) the Bank may declare the entire unpaid principal Indebtedness, immediately due and payable, without presentment, notice or demand, all of which are hereby expressly waived by Company; (c) upon the occurrence of any Event of Default specified in subsection 9.1(k), above, and notwithstanding the lack of any declaration by Bank, the entire unpaid principal Indebtedness shall become automatically and immediately due and payable, and the Commitment shall be automatically and immediately terminated; (d) the Bank may exercise any remedy permitted by this Agreement, the other Loan Documents or law. 9.3 The remedies provided for herein are cumulative to the remedies for collection of the Indebtedness as provided by law, in equity or by any Loan Document. Nothing herein contained is intended, nor shall it be construed, to preclude Bank from pursuing any other remedy for the recovery of any other sum to which Bank may be or become entitled for the breach of this Agreement by Company. 9.4 Upon the occurrence and during the continuance of any Event of Default, Bank may at any time and from time to time, without notice to the Company (any requirement for such notice being expressly waived by the Company), set off and apply against any and all of the obligations of the Company now or hereafter existing under this Agreement, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of Company, irrespective of whether or not such deposits held or indebtedness owing by the Bank may be contingent and unmatured. Promptly following any such setoff, the Bank shall give written notice to Company of the occurrence thereof. The Company hereby grants to the Bank a lien on and security interest in all such deposits, indebtedness and property as collateral security for the payment and performance of all of the obligations of the Company under this Agreement. The rights of the Bank under this Section 9.4 are in addition to the other rights and remedies (including, without limitation, other rights of setoff) which the Bank may have. 9.5 No Event of Default may be waived by the Bank except in a writing signed by an officer of the Bank. No single or partial exercise of any right, power or privilege hereunder, nor any delay in the exercise thereof, shall preclude other or further exercise of its rights by Bank. No waiver of any Event of Default shall extend to any other or further Event of Default. No forbearance on the part of the Bank in enforcing any of its rights shall constitute a waiver of any 28 of its rights. Company expressly agrees that this Section 9.5 may not be waived or modified by the Bank by course of performance, estoppel or otherwise. 10. MISCELLANEOUS 10.1 This Agreement shall be binding upon and shall inure to the benefit of Company and Bank and their respective successors and assigns, except that the credit provided for under this Agreement and no part thereof and no obligation of Bank hereunder shall be assignable or otherwise transferable by Company. 10.2 Company shall pay all closing costs and expenses, including, by way of description and not limitation, reasonable outside attorney fees (without duplication of fees and expenses for the same services) and lien search fees incurred by Bank in connection with the commitment, consummation and closing of this Agreement or any subsequent amendment of this Agreement or any other Loan Document. All of said amounts required to be paid by Company may, at Bank's option if they remain unpaid for fifteen (15) days after payment therefore is requested by Bank, be charged by Bank as an advance against the proceeds of the Note. All costs, including reasonable attorney fees incurred by Bank in protecting or enforcing any of its rights against Company or in defending Bank from any claims or liabilities by any party or otherwise incurred by Bank in connection with a Default or an Event of Default (including evaluation of whether a Default or Event of Default exists or will exist) or the enforcement of this Agreement or the related documents, including by way of description and not limitation, such charges in any court or bankruptcy proceedings or arising out of any claim or action by any person against Bank which would not have been asserted were it not for Bank's relationship with Company hereunder, shall also be paid by Company. 10.3 Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP. 10.4 No delay or failure of Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege, nor shall any single or partial exercise thereof preclude any further exercise thereof, or the exercise of any other power, right or privilege. The rights of Bank under this Agreement are cumulative and not exclusive of any right or remedies which Bank would otherwise have. 10.5 Except as expressly provided otherwise in this Agreement, all notices and other communications provided to any party hereto under this Agreement shall be in writing and shall be given by personal delivery, by mail, by reputable overnight courier, by telex or by facsimile and addressed or delivered to it at its address set forth below or at such other address as may be designated by