Covansys 10Q/A 2004 Q2 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

Commission file number: 0-22141

COVANSYS CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Michigan (State or Other Jurisdiction of Incorporation or Organization)		38-2606945 (IRS Employer Identification No.)

32605 West Twelve Mile Road

Suite 250

Farmington Hills, Michigan 48334

(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code:(248) 488-2088

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. Yeso Nox

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yesx Noo

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


No Par Value (Class of Common Stock)		26,916,753 (Outstanding as of July 30, 2004)

COVANSYS CORPORATION

INDEX


		Page No.

PART I. FINANCIAL INFORMATION
Item 1.	Restated Financial Statements		4
	Condensed Consolidated Balance Sheets		4
	Condensed Consolidated Statements of Operations		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 4.	Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 4.	Submission of Matters to a Vote of Security Holders		30
Item 6.	Exhibits		30

SIGNATURES			31
Section 302 Certification
Section 302 Certification
Section 906 Certification of Rajendra B. Vattikuti
Section 906 Certification of James S. Trouba

Explanatory Note

The purpose of this Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of Covansys Corporation (the “Company”) for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission is to reflect the restatement of the Company’s consolidated financial statements.

The adjustments giving rise to the Company’s need to restate its financial statements relate to the following areas:

Lease Accounting. During the 2004 year end closing process, the Company initiated and completed an analysis of its lease accounting in order to determine if its historical practices have deviated from the lease accounting standards discussed in SFAS 13, “Accounting for Leases”. As part of that analysis, the Company determined that it had not properly accounted for the operating lease for its US headquarters signed in 1993 in accordance with the guidance set forth in FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases.” The Company assessed the impact of the resulting errors on its historical financial statements and concluded that it was required to restate its financial statements for all periods affected by the matter.

Income Tax Accounting. In connection with its 2004 year end closing process, the Company performed a calculation of the cumulative temporary difference for property and equipment and capitalized software development costs and concluded that the net deferred tax liability of $1.6 million required to be recorded for these differences had been misclassified in its financial statements as a contingent tax reserve since December 31, 2001. Upon discovery of the error, the Company evaluated its accounting treatment for contingent tax reserves from December 31, 2001 through 2004. This analysis concluded that the Company did not have sufficient tax reserves at December 31, 2001 due to this error and it had excess reserves at December 31, 2003 due to other errors. The analysis of prior periods identified tax reserves for items that should have been released in the year ended December 31, 2003 due to the settlement of two issues reviewed under IRS examination offset partially by an error in recording state tax valuation allowances determined to be necessary in 2003 and one other less significant computational error. The Company assessed the impact of these errors on its historical financial statements and concluded that it was required to restate its financial statements for all periods affected by the matters.

Fixed Asset Accounting. In connection with its 2004 year end closing process, the Company discovered that a consolidating entry to properly state property and equipment on the balance sheet at December 31, 2003 was classified as accumulated other comprehensive income in error. The classification of the amount ($.7 million) has been corrected and has the effect of increasing property and equipment and reducing accumulated other comprehensive loss by $.7 million as of December 31, 2003. The correction had no impact on income from continuing operations or net income.

The effects of this restatement on the condensed consolidated balance sheets of the Company at June 30, 2004 and December 31, 2003, and on the condensed consolidated statements of operations for the three months and six months ended June 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the six months ended June 30, 2004 and 2003 are discussed in Item 1 (Restated Financial Statements) and Item 2 (Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part I of this Amendment No. 1. Material weaknesses identified by management and related to the restatement are disclosed in Item 4 of Part I of this Amendment No. 1. The Company’s Chief Executive Officer and Chief Financial Officer have also reissued their certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act. Except as required to reflect the effects of the restatement, no attempt has been made in this Amendment No. 1 to modify or update other disclosures in the previously filed Form 10-Q for the period ended June 30, 2004.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COVANSYS CORPORATION AND SUBSIDIARIES

condensed consolidated balance sheets


			Restated

			June 30,			December 31,
			2004			2003

			(Dollars in thousands)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	109,666		$	89,671
	Short-term investments			19,380			37,804
	Accounts receivable net of allowance for doubtful accounts of $1,832 and $1,789 at June 30, 2004 and December 31, 2003			71,983			67,245
	Revenue earned in excess of billings			28,851			32,127
	Deferred taxes			9,277			9,396
	Prepaid expenses and other			5,677			5,668

		Total current assets		244,834			241,911
Property and equipment, net				29,794			31,976
Computer software, net				4,715			5,430
Goodwill				18,119			18,441
Deferred taxes				2,942			3,020
Other assets, net				18,004			14,093

		Total assets	$	318,408		$	314,871

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	14,651		$	11,290
	Accrued payroll and related costs			19,207			21,462
	Other accrued liabilities			22,679			20,392
	Deferred revenue			589			1,239

		Total current liabilities		57,126			54,383
Other liabilities				2,853			4,107
Commitments and contingencies
Convertible redeemable preferred stock, no par value, 200,000 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively				170,929			168,655
Shareholders’ equity:
	Preferred stock, no par value, 1,000,000 shares authorized, 200,000 issued as convertible redeemable preferred stock			—			—
	Common stock, no par value, 200,000,000 shares authorized, 26,916,753 and 26,792,547 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively			—			—
	Additional paid-in capital			91,932			93,165
	Retained earnings			(120	)		(1,831	)
	Stock subscriptions receivable			(1,493	)		(1,790	)
	Accumulated other comprehensive loss			(2,819	)		(1,818	)

		Total shareholders’ equity		87,500			87,726

		Total liabilities and shareholders’ equity	$	318,408		$	314,871

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

COVANSYS CORPORATION AND SUBSIDIARIES

condensed consolidated statements of operations


			Restated						Restated

			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2004			2003			2004			2003

			(In thousands, except per share data)
			(Unaudited)
Revenues			$	94,109		$	96,240		$	179,001		$	192,799
Cost of revenues				68,846			73,611			138,847			148,388

		Gross profit		25,263			22,629			40,154			44,411
Selling, general and administrative expenses				19,585			22,848			38,849			44,869

		Income (loss) from operations		5,678			(219	)		1,305			(458	)
Other income, net				1,303			579			1,309			1,072

		Income before provision for income taxes		6,981			360			2,614			614
Provision for income taxes				2,378			396			901			491

		Net income (loss)		4,603			(36	)		1,713			123
Convertible redeemable preferred stock dividends				1,139			1,104			2,269			2,199

		Net income (loss) available for shareholders		3,464			(1,140	)		(556	)		(2,076	)
		Amounts allocated to participating preferred shareholders		(847	)		—			—			—

		Net income (loss) available to common shareholders	$	2,617		$	(1,140	)	$	(556	)	$	(2,076	)

Earnings (loss) per share
	Basic		$	0.10		$	(0.04	)	$	(0.02	)	$	(0.08	)

	Diluted		$	0.10		$	(0.04	)	$	(0.02	)	$	(0.08	)

Basic weighted average shares				26,882			27,081			26,866			27,182
Dilutive effect of options				610			—			(A)			—
Convertible redeemable preferred stock				(A)			(A)			(A)			(A)

Dilutive weighted average shares				27,492			27,081			26,866			27,182


(A)	Anti-dilutive

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

COVANSYS CORPORATION AND SUBSIDIARIES

condensed consolidated statements of cash flows


				Restated

				Six Months Ended
				June 30,

				2004			2003

				(Dollars in thousands)
				(Unaudited)
Cash flows from operating activities:
	Net income			$	1,713		$	123
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization			6,658			7,744
		Loss on disposal and obsolescence of property and equipment			1,066			398
		Provision for doubtful accounts			499			280
		Gain from sale of short-term investments			(109	)		(575	)
		Other			—			69
	Change in assets and liabilities:
		Accounts receivable and revenue earned in excess of billings			(2,055	)		2,627
		Prepaid expenses and other			(4,001	)		3
		Accounts payable, accrued payroll and related costs and other liabilities			1,550			(3,030	)

			Net cash provided from operating activities		5,321			7,639
Cash flows from investing activities:
	Investment in property, equipment and other				(4,845	)		(5,500	)
	Investment in computer software				(127	)		(619	)
	Proceeds from sale of available for sale securities				62,281			60,537
	Purchases of available for sale securities				(43,903	)		(67,175	)

			Net cash provided by (used in) investing activities		13,406			(12,757	)
Cash flows from financing activities:
	Net proceeds from issuance of common stock				872			231
	Net proceeds from exercise of stock options and other				370			129
	Repurchases of common stock				—			(1,464	)

			Net cash provided by (used in) financing activities		1,242			(1,104	)
			Effect of exchange rate changes on cash		26			—

Increase (decrease) in cash and cash equivalents					19,995			(6,222	)
Cash and cash equivalents at beginning of period					89,671			88,288

Cash and cash equivalents at end of period				$	109,666		$	82,066

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

COVANSYS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

1. Organization and Basis of Presentation

Covansys Corporation was founded in 1985. Covansys Corporation and its subsidiaries (the Company) is a global technology services company, with a focus on industry-specific solutions, strategic outsourcing and integration solutions. The Company addresses the most challenging technology issues companies are facing through a unique onsite, offsite, offshore delivery model that helps clients achieve rapid deployment and reduced costs. The Company offers high-level subject matter expertise in the public sector industry, as well as years of experience in retail, healthcare, distribution, manufacturing, financial services, telecommunications and utilities. The Company applies its industry-specific knowledge to deliver a wide range of outsourcing and integration services, including: application maintenance and development outsourcing (AMD/O); custom application development; e-business services; packaged software implementation, upgrades and enhancements; and other services.