such party in a notice to the other parties that complies as to delivery with the terms of this Section 10.5. Any notice, if personally delivered or if mailed and properly addressed with postage prepaid and sent by registered or certified mail, shall be deemed given when received; any notice, if given to a reputable overnight courier and properly addressed, shall be deemed given two (2) Business Days after the date on which it was sent, unless it is actually received sooner by the named addressee; and any notice, if transmitted by telex or facsimile, 29 shall be deemed given when received (answerback confirmed in the case of telexes and receipt confirmed in the case of telecopies). Bank may, but shall not be required to, take any action on the basis of any notice given to it by telephone, but Company shall promptly confirm such notice in writing or by telex or facsimile, and such notice will not be deemed to have been received until such confirmation is deemed received in accordance with the provisions of this Section set forth above. If such telephonic notice conflicts with any such confirmation, the terms of such telephonic notice shall control. To Company: Compuware Corporation One Campus Martius Detroit, MI 48226 Attn: Chief Financial Officer Fax No.: (313) 227-9221 With a copy to : General Counsel at the same address and fax number To Bank: One Detroit Center 500 Woodward Avenue Detroit, Michigan 48226 Attention: Timothy H. O'Rourke and Beverly Jones Fax No.: (313) 222-9516 10.6 This Agreement and the Note have been delivered at Detroit, Michigan, and shall be governed by and construed and enforced in accordance with the laws of the State of Michigan. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Company and Bank hereby irrevocably submit to the non-exclusive jurisdiction of any United States Federal Court or Michigan state court sitting in Detroit, Michigan in any action or proceeding arising out of or relating to this Agreement or any of the Loan Documents and Company and Bank hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in any such United States Federal Court or Michigan state court. Company irrevocably consents to the service of any and all process in any such action or proceeding brought in any court in or of the State of Michigan by the delivery of copies of such process to Company at its address specified on the signature page hereto or by certified mail directed to such address or such other address as may be designated by Company in a notice to the other parties that complies as to delivery with the terms of Section 10.5. Nothing in this Section shall affect the right of the Bank to serve process in any other manner permitted by law or limit the right of the Bank to bring any such action or proceeding against Company or any Subsidiary or any of its or their property in the courts with subject matter jurisdiction of any other jurisdiction. Company hereby irrevocably waives any objection to the laying of venue of any such suit or proceeding in the above described courts. 30 10.7 No amendments or waiver of any provisions of this Agreement nor consent to any departure by Company therefrom shall in any event be effective unless the same shall be in writing and signed by the Bank and the Company, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, waiver or consent with respect to any provision of this Agreement shall affect any other provision of this Agreement. 10.8 All sums payable by Company to Bank under this Agreement or the other documents contemplated hereby shall be paid directly to Bank at its principal office set forth in Section 10.5 hereof in immediately available United States funds, without set off, deduction or counterclaim. In its sole discretion, Bank may charge any and all deposit or other accounts (including without limit an account evidenced by a certificate of deposit) of Company with Bank for all or a part of any Indebtedness then due; provided, however, that this authorization shall not affect Company's obligation to pay, when due, any Indebtedness whether or not account balances are sufficient to pay amounts due. 10.9 Any payment of the Indebtedness made by mail will be deemed tendered and received only upon actual receipt by Bank at the address designated for such payment, whether or not Bank has authorized payment by mail or any other manner, and shall not be deemed to have been made in a timely manner unless received on the date due for such payment, time being of the essence. Company expressly assumes all risks of loss or liability resulting from non-delivery or delay of delivery of any item of payment transmitted by mail or in any other manner. Acceptance by Bank of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default, and at any time thereafter and until the entire amount then due has been paid, Bank shall be entitled to exercise any and all rights conferred upon it herein upon the occurrence of an Event of Default. Upon the occurrence and during the continuance of a an Event of Default, Company waives the right to direct the application of any and all payments at any time or times hereafter received by Bank from or on behalf of Company. Upon the occurrence and during the continuance of an Event of Default, Company agrees that Bank shall have the continuing exclusive right to apply and to reapply any and all payments received at any time or times hereafter against the Indebtedness in such manner as Bank may deem advisable, notwithstanding any entry by Bank upon any of its books and records. Company expressly agrees that to the extent that Bank receives any payment or benefit and such payment or benefit, or any part thereof, is subsequently invalidated, declared to be fraudulent or preferential, set aside or is required to be repaid to a trustee, receiver, or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or benefit, the Indebtedness or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or benefit had not been made and, further, any such repayment by Bank, to the extent that Bank did not directly receive a corresponding cash payment, shall be added to and be additional Indebtedness payable upon demand by Bank. 10.10 In the event Company's obligation to pay interest on the principal balance of the Note is or becomes in excess of the maximum interest rate which Company is permitted by law to contract or agree to pay, giving due consideration to the execution date of this Agreement, then, in that event, the rate of interest applicable shall be deemed to be immediately reduced to 31 such maximum rate and all previous payments in excess of such maximum rate shall be deemed to have been payments in reduction of principal and not of interest. 10.11 COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 10.12 This Agreement may be executed in several counterparts, and each executed copy shall constitute an original instrument, but such counterparts together shall constitute but one and the same instrument. 10.13 This Agreement, the Note (if issued) and any Requests for Advance hereunder, and the other Loan Documents contain the entire agreement of the parties hereto, superseding all prior agreements, discussions and understandings relating to the subject matter hereof, and none of the parties shall be bound by anything not expressed in writing. In the event of any conflict between the terms of this Agreement and the other Loan Documents, this Agreement shall govern. 10.14 In case any one or more of the obligations of Company under this Agreement, the Note or any of the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of Company under this Agreement, the Note or any of the other Loan Documents in any other jurisdiction. 10.15 Each covenant hereunder shall be given independent effect (subject to any exceptions stated in such covenant) so that if a particular action or condition is not permitted by any such covenant (taking into account any such stated exception), the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default. 10.16 All terms, covenants, agreements, representations and warranties of Company or any party to any of the Loan Documents made herein or in any of the Loan Documents or in any certificate, report, financial statement or other document furnished by or on behalf of Company or any Subsidiary in connection with this Agreement or any of the Loan Documents shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by Bank, and those covenants and agreements of Company set forth in Section 10.17 hereof (together with any other indemnities of Company or any Subsidiary contained elsewhere in this Agreement or in any of the other Loan Documents) shall survive the repayment in full of the Indebtedness and the termination of the Commitment. 32 10.17 (a) Company agrees to indemnify and hold Bank harmless from all loss, cost, damage, liability or expenses, including reasonable outside attorneys' fees and disbursements (but without duplication of fees and expenses for the same services), incurred by Bank by reason of an Event of Default, or enforcing the obligations of Company or any Subsidiary under this Agreement or any of the other Loan Documents or in the prosecution or defense of any action or proceeding concerning any matter growing out of or connected with this Agreement or any of the Loan Documents, excluding, however, any loss, cost, damage, liability or expenses arising solely as a result of the gross negligence or willful misconduct of the party seeking to be indemnified under this Section 10.17(a). (b) Company agrees to defend, indemnify and hold harmless Bank, and its respective employees, agents, officers and directors from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature (including without limitation, reasonable attorneys and consultants fees, investigation and laboratory fees, environmental studies required by Bank in connection with the violation of Environmental Laws, court costs and litigation expenses, excluding however, those arising solely as a result of the gross negligence or willful misconduct of the Person seeking indemnification, as the case may be) arising out of or related to (i) the presence, use, disposal, release or threatened release of any Hazardous Materials on, from or affecting