The accompanying unaudited condensed consolidated financial statements have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of Covansys Corporation and subsidiaries as of June 30, 2004, the results of its operations for the three and six month periods ended June 30, 2004 and 2003, and cash flows for the six month periods ended June 30, 2004 and 2003. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004.

The results of operations for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results to be expected in future quarters or for the year ending December 31, 2004.


2.	Restatement of Financial Statements

Subsequent to the issuance of its financial statements for the year ended December 31, 2003 and the three and six month periods ended June 30, 2004, the Company identified adjustments related to leases, income taxes and fixed assets that required restatement of its previously issued financial statements. Each of these adjustments is described further below.

Lease Accounting

During the 2004 year end closing process, the Company initiated and completed an analysis of its lease accounting in order to determine if its historical practices have deviated from the lease accounting standards discussed in SFAS 13, “Accounting for Leases”. As part of that analysis, the Company determined that it had not properly accounted for the operating lease for its US headquarters signed in 1993 in accordance with the guidance set forth in FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases”. The Company assessed the impact of the resulting errors on its historical financial statements and concluded that it was required to restate its financial statements for all periods affected by the matter. The impact on the three months and six months ended June 30, 2004 and 2003 was to increase (decrease) income from operations before income taxes by $100 and $(33), respectively, and $198 and $(66), respectively.

Income Tax Accounting

In connection with its 2004 year end closing process, the Company performed a calculation of the cumulative temporary difference for property and equipment and capitalized software development costs and concluded that the net deferred tax liability of $1,638 required to be recorded for these differences had been misclassified in its financial statements as a contingent tax reserve since December 31, 2001. Upon discovery of the error, the Company evaluated its accounting treatment for contingent tax reserves from December 31, 2001 through 2004. This analysis concluded that the Company did not have sufficient tax reserves at December 31, 2001 due to this error and it had excess reserves at December 31, 2003 due to other errors. The analysis of prior periods identified tax reserves for items that should have been released in the year ended December 31, 2003 due to the settlement of two issues reviewed under IRS examination offset partially by an error in recording state tax valuation allowances determined to be necessary in 2003 and one other less significant computational error. The Company assessed the impact of these errors on its historical financial statements and concluded that it was required to restate its financial statements for all periods affected by the matters. There was no impact for the three months and six months ended June 30, 2004 and 2003.

Fixed Asset Accounting

In connection with its 2004 year end closing process, the Company discovered that a consolidating entry to properly state property and equipment on the balance sheet at December 31, 2003 was classified as accumulated other comprehensive income in error. The classification of the amount ($723) has been corrected and has the effect of increasing property and equipment and reducing accumulated other comprehensive loss by $723 as of June 30, 2003 and December 31, 2003, respectively. The correction had no impact on income from operations or net income.

The effect on cash flow for the six months ended June 30, 2003 was to increase the amount used in investing activities and increase the amount provided from operating activities by $723.

The following schedule reconciles net income (loss) available for common shareholders for the three months and six months ended June 30, 2004 and 2003, as previously reported, to the corresponding amounts on a restated basis, after giving effect to the adjustments described above.


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2004			2003			2004			2003

Net income (loss) available for common shareholders as previously reported	$	2,571		$	(1,120	)	$	(675	)	$	(2,036	)
Rent expense (pre-tax) restatement		100			(33	)		198			(66	)
Tax effect of restatement adjustments		(39	)		13			(79	)		26

Total net adjustments		61			(20	)		119			(40	)

Net income (loss) available for common shareholders as restated		2,632			(1,140	)		(556	)		(2,076	)
Additional amount allocated to participating preferred shareholders		(15	)		—			—			—

Net income (loss) available for common shareholders as restated	$	2,617		$	(1,140	)	$	(556	)	$	(2,076	)

Earnings (loss) per share
Basic earnings (loss) per share as previously reported	$	.10		$	(.04	)	$	(.02	)	$	(.08	)
Effect of adjustments		—			—			—			—

Basic earnings (loss) per share as restated	$	.10		$	(.04	)	$	(.02	)	$	(.08	)

Diluted earnings (loss) per share as previously reported	$	.09		$	(.04	)	$	(.02	)	$	(.08	)
Effect of adjustments		.01			—			—			—

Diluted earnings (loss) per share as restated	$	.10		$	(.04	)	$	(.02	)	$	(.08	)

The following schedule reconciles Comprehensive Income for the three months and six months ended June 30, 2004 and 2003, as previously reported, to the corresponding amounts on a restated basis, after giving effect to the adjustments described above.


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2004			2003			2004			2003

Comprehensive income as previously reported	$	1,859		$	2,290		$	593		$	2,003
Rent expense (pre-tax) restatement		100			(33	)		198			(66	)
Tax effect of restatement adjustments		(39	)		13			(79	)		26
Fixed asset restatement		—			—			—			723

Comprehensive income as restated	$	1,920		$	2,270		$	712		$	2,686

The following table sets forth the effect of the adjustments described above on the consolidated statements of operations for the three months and six months ended June 30, 2004 and 2003.


		Three Months Ended						Three Months Ended
		June 30, 2004						June 30, 2003

		As						As
		Previously						Previously
		Reported			Restated			Reported			Restated

		(In thousands, except per share data)
		(Unaudited)
Revenue		$	94,109		$	94,109		$	96,240		$	96,240
Cost of revenue			68,846			68,846			73,611			73,611

	Gross profit		25,263			25,263			22,629			22,629
Selling, general and administrative expenses			19,685			19,585			22,815			22,848

	Income (loss) from operations		5,578			5,678			(186	)		(219	)
Other income, net			1,303			1,303			579			579

	Income before provision for income taxes		6,881			6,981			393			360
Provision for income taxes			2,339			2,378			409			396

	Net income (loss)		4,542			4,603			(16	)		(36	)
Convertible redeemable preferred stock dividends			1,139			1,139			1,104			1,104

Net income (loss) available for shareholders			3,403			3,464			(1,120	)		(1,140	)
Amounts allocated to participating preferred shareholders			(832	)		(847	)		—			—

	Net income (loss) available for common shareholders	$	2,571		$	2,617		$	(1,120	)	$	(1,140	)

Earnings (loss) per share:
	Basic earnings (loss) per share	$	0.10		$	0.10		$	(0.04	)	$	(0.04	)

	Diluted earnings (loss) per share	$	0.09		$	0.10		$	(0.04	)	$	(0.04	)

	Basic weighted average shares outstanding		26,882			26,882			27,081			27,081
	Dilutive effect of options		610			610			—			—
	Convertible redeemable preferred stock		(A	)		(A	)		(A	)		(A	)

	Diluted weighted average shares outstanding		27,492			27,492			27,081			27,081


(A)	Anti-dilutive.


		Six Months Ended						Six Months Ended
		June 30, 2004						June 30, 2003

		As						As
		Previously						Previously
		Reported			Restated			Reported			Restated

		(In thousands, except per share data)
		(Unaudited)
Revenue		$	179,001		$	179,001		$	192,799		$	192,799
Cost of revenue			138,847			138,847			148,388			148,388

	Gross profit		40,154			40,154			44,411			44,411
Selling, general and administrative expenses			39,047			38,849			44,803			44,869

	Income (loss) from operations		1,107			1,305			(392	)		(458	)
Other income, net			1,309			1,309			1,072			1,072

	Income before provision for income taxes		2,416			2,614			680			614
Provision for income taxes			822			901			517			491

	Net income (loss)		1,594			1,713			163			123
Convertible redeemable preferred stock dividends			2,269			2,269			2,199			2,199

	Net income (loss) available for shareholders		(675	)		(556	)		(2,036	)		(2,076	)
Amounts allocated to participating preferred shareholders			—			—			—			—

	Net income (loss) available for common shareholders	$	(675	)	$	(556	)	$	(2,036	)	$	(2,076	)

Earnings (loss) per share:
	Basic earnings (loss) per share	$	(0.02	)	$	(0.02	)	$	(0.08	)	$	(0.08	)

	Diluted earnings (loss) per share	$	(0.02	)	$	(0.02	)	$	(0.08	)	$	(0.08	)

	Basic weighted average shares outstanding		26,866			26,866			27,182			27,182
	Dilutive effect of options		(A	)		(A	)		—			—
	Convertible redeemable preferred stock		(A	)		(A	)		(A	)		(A	)

	Diluted weighted average shares outstanding		26,866			26,866			27,182			27,182


(A)	Anti-dilutive.