any premises owned or occupied by Company or any of their respective Subsidiaries in violation of or non-compliance with applicable Environmental Laws, (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials, (iii) any lawsuit or other proceeding brought or threatened, settlement reached or governmental order or decree relating to such Hazardous Materials, (iv) if any Event of Default exists and remains uncured, the cost of remediation or monitoring of all Hazardous Materials in violation of or non-compliance with applicable Environmental Laws from all or any portion of any premises owned by Company or their respective Subsidiaries, (v) if any Event of Default exists and remains uncured, complying or coming into compliance with all Environmental Laws and/or (vi) if any Event of Default exists and remains uncured, any violation of Environmental Laws. The obligations of Company under this Section 10.17(b) shall be in addition to any and all other obligations and liabilities the Company may have to Bank at common law or pursuant to any other agreement. 10.18 The Company authorizes Bank, in its sole discretion, upon one Business Day's notice to Company (or without notice if an Event of Default has occurred and is continuing), to charge its general deposit account(s) maintained at Bank for the amount of any principal, interest, or other amounts or costs due under this Agreement when the same become due and payable under the terms of this Agreement or the Note. 10.19 (a) On the Restatement Date, the Prior Credit Agreement shall be amended, restated and superseded in its entirety. The parties hereto acknowledge and agree that (i) this Agreement, the Note, and the other Loan Documents executed and delivered in connection herewith do not constitute a novation, payment and reborrowing, or termination of the "Indebtedness" (as defined in the Prior Credit Agreement) under the Prior Credit Agreement as 33 in effect prior to the Restatement Date; and (ii) such "Indebtedness" is in all respects continuing with only the terms thereof being modified as provided in this Agreement; (b) Notwithstanding the modifications effected by this Agreement of the representations, warranties and covenants of Company contained in the Prior Credit Agreement, Company acknowledges and agrees that any causes of action or other rights created in favor of Bank and its successors arising out of the representations and warranties of Company contained in or delivered (including representations and warranties delivered in connection with the making of the loans or other extensions of credit thereunder) in connection with the Prior Credit Agreement shall survive the execution and delivery of this Agreement; provided, however, that it is understood and agreed that Company's monetary obligations under the Prior Credit Agreement in respect of the advances thereunder are evidenced by this Agreement as provided herein. All indemnification obligations of Company pursuant to the Prior Credit Agreement (including any arising from a breach of the representations thereunder) shall survive the amendment and restatement of the Prior Credit Agreement pursuant to this Agreement. (c) On and after the Restatement Date, (i) each reference in the Loan Documents to the "Credit Agreement", "thereunder", "thereof" or similar words referring to the Credit Agreement shall mean and be a reference to this Agreement and (ii) each reference in the Loan Documents to a "Note" shall mean and be a Note as defined in this Agreement. WITNESS the due execution hereof as of the day and year first above written. [SIGNATURES ARE ON FOLLOWING PAGE] 34 COMERICA BANK COMPUWARE CORPORATION By: /s/ Timothy H. O'Rourke By: --------------------------- ------------------------ Its: Vice President Its: ------------------------ 35 ACKNOWLEDGMENT OF GUARANTOR The undersigned is the Guarantor under that certain Guaranty dated May 2, 2003 ("Guaranty") made by the undersigned in favor of Comerica Bank ("Bank") with respect to the obligations and liabilities of Compuware Corporation, a Michigan corporation ("Company") to Bank. The undersigned (a) acknowledges the execution and delivery of the foregoing Amended and Restated Credit Agreement, (b) affirms each of its obligations to Bank under the Guaranty, and (c) acknowledges and agrees that the Guaranty remains in full force and effect in accordance with its terms and that the undersigned has no defense, counterclaim or setoff to its obligations under the Guaranty. Dated: July 27, 2006 COMPUWARE INTERNATIONAL I LLC By: Compuware Corporation Its: Sole Member By: /s/ Laura Fournier ------------------------------ Its: Chief Financial Officer 36 EX-10.101 3 k07492exv10w101.txt FIFTH AMENDMENT TO THE COMPUWARE CORPORATION ESOP/401(K) PLAN EXHIBIT 10.101 FIFTH AMENDMENT TO THE COMPUWARE CORPORATION ESOP/401(k) PLAN (AS AMENDED AND RESTATED EFFECTIVE APRIL 1, 2004) WHEREAS, Compuware Corporation (the "Company") has established and maintains the Compuware Corporation ESOP/401(k) Plan (the "Plan), originally effective as of April 1, 1986, as most recently amended and restated effective as of April 