The following table sets forth the effects of the restatement adjustments discussed above on the consolidated balance sheets at June 30, 2004 and December 31, 2003, respectively:


			June 30, 2004						December 31, 2003

			As						As
			Previously						Previously
			Reported			Restated			Reported			Restated

			(Dollars in thousands)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	109,666		$	109,666		$	89,671		$	89,671
	Short term investments			19,380			19,380			37,804			37,804
	Accounts receivable, net			74,629			71,983			67,245			67,245
	Revenue earned in excess of billings			28,851			28,851			32,127			32,127
	Deferred taxes			9,277			9,277			9,396			9,396
	Prepaid expenses and other			5,472			5,677			5,668			5,668

		Total current assets		247,275			244,834			241,911			241,911
Property and equipment, net				29,071			29,794			31,253			31,976
Computer software, net				4,715			4,715			5,430			5,430
Goodwill				18,119			18,119			18,441			18,441
Deferred taxes				4,231			2,942			4,231			3,020
Other assets				15,562			18,004			14,093			14,093

		Total assets	$	318,973		$	318,408		$	315,359		$	314,871

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	14,651		$	14,651		$	11,290		$	11,290
	Accrued payroll and related costs			19,207			19,207			21,462			21,462
	Other accrued liabilities			23,719			22,679			21,854			20,392
	Deferred revenue			589			589			1,239			1,239

		Total current liabilities		58,166			57,126			55,845			54,383
Other liabilities				251			2,853			889			4,107
Commitments and contingencies
Convertible redeemable preferred stock, no par value, 200,000 shares issued and outstanding as of June 30, 2004 and December 31, 2003				170,929			170,929			168,655			168,655
Shareholders’ equity:
	Preferred stock, no par value, 1,000,000 shares authorized			—			—			—			—
	Common stock, no par value, 200,000,000 shares authorized, 26,916,753 and 26,792,547 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively			—			—			—			—
	Additional paid-in capital			91,932			91,932			93,165			93,165
	Retained earnings (deficit)			2,730			(120	)		1,136			(1,831	)
	Stock subscriptions receivable			(1,493	)		(1,493	)		(1,790	)		(1,790	)
	Accumulated other comprehensive loss			(3,542	)		(2,819	)		(2,541	)		(1,818	)

		Total shareholders’ equity		89,627			87,500			89,970			87,726

		Total liabilities and shareholders’ equity	$	318,973		$	318,408		$	315,359		$	314,871

3. Income Taxes

The Company has provided federal, foreign and state income taxes in the condensed consolidated statements of operations based on the anticipated effective tax rate for fiscal years 2004 and 2003. The

Company’s tax rate is impacted by permanent items such as Subpart F income and nondeductible travel and entertainment expenses as well as the mix between domestic and foreign earnings.

Realization of deferred tax assets associated with the Company’s future deductible temporary differences and net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Although realization of the deferred tax assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized through future taxable income. On a quarterly basis, management assesses whether it remains more likely than not that the deferred tax assets will be realized.

The Company has five (four in 2003) business units in India which are entitled to a tax holiday for 10 consecutive years commencing with the year the business unit started producing computer software or until the Indian tax year ending March 31, 2009, whichever is earlier. The tax holiday period for one of the business units has expired. The remaining business units are subject to the tax holiday for various periods ranging from March 31, 2005 through March 31, 2009. As the tax holiday expires, the Company’s overall effective tax rate will be negatively impacted.

4. Fixed Price Contracts

The Company realized approximately 44% and 40% of its revenue during the three months and six months ended June 30, 2004, from fixed price contracts with respect to which it recognizes revenue on a percentage of completion basis. These contracts expose the Company to collection risk on both billed and unbilled receivables in the event that contract milestones are not met or the client does not accept the product as delivered. In addition, the Company could incur unanticipated losses if it is necessary to increase its estimated cost to complete.

The Company’s first quarter 2004 financial results were negatively impacted by approximately $9,400 due to four significant fixed price contracts which it considers to be challenged, three of which were discussed in the Company’s 2003 Form 10-K/A.

Communications with contracting parties during 2004 caused management to re-assess the collectibility of billed and unbilled receivables for two troubled projects. In both cases, the Company has been informed that its services would no longer be required to complete the project prior to its implementation. As a result, the Company reduced the related receivables by $5,500 to their net realizable value in the first quarter of 2004. In accordance with the application of percentage of completion accounting, the Company reflected the changes as a contract price adjustment, and accordingly, as a reduction in revenue. The Company continues to actively review its collection options.

The Company also determined it was necessary to increase its estimated cost to complete for three of these projects due to changes in 2004 in both scope and resource requirements. The revision in estimates had the effect of reducing gross margin by $3,900 in the first quarter of 2004.

The Company has $6,800 in billed and unbilled receivables related to these four contracts at June 30, 2004, which management believes are collectible.

5. Segment Information

The Company is a provider of IT services, and is organized geographically throughout North America, India and Asia, and other international locations. The chief operating decision-maker evaluates each location’s performance based primarily on its revenues and income from operations due to the similarity of the nature of services provided to clients. Revenue for the India/ Asia operation is evaluated based on the full attribution of bill rates charged to the end customer. The segment revenue figures disclosed below are stated at full attribution. Full attribution revenue is calculated using the end customer invoice rate on intersegment engagements, as opposed to using the transfer price rate. The chief operating decision-maker does not evaluate segment performance based on assets. Assets, including the related depreciation and amortization expense, are managed

primarily by corporate management. Under this organization, the operating segments have been aggregated into the following four operating segments and other.


	•	Public Sector includes all services provided to domestic state and local municipalities.

	•	Commercial includes all North American services provided to non-public sector customers. Commercial includes application services for maintenance and development outsourcing (AMD/O), retail, healthcare, distribution, manufacturing, financial services, telecommunications, utilities, e-business, packaged software implementation and other services. Commercial also includes telecommunication services provided in Europe.

	•	India/Asia includes all services performed in India or Asia.

	•	Europe includes services performed in Europe. Telecommunication services performed in Europe are excluded from the Europe figures as such services are included in the Commercial segment.

	•	Other consists primarily of the labor and supporting expenses for the Corporate functions, depreciation and amortization expenses as well as lease expenses for corporate headquarters.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company’s 2004 Annual Report on Form 10-K.

The organizational realignment initiated during the second quarter 2003 substantially modified the Company’s reporting structure and required the migration from the traditional single segment reporting presentation to a multi-segment presentation. This modified reporting format presents revenue of each segment on a full attribution basis, whereby the end customer invoice rate is presented, with inter-segment eliminations separately identified. This presentation reflects the importance and critical relationship whereby India/Asia supports, primarily, the Commercial and Public Sector segments with services. The segment operating results at the income from operations level utilizes the company’s transfer pricing methodology and thereby attributes a majority of the margin to the segments where the end customers are located. Thus the profitability of Commercial and Public Sector segments is enhanced while the profitability of India/Asia segment is directly reduced.

India/Asia supplies substantial resources to North American and European customers. The rate charged by India to U.S. and Europe has been developed utilizing a cost plus transfer pricing methodology. This results in a large component of the available gross margin accruing to North America or Europe where the end customer is located.

Revenue and income (loss) from operations by segment is as follows:


			Restated						Restated

			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2004			2003			2004			2003

Revenues
	Commercial		$	58,543		$	60,159		$	117,646		$	117,143
		Less intersegment		(205	)		—			(365	)		—

				58,338			60,159			117,281			117,143
	Public Sector			26,765			29,781			45,560			63,383
	India/Asia			24,298			16,946			48,705			32,666
		Less intersegment		(17,927	)		(13,552	)		(37,907	)		(26,421	)

				6,371			3,394			10,798			6,245
	Europe			3,671			3,749			7,636			7,874
		Less intersegment		(1,036	)		(843	)		(2,274	)		(1,569	)

				2,635			2,906			5,362			6,305
	Other			—			—			—			(277	)

			$	94,109		$	96,240		$	179,001		$	192,799

Income (Loss) from Operations
	Commercial		$	11,653		$	8,342		$	21,739		$	12,941
	Public Sector			2,461			1,378			(3,597	)		4,773
	India/Asia			1,057			416			2,257			1,088
	Europe			(25	)		(194	)		215			138
	Corporate and Other			(9,468	)		(10,161	)		(19,309	)		(19,398	)

				5,678			(219	)		1,305			(458	)
Other Income, net				1,303			579			1,309			1,072

	Income (Loss) before Provision (Benefit) for Income Taxes		$	6,981		$	360		$	2,614		$	614

6. Property and Equipment

Subsequent to the original issuance of its financial statements for the year ended December 31, 2003, the Company identified $2,561 of adjustments related to property and equipment, $1,495 of which related to prior periods requiring the Company to restate its previously filed financial statements for all periods affected by the charge. The remaining $1,066 was recorded in the first quarter of 2004, $742 of which relates to equipment that the Company has been unable to determine the period or periods during which the equipment left its possession and $324 of which relates to equipment that became obsolete in the first quarter of 2004. Of the $1,066, $39 was recorded in cost of revenue and $1,027 was recorded in selling, general and administrative expense.

7. Common Stock Repurchase Program

In October 2002, the Company’s board of directors authorized the repurchase of an additional 2,000,000 shares of the Company’s common stock, bringing the total authorization to 14,000,000 shares. Through June 30, 2004, the Company has repurchased approximately 11,181,876 shares of its common stock for cash, at a total cost of $139,572. The Company did not repurchase any shares in 2004. As of June 30, 2004, 2,818,124 shares remain available for repurchase under the board of directors authorization.

8. Net Income (Loss) Per Share

Basic and diluted net income (loss) per share is computed in accordance with SFAS No. 128, “Earnings Per Share, as amended by Emerging Issues Task Force (“EITF”) Issue 03-6 by dividing net income (loss) available for common shareholders by the weighted average number of shares of common stock outstanding. For the three month and six month periods ended June 30, 2004 and 2003, the effect of convertible redeemable preferred stock has not been in the calculation of dilutive net income (loss) per share because to do so would be anti-dilutive. The calculation of dilutive net income (loss) per share for the three month and six month periods ended June 30, 2004 and 2003 excludes in both periods 8,695,652 of common stock equivalents related to the convertible redeemable preferred stock, 5,300,000 of warrants issued to CD&R and 2,062,482 and 3,025,898 and 2,322,180 and 3,058,252 representing the average number of stock options outstanding for the three month and six month periods ended June 30, 2004 and 2003, respectively. The warrants and stock options were excluded from the calculation because the impact was anti-dilutive given the exercise prices for these warrants and stock options were higher than the Company’s average stock price for these periods.

The Company’s Series A Voting Convertible Preferred Stock is a participating security as defined in Issue 03-6. Issue 03-6 is effective for periods beginning for March 31, 2004. We adopted Issue 03-6 in the second quarter ended June 30, 2004 and restated EPS for all prior periods presented. The adoption of Issue 03-6 will result in a reduction in EPS available for common shareholders in periods where the Company has income and have no impact in periods where the Company has a loss.

9. Stock Option Plans

The Company has elected to account for stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no additional compensation expense has been recognized for our stock option plan within the accompanying consolidated statements of operations. Had compensation expense for our stock option plan been determined based on the fair value at the grant date consistent with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” the Company’s pro forma net income (loss) available for common shareholders and pro forma basic and diluted net income (loss) per common share would have been reduced to the amounts indicated below:


		Restated					Restated

		Three Months Ended					Six Months Ended
		June 30,					June 30,

		2004		2003			2004			2003

Net income (loss) available for common shareholders:
	As reported	$	2,617	$	(1,140	)	$	(556	)	$	(2,076	)
	Stock-based employee compensation cost included in the determination of net income (loss) from operations as reported		—		—			—			—
	Stock-based employee compensation cost had the fair value method been used		538		263			1,191			3,739

	SFAS No. 123 pro forma	$	2,079	$	(1,403	)	$	(1,747	)	$	(5,815	)

Basic and diluted income (loss) per share:
	As reported-basic	$	.10	$	(.04	)	$	(.02	)	$	(.08	)
	As reported-diluted	$	.10	$	(.04	)	$	(.02	)	$	(.08	)
	SFAS No. 123 pro forma-basic	$	.08	$	(.05	)	$	(.07	)	$	(.21	)
	SFAS No. 123 pro forma-diluted	$	.08	$	(.05	)	$	(.07	)	$	(.21	)

10. Comprehensive Income

Total comprehensive income is summarized as follows:


		Restated						Restated

		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2004			2003			2004			2003

Net income (loss)		$	4,603		$	(36	)	$	1,713		$	123
Currency translation adjustment			(2,683	)		2,306			(1,001	)		2,754
Reclassification of unrealized gains on short-term investments			—			—			—			(191	)

	Total comprehensive income	$	1,920		$	2,270		$	712		$	2,686

11. Related Party Transactions

Synova, Inc. and subsidiaries (Synova) is an IT professional services organization owned by a co-Chairman of the Company’s Board of Directors. During the three month periods ended June 30, 2004 and 2003, the Company provided services to Synova totaling $655 and $883, respectively and $1,306 and $1,693 for the six month periods ended June 30, 2004 and 2003, respectively. In addition, during the three month periods ended June 30, 2004 and 2003 Synova provided services to the Company totaling $293 and $567, respectively and $494 and $1,294 for the six month periods ended June 30, 2004 and 2003, respectively. The net balance owed to the Company by Synova at June 30, 2004 was $440. In addition, under the terms of a note payable, Synova owes the Company $7,500. This note is due in September 2005, and interest is paid quarterly in accordance with its terms.

The Company paid approximately $214 and $220 to CDR, a shareholder, for financial, management advisory, and executive management services during the three month periods ended June 30, 2004 and 2003, respectively and $394 and $391 for the six month periods ended June 30, 2004 and 2003, respectively.

In the third quarter of fiscal 2002, the Company entered into a ten-year agreement to provide outsourcing services to SIRVA, Inc. a company related through common ownership of CDR. During the three month and six month periods ended June 30, 2004 and 2003, services provided by the Company to SIRVA, Inc. totaled approximately $2,177 and 1,914, $4,753 and $3,455, respectively. The net balance owed to the Company by SIRVA at June 30, 2004 was $639.

During the three month and six month periods ended June 30, 2004 and 2003, the Company paid the Chesapeake Group, Inc., a company owned by a director $0 and $14 and $17 and $30, respectively, for merger and acquisition consulting services. At June 30, 2004 the Company owes the Chesapeake Group, Inc. $850.

The Company has a note receivable in the amount of $558 from a director. This note bears interest at 8.25% and is due in December 2006.

The Company has a note receivable in the amount of $306 from an executive officer. This note bears interest at 2.5%.

The Company has a non-interest bearing note receivable in the amount of $83 from a co-chairman of the Company’s Board of Directors.

12. Restructuring and Other Related Charges

The following is a roll forward of the accrual balance for Restructuring and Other Related charges for the six month periods ended June 30, 2004 and 2003 respectively.


				Lease
	Severance			Terminations			Other			Total

Balance January 1, 2004	$	371		$	1,668		$	—		$	2,039
Expense		1,019			1,429			—			2,448
Payments and other		(745	)		(546	)		—			(1,291	)

Balance June 30, 2004	$	645		$	2,551		$	—		$	3,196

Balance January 1, 2003	$	8		$	2,527		$	29		$	2,564
Expense		2,529			227			—			2,756
Payments and other		(1,573	)		(737	)		(29	)		(2,339	)

Balance June 30, 2003	$	964		$	2,017		$	—		$	2,981

Amounts related to lease terminations will be paid out through 2008. Amounts related to severance will be paid in 2004.

13. Cost of Computer Software to be Sold, Leased or Marketed

SFAS No. 86 “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” requires capitalized software development costs incurred subsequent to establishment of technological feasibility and prior to the availability of the product for general release to customers. During the six months ended June 30, 2004 the Company capitalized computer software of approximately $128. Amortization of capitalized costs begins when the product is available for general release to customers and is computed on a straight-line basis over each products estimated economic life — typically five years. Amortization costs were $421 and $591 for the three months ended June 30, 2004 and 2003, respectively and $843 and $1,181 for the six months ended June 30, 2004 and 2003, respectively.