1, 2004, and as subsequently amended by First, Second, Third, and Fourth Amendments; and WHEREAS, pursuant to Section 11.01, the Plan Administrator has been delegated the authority to amend the Plan; and WHEREAS, the Plan Administrator desires to amend the Plan to provide for a special allocation of Company contributions and forfeitures for the plan year ending March 31, 2007; and WHEREAS, the Plan Administrator desires to amend the Plan in order to accomplish the merger of the ProviderLink 401(k) Plan; and WHEREAS, the Plan Administrator desires to amend the Plan to clarify the application of the two-year restriction on in-service withdrawals or transfers from a participant's Company Contribution Account; NOW THEREFORE, IN CONSIDERATION OF THE PREMISES, the Plan is amended as follows: 1. Section 2.45, "Merge Date," is amended, effective May 23, 2006, by adding the following: August 2, 2006 ProviderLink 401(k) Plan 2. Section 2.46, "Merged Plans," is amended, effective May 23, 2006, by adding the following: ProviderLink 401(k) Plan 3. Subsection (a)(2)(C) of Section 5.01(a), INVESTMENT OPTIONS, is amended and restated, effective April 1, 2006, to read as follows: (C) regardless of an Active or Former Active Participant's age or service, the funds are attributable to contributions that have been allocated to his or her Company Contribution Account for at least two anniversary years from the date the recordkeeper performed the allocation for the Plan Year, which date is no earlier than the date the contribution was deposited into the Trust. The two year restriction shall not apply to a Former Active Participant who no longer is an Employee. 4. Section 4.07, COMPANY DISCRETIONARY CONTRIBUTIONS, is amended, effective May 22, 2006, by adding a new subsection (h) that reads as follows: (f) The Company shall make a special mid-year contribution and allocation of Company Stock in an amount sufficient so that when added to forfeitures of Company Stock available for reallocation, each Participant who satisfies the eligibility requirements described in (1) and (2) of this subsection shall receive an allocation of 100 shares of Company Stock. To be eligible for this special allocation, as of May 22, 2006, a Participant must be: (1) a U.S.-Based Employee; and (2) an Active Participant, including an Active Participant on leave of absence as identified in the Company's Human Resources Information System, but excluding (A) full-time hourly Employees unless they are on Services Microsoft Direct Cost assignment; (B) Employees classified by the Company as Tier I or Tier II Executives covered under the Employer's fiscal year 2007 Executive Bonus Plan; and (C) Employees who are summer interns hired for short-term employment between post-secondary school semesters. IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to the Compuware Corporation ESOP/401(k) Plan to be executed by its duly authorized representative this 23rd day of May, 2006. COMPUWARE CORPORATION By: /s/ Kathy Igoe ---------------------- Its: Secretary --------------------- EX-15 4 k07492exv15.txt INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S AWARENESS LETTER EXHIBIT 15 August 2, 2006 To the Compuware Corporation Detroit, Michigan: We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Compuware Corporation and subsidiaries for the periods ended June 30, 2006 and 2005, as indicated in our report dated August 2, 2006 (which report includes an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standards No. 123R, Share-Based Payment); because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, is incorporated by reference in Registration Statements on Form S-8: No. 333-68808, 333-57984, 333-79821, 333-70549, 333-43971, 333-37873, 333-17263, 33-57364, 333-4522, 33-70852, 33-78822, 33-98742, and 333-119956. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP EX-31.1 5 k07492exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER TO RULE 13A-14(A) EXHIBIT 31.1 CERTIFICATION I, Peter Karmanos, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Compuware Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2006 /s/ Peter Karmanos, Jr. - ----------------------- Peter Karmanos, Jr. Chief Executive Officer EX-31.2 6 k07492exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER TO RULE 13A-14(A) EXHIBIT 31.2 CERTIFICATION I, Laura L. Fournier, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Compuware Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 2, 2006 /s/ Laura L. Fournier - ----------------------- Laura L. Fournier Chief Financial Officer EX-32 7 k07492exv32.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Compuware Corporation (the "Company") on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Peter Karmanos, Jr., Chief Executive Officer of the Company, and Laura L. Fournier, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Peter Karmanos, Jr. - ----------------------- Peter Karmanos, Jr. Chief Executive Officer August 2, 2006 /s/ Laura L. Fournier - ----------------------- Laura L. Fournier Chief Financial Officer August 2, 2006 -----END PRIVACY-ENHANCED MESSAGE-----