14. Goodwill

Changes in the carrying amount of goodwill for the six months ended June 30, 2004 is as follows:


Balance January 1, 2004	$	18,441
Currency translation		(322	)

Balance June 30, 2004	$	18,119

15. Other Income, Net

Other income, net represents interest earned and realized gains and losses from the sale of short-term investments and cash equivalents and foreign currency transaction and translation gains and losses.

Foreign currency fluctuations during the three months ended March 31 and June 30, 2004 resulted in a foreign currency translation gain (loss) of approximately ($718) and $761, respectively, from the remeasurement of nonfunctional currency net asset positions into the functional currency of the respective foreign subsidiary.

16. Recently Issued Financial Accounting Standards

In December 2003, the FASB issued FIN 46R “Consolidation of Variable Interest Entities — an interpretation of ARB 51”. FIN 46R provides guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights, which are referred to as variable-interest entities (“VIEs”). FIN 46R became effective for Covansys on January 1, 2004. The adoption of FIN 46R did not have a material effect on our results of operations or financial position.

17. Recent Developments

On April 27, 2004, the Company announced that it had entered into a long-term Master Services Agreement and a Stock Purchase Agreement with Fidelity Information Services (“FIS”), Inc., a subsidiary of Fidelity National Financial, Inc.. The Master Services Agreement is expected to generate an anticipated $150 million in revenues to the Company over the next five years.

Under the Stock Purchase Agreement with FIS the Company will issue to FIS approximately 8.7 million shares of the Company’s common stock at a price of $12 per share or approximately $104.4 million. In addition FIS will receive four tranches of warrants, each for one million shares of the Company’s common stock, which have a strike price between $15 and $24 per share. FIS will also acquire approximately 2.5 million shares of the Company’s common stock from Rajendra Vattikuti, founder and co-chairman of the Company.

In order to facilitate the transactions with FIS, the Company also entered into a Recapitalization Agreement with a wholly-owned subsidiary of a private equity investment fund managed by Clayton, Dubilier & Rice, Inc. (the “CDR Stockholder”) to restructure the CDR Stockholder’s ownership interest in the Company and certain corresponding governance rights, in exchange for a combination of cash, stock, notes and warrants. The CDR Stockholder owns 200,000 shares of the Company’s Series A Voting Convertible Preferred Stock, or approximately 8.7 million shares of common stock on an as converted basis, and 5.3 million common stock warrants with a strike price of $18 per share.

Under the terms of the Recapitalization Agreement the CDR Stockholder will exchange all of its existing holdings in the Company for consideration consisting of $180 million of cash, two million shares of common stock of the Company, subordinated notes in the total amount of $15 million due December 31, 2005, and five-year warrants for five million shares of common stock with a strike price of $18 per share. The Company expects to finance the transaction with the CDR Stockholder with cash on hand, which totaled $109.7 million as of June 30, 2004, as well as proceeds from the FIS Investment.

As a result of the transactions contemplated by the Recapitalization Agreement with the CDR Stockholder, the Company expects to record a reduction to income available to common shareholders upon the closing. While the amount of the reduction will depend on the trading price of the Company’s common stock when the transaction is finalized, based on the closing price of $12.14 per share of the Company’s common stock as of Monday, April 26, 2004, the estimated reduction to income available to common shareholders would be approximately $59.0 million. The closing price of the Company’s common stock on July 30, 2004 was $9.24.

The closing of the Recapitalization Agreement with the CDR Stockholder is conditioned, among other things, on the closing under the Stock Purchase Agreement with FIS. The Stock Purchase Agreement includes customary representations by the Company, including the timely filing of all SEC reports and the accuracy financial statements. The closing under the Stock Purchase Agreement with FIS is subject to the satisfaction or waiver of closing conditions which include, among others, approval by the Company’s shareholders, the material accuracy of the Company’s representations when made and as of the closing date, and the absence of any material adverse effect on the Company since the signing of that Agreement.

The Company has capitalized $2.9 million of outside professional fees in connection with these transactions. The Company is also obligated to reimburse FIS up to $1.0 million for outside professional fees. Upon consummation of the transaction, fees related to the issuance of common stock will be netted against the proceeds received and fees related to redemption of the Company’s Series A Voting Convertible Preferred Stock will reduce income available to common shareholders.

On May 26, 2004, the Company was informed that its common stock was subject to delisting due to the Company’s failure to comply with Nasdaq Marketplace Rule 4310(c)(14), which requires the Company to file its periodic reports as required by the Securities Act of 1934. On July 1, 2004, the Company attended a hearing with a Nasdaq Listing Qualifications Panel. The Company believes that it regained full compliance with Nasdaq Marketplace Rule 4310(c)(14) when it filed its quarterly report on Form 10-Q for the period ended March 31, 2004 on August 6, 2004.

Item 2. Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following section should be read in conjunction with our Consolidated Financial Statements and related Notes appearing in this Form 10-Q/A. With the exception of statements regarding historical matters and statements concerning our current status, certain matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve substantial risks and uncertainties. Such forward-looking statements may be identified by the words “anticipate,” “believe,” “estimate,” “expect” or “intend” and similar expressions. Our actual results, performance or achievements could differ materially from these forward-looking statements.

Factors that could cause or contribute to such material differences include actions by governmental or regulatory agencies, general economic conditions and conditions in the IT industry such as the demand for IT services, public sector government budgetary constraints, potential cost overruns on fixed-price projects, effective application of the percentage of completion method of accounting for fixed priced contracts, risks related to merger, acquisition and strategic investment strategy, variability of operating results, government regulation of Immigration, exposure to regulatory, political and economic conditions in India and Asia, competition in the IT services industry, the short-term nature and termination provisions of contracts, economic conditions unique to clients in specific industries and limited protection of intellectual property rights.

Restatement of Consolidated Financial Statements

The adjustments giving rise to the Company’s need to restate its financial statements relate to the following areas:

Lease Accounting. During the 2004 year end closing process, the Company initiated and completed an analysis of its accounting in order to determine if its historical practices have deviated from the lease accounting standards discussed in SFAS 13, “Accounting for Leases”. As part of that analysis, the Company determined that it had not properly accounted for the operating lease for its US headquarters signed in 1993 in accordance with the guidance set forth in FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases.” The Company assessed the impact of the resulting errors on its historical financial statements and concluded that it was required to restate its financial statements for all periods affected by the matter.

($.7 million) has been corrected and has the effect of increasing property and equipment and reducing accumulated other comprehensive loss by $.7 million as of December 31, 2003. The correction had no impact on income from operations or net income.

Additional detail with respect to the impact of the restatement on the Company’s condensed consolidated financial statements for the three months and six months ended June 30, 2004 and 2003 is reported in Note 2 (“Restatement of Financial Statements”) to the Company’s condensed consolidated financial statements included under Item 1. of this Form 10-Q/A.

Overview

We are a global technology services company, with a focus on industry-specific solutions, strategic outsourcing and integration solutions. We address the most challenging technology issues companies are facing through a unique onsite, offsite, offshore delivery model that helps clients achieve rapid deployment and reduced costs. We offer high-level subject matter expertise in the public sector industry, as well as years of experience in retail, healthcare, distribution, manufacturing, financial services, telecommunications and utilities. We apply our industry-specific knowledge to deliver a wide range of outsourcing and integration services, including: application maintenance and development outsourcing (AMD/O); custom application development; e-business services; packaged software implementation, upgrades and enhancements; and other services. Our strategy is to establish long-term client relationships and to secure additional engagements with existing clients by providing quality services and by being responsive to client needs. For each of the past five years, over 80% of our revenues were generated from existing clients from the previous fiscal year.

We generally assume responsibility for project management and may bill the client on either a time-and-materials or fixed-price basis. We recognize revenues on time-and-materials engagements as the services are performed. On fixed-price engagements, we recognize revenues under the percentage of completion method except for fixed-price outsourcing contracts where we recognize revenues ratably over the applicable period. For the three month periods ended June 30, 2004 and 2003, approximately 44% and 41%, respectively, of our total revenues were generated from fixed-price engagements.

Our most significant cost is project personnel cost, which consists primarily of salaries, wages and benefits for our IT professionals. We strive to maintain our gross profit margin by controlling project costs and managing salaries and benefits relative to billing rates. We use a human resource management team to ensure that IT professionals are quickly placed on assignments to minimize nonbillable time and are placed on assignments that use their technical skills and allow for maximum billing rates.

In an effort to sustain our growth and profitability, we have made and continue to make substantial investments in our infrastructure, including: (1) development centers in the United States and India; (2) system methodologies; and (3) internal systems.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures in the consolidated financial statements and accompanying notes. We regularly evaluate and discuss with our Audit Committee the accounting policies and estimates we use to prepare our consolidated financial statements. Estimates are used for, but not limited to, revenue recognition under the percentage-of-completion method, impairment assessments of goodwill and other long-lived assets, realization of deferred tax assets, allowance for doubtful accounts, and litigation related contingencies. These estimates are based on historical experience, project management, and various assumptions that we believe to be reasonable given the particular facts and circumstances. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results could differ significantly from these estimates under different assumptions, judgments or conditions.

The Securities and Exchange Commission has defined “critical accounting policies” as those that are most important to the portrayal of a company’s financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates. Based on this definition, we have identified the critical accounting policies discussed below. We have other significant accounting policies, which also involve the use of estimates, judgments and assumptions that are integral to understanding our results of operations. For a complete discussion of all significant accounting policies, see Note 1 of our Notes to Consolidated Financial Statements included in our 2004 Form 10-K.

The following is an overview discussion of our critical accounting policies.

Revenue Recognition. We recognize revenue in accordance with Staff Accounting Bulletin No. 104, for our time-and-materials and fixed price outsourcing contracts. For those service contracts which are billed on a time and materials basis, we recognize revenues as the services are performed. In our time and materials contracts our effort, measured by our time incurred, represents the contractual milestones or output measure which is the contractual earnings pattern. For our fixed price IT outsourcing and maintenance contracts, we recognize revenue ratably over the applicable outsourcing or maintenance period as the services are performed continuously over the contract period.

For our contracts to design, develop or modify complex information systems based upon the client’s specifications, we recognize revenue on a percentage of completion basis in accordance with Statement of Position 81-1. The percentage of completion is determined by relating the actual cost of labor performed to date to the estimated total cost of labor for each contract. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. Such revisions, which may result in increases or decreases to revenue and income, are reflected in the financial statements in the period in which they are first identified. If the estimate indicates a loss on a particular contract, a provision is made for the entire estimated loss without reference to the percentage of completion.

Covansys periodically enters into contracts that include multiple-element arrangements, which may include any combination of services, software, support/maintenance, and the re-sale of hardware or software. Contracts entered into after June 30, 2003 containing multiple elements or deliverables are segmented into separate units of accounting where the separate elements represent separate earnings processes in accordance with EITF 00-21. Revenues are allocated among the elements based on the relative fair values of the elements and are recognized in accordance with our policies for the separate elements unless the undelivered elements are essential to the functionality of the delivered elements. In circumstances where an undelivered element is essential to the functionality of the delivered element, no revenue is recognized for the delivered element until the undelivered element is delivered.

Retainages, which are not material for any of the periods presented, are included in revenue earned in excess of billings in the accompanying condensed consolidated balance sheets. Revenue earned in excess of billings is primarily comprised of revenue recognized on certain contracts in excess of contractual billings on such contracts. Billings in excess of revenue earned are classified as deferred revenue.

Impairment of Long-Lived Assets.We review the recoverability of our long-lived assets, including property and equipment when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable and goodwill on an annual basis. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from expected future pre-tax cash flows of the related asset group or operating segment. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.

Computer Software. We perform research to develop software for various business applications. The costs of such research are charged to expense when incurred. When the technological feasibility of the product is established, subsequent costs are capitalized. Capitalized software costs are amortized on a product-by-

product basis. Amortization is recorded on the straight-line method over the estimated economic life of the product, generally five years, commencing when such product is available. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic product lives and changes in software and hardware technology. These assumptions are reevaluated and adjusted as necessary at the end of each accounting period. Management reviews the valuation and amortization of capitalized development costs. We periodically consider the value of future cash flows attributable to the capitalized development costs in evaluating potential impairment of the asset. Amounts charged to expense for research and development of computer software were not material in the periods indicated.

Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Recent Developments

Fixed Price Contracts. The Company realized approximately 44% and 40% of its revenue during the three months and six months ended June 30, 2004, from fixed price contracts with respect to which it recognizes revenue on a percentage of completion basis. These contracts expose the Company to collection risk on both billed and unbilled receivables in the event that contract milestones are not met or the client does not accept the product as delivered. In addition, the Company could incur unanticipated losses if it is necessary to increase its estimated cost to complete.

Communications with contracting parties during 2004 caused management to re-assess the collectibility of certain billed and unbilled receivables for two contracts. In both cases, the Company has been informed that its services would no longer be required to complete the project prior to its implementation. As a result, the Company reduced the related receivables by $5,500 to their net realizable value in the first quarter of 2004. In accordance with the application of percentage of completion accounting, the Company reflected the changes as a contract price adjustment, and accordingly, as a reduction in revenue. The Company continues to actively review its collection options.

The Company has $6,800 in billed and unbilled receivables related to these four contracts at June 30, 2004, which management believes are collectible.

Strategic Transaction. On April 27, 2004, the Company announced that it had entered into a long-term Master Services Agreement and a Stock Purchase Agreement with Fidelity Information Services, Inc. (“FIS”), a subsidiary of Fidelity National Financial, Inc. (“FNF”). The Master Services Agreement is expected to generate an anticipated $150 million in revenues to the Company over the next five years.

Under the Stock Purchase agreement with FIS the Company will issue to FIS approximately 8.7 million shares of the Company’s common stock at a price of $12 per share or approximately $104.4 million. In addition FIS will receive four tranches of warrants, each for one million shares of the Company’s common stock, which have a strike price between $15 and $24 per share. FNF will also acquire approximately 2.5 million shares of the Company’s common stock from Rajendra Vattikuti, founder and co-chairman of the Company.

In order to facilitate the transactions with FIS, the Company also entered into a Recapitalization Agreement with a wholly-owned subsidiary of a private equity fund managed by Clayton, Dubilier & Rice, Inc. (the “CDR Stockholder”) to restructure the CDR Stockholder’s ownership interest in the Company and certain corresponding governance rights, in exchange for a combination of cash, stock, notes and warrants. The CDR Stockholder owns 200,000 shares of the Company’s Series A Voting Convertible Preferred Stock, or approximately 8.7 million shares of common stock on an as converted basis, and 5.3 million common stock warrants with a strike price of $18 per share.

Under the terms of the Recapitalization Agreement the CDR Stockholder will exchange all of its existing holdings in the Company for consideration consisting of $180 million of cash, two million shares of common stock of the Company, subordinated notes in the total amount of $15 million due December 31, 2005, and five-year warrants for five million shares of common stock with a strike price of $18 per share. The Company will finance the transaction with the CDR Stockholder with cash on hand, which totaled $109.7 million as of June 30, 2004, as well as proceeds from the FIS investment.

The closing of the Recapitalization Agreement with the CDR Stockholder is conditioned, among other things, on the closing under the Stock Purchase Agreement with FIS. The Stock Purchase Agreement includes customary representations by the Company including the timely filing of all SEC reports and the accuracy of financial statements. The closing under the Stock Purchase Agreement with FIS is subject to the satisfaction or waiver of closing conditions which include, among others, approval by the Company’s shareholders, the material accuracy of the Company’s representations when made and as of the closing date, and the absence of any material adverse effect on the Company since the signing of that Agreement.

Other. On May 26, 2004, the Company was informed that its common stock was subject to delisting due to the Company’s failure to comply with Nasdaq Marketplace Rule 4310(c)(14), which requires the Company to file its periodic reports as required by the Securities Act of 1934. On July 1, 2004, the Company attended a hearing with a Nasdaq Listing Qualifications Panel. The Company regained full compliance with all Nasdaq listing requirements by filing the initial report on Form 10-Q/A for the three months ended March 31, 2004 in August 2004.

Results of Operations

Revenue and gross profit by segment is as follows:


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2004			2003			2004			2003

Revenues
	Commercial		$	58,543		$	60,159		$	117,646		$	117,143
		Less intersegment		(205	)		—			(365	)		—

				58,338			60,159			117,281			117,143
	Public Sector			26,765			29,781			45,560			63,383
	India/Asia			24,298			16,946			48,705			32,666
		Less intersegment		(17,927	)		(13,552	)		(37,907	)		(26,421	)

				6,371			3,394			10,798			6,245
	Europe			3,671			3,749			7,636			7,874
		Less intersegment		(1,036	)		(843	)		(2,274	)		(1,569	)

				2,635			2,906			5,362			6,305
	Other			—			—			—			(277	)

			$	94,109		$	96,240		$	179,001		$	192,799

	Gross profit (loss)
		Commercial	$	16,232		$	14,954		$	30,611		$	26,593
		Public Sector		6,264			5,856			3,860			13,991
		India/Asia		2,321			1,869			4,683			3,666
		Europe		948			725			2,097			1,949
		Other		(502	)		(775	)		(1,097	)		(1,788	)

			$	25,263		$	22,629		$	40,154		$	44,411

Revenues. Revenues were $94.1 million and $96.2 million in the second quarter of 2004 and 2003, respectively and $179.0 million and $192.8 million for the six months ended June 30, 2004 and 2003. Revenues from the commercial segment were $58.3 million in the second quarter of 2004, a decrease of 3.2% from 2003 revenue of $60.2 million. The decline in revenue is primarily due in part to the transfer of certain customer relationships to the Company’s operations in India. For the six months period, revenues were flat with the comparable prior year period.

Public sector revenues declined $3.0 million from second quarter 2003 revenues of $29.8 million and declined $17.8 million from first half 2003 revenues of $63.4 million. The decline in revenue was the result of the completion of numerous projects in 2003, combined with a slow down in requests for new proposals for potential new projects being issued by state governments, as well as adjustments to the estimated cost to complete on certain fixed price contracts in the first quarter of 2004 in respect of which the Company recognizes income on the percentage of completion basis. These adjustments resulted in the Company not recognizing approximately $3.7 million of revenue in the three months ended March 31, 2004 which would have been recognized had the estimates to complete not required adjustment. In addition, public sector revenue was also negatively impacted by a $5.5 million adjustment related to management’s reassessment of the collectibility of outstanding billed and unbilled receivables associated with two troubled projects. In accordance with the application of percentage of completion accounting, the Company reflected the changes as a contract price adjustment, and accordingly, as a reduction in revenue.

Revenues from India/ Asia increased significantly in both periods over comparable periods in 2003, reflecting the shift to a higher utilization of Indian resources on existing customer relationships as well as the transfer of certain commercial segment customer relationships to the region.

Gross Profit. Gross profit in the second quarter of 2004 was $25.3 million or 26.8% or revenue compared with $22.6 million of 23.5% of revenue in the comparable 2003 period. Gross profit for the first six months of 2004 was $40.1 million or 22.4% of revenue compared with $44.4 million or 23.0% of revenue for the first six months of 2003. Gross profit in the second quarter of 2003 was negatively impacted by severance of approximately $1.0 million related to the realignment of the Company. Also, two loss contracts in the public sector segment also contributed to the lower gross profit as the Company recorded a charge of approximately $0.8 million relative to these contracts.

Gross profit for the first six months of 2004 was negatively impacted by the reassessment of costs of a loss contract, adjustments to estimates to the costs to complete for certain public sector contracts, as well as the adjustment of certain unbilled fixed price contract receivables in the public sector segment based upon perceived collection risk. These adjustments had a negative effect of approximately $9.4 million in the first six months of 2004. In addition gross profit in the second quarter of 2004 was impacted due to costs associated with project ramp up on new accounts in India/Asia resulting from increased headcount and lower utilization rates. Gross profit in 2003 was impacted by a $1.0 million charge recorded in the first quarter of 2003 related to a loss contract.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $19.6 million and $22.8 million in the second quarter of 2004 and 2003 respectively or 20.8% and 23.7% of revenue. For the six months ended June 30, 2004 and 2003, selling, general and administrative expenses were $38.8 million and $44.9 million respectively or 21.7% and 23.3% of revenue. Included in selling, general and administrative costs in the second quarter of 2004 are lease termination costs of $1.2 million and $0.7 million in professional fees associated with the fixed asset analysis. In addition, the first six months of 2004 includes a charge of $1.0 million from the loss on disposal and obsolescence of property and equipment as further described in Note 6.

Included in 2003 amounts are severance costs of $1.5 million in the second quarter associated with the realignment of the Company’s operations and approximately $0.6 million for lease termination costs and write-down of leasehold improvements. The organizational realignment initiated during the second quarter of 2003 is the primary driver in the reduction of costs in 2004 compared with 2003. Through the elimination of overlapping layers in the organization as part of the organizational realignment, the Company has been able to cut costs and improve the support structure across the organization.

Other Income, Net. Other income, net represents interest earned and realized gains and losses from the sale of short-term investments and cash equivalents and foreign currency transaction and translation gains and losses. Foreign currency fluctuations during the three months ended March 31 and June 30, 2004 resulted in a foreign currency translation gain (loss) of approximately ($718) and $761 from the remeasurement of nonfunctional currency net asset positions into the functional currency of the respective foreign subsidiary.

Provision for Income Taxes. The effective tax rate in the second quarter and first six months of 2004 was 34.1% and 34.5%, respectively. The Company estimates that its effective tax rate for the remainder of 2004 will be approximately 34.5%.

Liquidity and Capital Resources

As of June 30, 2004, we had cash and short-term investments totaling $129.0 million. The Company generally funds its operations and working capital needs through internally generated funds. Cash provided from operations was $5.3 million for the six month period ended June 30, 2004.

The principal use of cash for investing activities during the six month period ended June 30, 2004 was for the purchase of investment securities available for sale and for the purchase of property and equipment.

To facilitate future cash flow needs, we have an arrangement with a commercial bank where we may borrow an amount not to exceed $20.0 million with interest at the bank’s prime rate less .5%, or the LIBOR rate plus 1.2% at the borrower’s option. $15.0 million of the $20.0 million is available for standby letters of credit. As of June 30, 2004, we had $6.2 million of standby letters of credit outstanding as collateral for five performance bonds. Borrowings under this facility are short-term, payable on demand and are collateralized by all assets. During the six month period ended June 30, 2004, we did not have any balances outstanding under this arrangement.

Most of our revenues are billed in U.S. dollars. We recognize transaction gains and losses in the period of occurrence. Foreign currency fluctuations during the six month period ended June 30, 2004 did not have a material impact on income from operations as currency fluctuations on revenue denominated in a foreign currency were offset by currency fluctuations on expenses denominated in a foreign currency. There were no material operating trends or effects on liquidity as a result of fluctuations in the functional currency. We do not use derivatives to hedge against foreign currency fluctuations, nor do we speculate in foreign currency.

Revenues, based on end customer bill rates, generated by our India and Asia operations, including development centers, from both direct services provided to clients in India and Asia as well as services provided to customers in the United States and Europe, accounted for 25.8% and 17.6% of our total revenues for the three month periods ended June 30, 2004 and 2003, respectively.

Inflation did not have a material impact on our revenues or income from operations during the three month and six month periods ended June 30, 2004 and 2003.

Recently Issued Financial Accounting Standards

Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risk for the effect of foreign currency fluctuations and interest rate changes. Information relating to quantitative and qualitative disclosure about market risk is set forth below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

Foreign Exchange Risk

Most of our revenues are billed in U.S. dollars. We recognize transaction gains and losses in the period of occurrence. Foreign currency fluctuations in the six month periods ended June 30, 2004 and 2003 did not have a material impact on income from operations as currency fluctuations on revenue denominated in a foreign currency were offset by currency fluctuations on expenses denominated in a foreign currency. We do not generally use derivatives to hedge against foreign currency fluctuations, nor do we speculate in foreign currency.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our cash and short-term investment portfolio, which was $129.0 million as of June 30, 2004. All of our short-term investments are designated as available-for-sale and accordingly, are presented at fair value in the consolidated balance sheet. A portion of our short term investments are in mutual funds. Mutual funds may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.

Commitments, Contingencies and Potential Liability to Clients

The Company is, from time to time, party to ordinary, routine litigation incidental to the Company’s business. After discussion with its legal counsel, the Company does not believe that the ultimate resolution of any existing matter will have a material adverse effect on its financial condition, results of operations or cash flows.

In addition, many of the Company’s engagements involve projects that are critical to the operations of its clients’ businesses and provide benefits that may be difficult to quantify. The Company attempts to contractually limit its liability for damages arising from errors, mistakes, omissions or negligent acts in rendering its services. The Company has undertaken engagements for which the Company guarantees its performance based upon defined client specifications on delivery dates. Certain engagements have required the Company to obtain a performance bond from a licensed surety, to guarantee performance, and to post the performance bond with the client. The Company intends to satisfy all of its performance obligations with its clients and does not anticipate defaulting on any of these performance bonds or letters of credit.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at http://www.covansys.com as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission.


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

The Company maintains controls and procedures designed to ensure that it is able to collect the information that is required to be disclosed in the reports it files with the SEC, and to process, summarize and disclose this information within the time period specified by the rules of the SEC. The Company’s Chief Executive Officer and the Chief Financial Officer are responsible for establishing, maintaining and enhancing these controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of June 30, 2004 the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective for the reasons discussed below.

Changes in Internal Controls

The Company’s internal control over financial reporting is the responsibility of the Chief Executive Officer and the Chief Financial Officer. To fulfill this responsibility, management has continued to enhance internal controls and increase the oversight over those affected controls. Management has also taken corrective action with regard to identified significant deficiencies and material weaknesses through a number of initiatives including those specifically set forth below.

Revenue Contract Accounting.In the first quarter of 2005, the Company engaged in a thorough process to organize and catalogue its customer contracts in preparation of the integration of its contract information into a module of its ERP system. This process confirmed that measures implemented by the Company at the end of the second quarter of 2004 had strengthened the Company’s revenue recognition processes by requiring that contract documentation for new engagements be presented to and/or confirmed by the Legal Department prior to recognition of revenue for that contract. There are still improvements required, however, to strengthen the design of the Company’s process to capture and validate the contractual terms which impact the Company’s recognition of revenue. In conjunction with the contract organization process and in preparation of the year-end consolidated financial statements, management reviewed substantially all of its contracts that contain a fee limitation cap to confirm that revenue recognized did not exceed the fee limitation cap. It was through this process that the revenue adjustment associated with the contract disclosed in Note 22 of the consolidated financial statements in the 2004 Form 10-K, was identified and recorded during the fourth

quarter closing process. The Company is continuing to develop procedures to improve the flow of information between its legal, finance and field operations, which procedures will include:


	•	Quarterly verification that contractual documentation exists to support revenue recognized in the applicable reporting period;

	•	Integration of the Company’s contract repository into a module of the Company’s ERP system (anticipated to occur no later than the third quarter of 2005); and

	•	Enhancement of the Company’s ERP system to track fee limitation caps.

Percentage of Completion Accounting.In November 2003, the Company disclosed a material weakness in its internal controls related to the Company’s application of the percentage-of-completion method of accounting for its fixed price contracts. The Company has implemented a multi-part plan to strengthen controls of fixed price contracts and to enhance the processes supporting application of the percentage-of-completion method of accounting for its fixed price contracts. As of December 31, 2004, however, management concluded that the material weakness had not been adequately remediated. Specifically, management determined that the initiatives encompassed in that plan had not been fully implemented and were not yet operating effectively. Since the material weakness was identified in 2003, management has implemented the following:


	•	Standardization and continuous improvement of the use of three primary estimating tools;

	•	Periodic project reviews with executive management;

	•	Enhanced training addressing revenue recognition, contract management and project tracking and reporting. Migration of project plans and project reporting to a standard workbook;

	•	The addition of a fixed price specialist to assist the project management teams on use of the standard workbook along with being available to address project related reporting issues; and

	•	Monthly certification by individual project managers attesting to the appropriateness of their monthly estimate-to-complete submissions.

The Company believes the foregoing measures strengthened its accounting policies with regard to percentage-of-completion accounting, but that such measures did not include a consistent risk-adjusted methodology for project managers to use in their estimates of costs to complete on percentage of completion projects. The Company will continue to strengthen its processes in this area in 2005 through:


	•	Creation and consistent application of a risk-adjusted methodology to identify the appropriate level of contingency for percentage of completion projects and a framework for project managers to use in calculating their estimates of costs to complete;

	•	Continued executive oversight of significant projects including weekly reviews by executive management of projects that include new or high risk technology implementations or that have significantly deviated from the project plan;

	•	Increased monitoring of projects by the Project Management Office and Internal Audit Department;

	•	Creation of more detailed procedural documentation and additional training to assist the Company’s employees in their reporting responsibilities; and

	•	Automation and integration of the Company’s various systems and spreadsheets to provide greater transparency and real time information about the various projects and contracts under which the Company operates.

Net Property and Equipment:At the conclusion of a physical inventory process undertaken by the Company in June 2004, the Company identified a charge of $2.6 million for assets that could not be located or were no longer in use. This process resulted in a restatement of previously issued financial statements for 2003, 2002, and 2001 and in the Company reporting a material weakness related to the Company’s recording and tracking of fixed assets in its Form 10-Q for the quarter ended March 31, 2004. Additionally, as discussed in

Note 2 of the condensed consolidated financial statements included under Item 1. of this Form 10-Q/A, as part of the year-end closing process, management discovered that a consolidating entry to properly record inter-company property and equipment transactions on the balance sheet at December 31, 2003, and at quarterly balance sheets through September 30, 2004, was classified within accumulated comprehensive income in error. This balance sheet misclassification has been corrected in the financial statements for the current and prior period. Since June 2004, the Company has successfully accomplished the following items of its plan to strengthen accounting for its fixed assets:


	•	Development of a policy and procedure manual regarding the recording, tracking and depreciation of fixed assets;

	•	Addition of a new resource in the information technology staff who is responsible for equipment tracking; and

	•	Periodic physical inventories of fixed assets including one complete at year-end 2004 which resulted in no material subsequent adjustments. Management will continue the periodic physical inventory process in 2005.

The Company anticipates implementing a transaction level fixed asset module within the Company’s ERP system to integrate the tracking of its fixed assets no later than the second quarter 2005.

Income Taxes:As part of its 2004 year-end closing process, the Company identified errors (disclosed in Note 2 of the condensed consolidated financial statements included under Item 1. of this Form 10-Q/A) when reconciling its cumulative temporary difference and contingent tax liabilities to recorded amounts. Management will strengthen controls over this area in 2005 by enlisting additional tax expertise either within the Company or through more effective use and oversight of third party tax service providers.

Leases (Step-Rents):As part of its 2004 year-end closing process, it was concluded that straight-line rent expense for the Company’s headquarters had been incorrectly accrued and that the related lease expense for prior periods was incorrect. This error was determined to be a material weakness in internal controls and resulted in a restatement of prior period financial statements. The Company has recently implemented controls to reduce the risk of such an error in the future through implementation of a comprehensive lease review checklist, review of each significant lease for proper accounting treatment by the Company’s controller, and limiting execution of all property leases by the Company’s Chief Financial Officer or authorized designee.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 24, 2004, Covansys reached an agreement with Indiana Marion County Prosecutor to voluntary make a restitution payment of $204,000 and a payment of $50,000 for investigation costs arising from an alleged violation of contract and procurement regulations. Covansys agreed to make the payments in lieu of protracted legal proceedings. The payments related to a contract between Covansys and the Indiana Family and Social Services Administration (“FSSA”). During 2002, Covansys did not receive written confirmation that FSSA had obtained a written waiver of the competitive bidding requirement for the hardware and software components of the contract. The agreement with the Marion County Prosecutor does not inhibit the Company’s ability to obtain any additional work from FSSA or any other agency of the State of Indiana. As previously disclosed in the Company’s first quarter Form 10-Q the Company accrued for these amounts as of March 31, 2004.

Item 4. Submission of Matters to a Vote of Security Holders

On June 28, 2004, the annual meeting of shareholders was held. The meeting was held for the following purposes:


	1. to elect four directors to the Board of Directors; and

	2. to ratify the appointment of PricewaterhouseCoopers LLP as independent auditors for the fiscal year 2004.

The shareholders re-elected Mr. Douglas S. Land as a director. The vote was 29,748,876 for and 6,031,927 withheld.

The shareholders re-elected Mr. Ronald K. Machtley as a director. The vote was 33,737,833 for and 2,042,970 withheld.

The shareholders re-elected Mr. Frank D. Stella as a director. The vote was 33,422,471 for and 2,358,332 withheld.

The shareholders re-elected Mr. David Wasserman as a director. The vote was 29,858,943 for and 5,921,860 withheld.

Mr. William C. Brooks, Mr. Kevin J. Conway and Mr. John A. Stanley continue as directors with terms expiring in 2005. Mr. Rajendra B. Vattikuti, Mr. Ned C. Lautenbach and Mr. Martin C. Clague continue as directors with a term expiring in 2006.

The shareholders approved the appointment of PricewaterhouseCoopers LLP as independent auditors of Covansys Corporation for the year ending December 31, 2004, the vote was 33,458,174 for, 2,197,986 against and 270,886 abstain.

Item 6. Exhibits

(a) Exhibits


Number		Exhibit

	31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Rajendra B. Vattikuti pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of James S. Trouba pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


	COVANSYS CORPORATION


	By:	/s/Thomas E. Lindsey



	Thomas E. Lindsey
	Vice President and Chief
	Accounting Officer
	(Principal Accounting Officer)

	/s/James S. Trouba

	James S. Trouba
	Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

Dated: March 22, 2005

Exhibit Index


Exhibit No.		Description

	31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Rajendra B. Vattikuti pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of James S. Trouba pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Covansys (CVNS) Inactive 10-Q/A2004 Q2 Quarterly report (amended)

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