Edgar Filing: COMPUWARE CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ________________

Commission file number 000-20900

COMPUWARE CORPORATION

(Exact name of registrant as specified in its charter)

Michigan		38-2007430
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

One Campus Martius, Detroit, MI 48226-5099

(Address of principal executive offices including zip code)

Registrant's telephone number, including area code: (313) 227-7300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:

As of August 2, 2012, there were outstanding 215,559,325 shares of Common Stock, par value $.01, of the registrant.

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2012 and March 31, 2012	3

	Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2012 and 2011	4

	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2012 and 2011	5

	Notes to Condensed Consolidated Financial Statements	6

	Report of Independent Registered Public Accounting Firm	23

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 5.	Other Information	48

Item 6.	Exhibits	49

SIGNATURES		50

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

	June 30,			March 31,
ASSETS	2012			2012

CURRENT ASSETS:
Cash and cash equivalents	$	83,507		$	99,180
Accounts receivable, net		359,610			455,427
Deferred tax asset, net		42,784			37,665
Income taxes refundable		8,470			14,807
Prepaid expenses and other current assets		34,489			34,279
Total current assets		528,860			641,358

PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		316,363			321,991

CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET		118,343			118,973

ACCOUNTS RECEIVABLE		206,004			205,869

DEFERRED TAX ASSET, NET		39,803			40,672

GOODWILL		791,946			801,889

OTHER ASSETS		36,534			36,786

TOTAL ASSETS	$	2,037,853		$	2,167,538

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	17,842		$	16,169
Accrued expenses		82,844			119,834
Income taxes payable		3,168			3,919
Deferred revenue		406,476			447,050
Total current liabilities		510,330			586,972

LONG TERM DEBT		36,500			45,000

DEFERRED REVENUE		334,537			373,359

ACCRUED EXPENSES		26,822			30,109

DEFERRED TAX LIABILITY, NET		82,904			82,161
Total liabilities		991,093			1,117,601

SHAREHOLDERS' EQUITY:
Common stock		2,166			2,175
Additional paid-in capital		691,485			685,904
Retained earnings		372,487			372,408
Accumulated other comprehensive loss		(19,378	)		(10,550	)
Total shareholders' equity		1,046,760			1,049,937

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,037,853		$	2,167,538

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended
	June 30,
	2012			2011
REVENUES:
Software license fees	$	33,994		$	34,126
Maintenance fees		102,949			106,985
Subscription fees		20,479			19,124
Professional services fees		48,152			53,572
Application services fees		20,587			16,167

Total revenues		226,161			229,974

OPERATING EXPENSES:
Cost of software license fees		4,825			3,536
Cost of maintenance fees		8,946			9,531
Cost of subscription fees		7,393			7,127
Cost of professional services		42,301			45,119
Cost of application services		17,721			16,834
Technology development and support		26,497			24,701
Sales and marketing		62,190			61,995
Administrative and general		39,725			41,514

Total operating expenses		209,598			210,357

INCOME FROM OPERATIONS		16,563			19,617

OTHER INCOME, NET		52			998

INCOME BEFORE INCOME TAX PROVISION		16,615			20,615

INCOME TAX PROVISION		6,147			3,630

NET INCOME	$	10,468		$	16,985

Basic earnings per share	$	0.05		$	0.08

Diluted earnings per share	$	0.05		$	0.08

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Foreign currency translation adjustments	$	(12,115	)	$	127

TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments		(3,287	)		953

OTHER COMPREHENSIVE (LOSS), NET OF TAX		(8,828	)		(826	)

COMPREHENSIVE INCOME	$	1,640		$	16,159

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Three Months Ended
		June 30,
		2012			2011
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	10,468		$	16,985
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			15,369			13,015
Stock award compensation			8,289			5,323
Deferred income taxes			(884	)		(1,200	)
Other			9			45
Net change in assets and liabilities, net of effects from currency fluctuations:
Accounts receivable			84,862			64,773
Prepaid expenses and other current assets			(1,548	)		3,787
Other assets			863			(6,557	)
Accounts payable and accrued expenses			(36,468	)		(31,561	)
Deferred revenue			(68,088	)		(52,356	)
Income taxes			5,253			2,952
Net cash provided by operating activities			18,125			15,206

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment			(2,244	)		(5,020	)
Capitalized software			(8,846	)		(3,593	)
Other			(600	)
Net cash used in investing activities			(11,690	)		(8,613	)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings			41,000
Payments on borrowings			(49,500	)
Net proceeds from exercise of stock awards including excess tax benefits			2,517			5,142
Employee contribution to stock purchase plans			818			779
Repurchase of common stock			(14,075	)
Net cash provided by (used in) financing activities			(19,240	)		5,921

EFFECT OF EXCHANGE RATE CHANGES ON CASH			(2,868	)		2,108

NET CHANGE IN CASH AND CASH EQUIVALENTS			(15,673	)		14,622

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			99,180			180,244

CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	83,507		$	194,866

See notes to condensed consolidated financial statements

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Note 1 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the "Company", “Compuware”, “we”, “our” and “us”). All inter-company balances and transactions have been eliminated in consolidation.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at June 30, 2012, final amounts may differ from these estimates.

In the opinion of management of the Company, the accompanying financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2012 included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet at March 31, 2012 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of results expected to be achieved for the full fiscal year.

Basis for Revenue Recognition

The Company derives its revenue from licensing software products; providing maintenance and support services for those products; and rendering web performance, professional and application services. Our software solutions are comprised of license fees, maintenance fees, subscription fees and software related professional services fees.

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services or software related professional services) and non-software deliverables (web performance services, professional services unrelated to our software products or application services). Our web performance services and application services do not qualify as software deliverables because our license grant does not allow the customer the right or capability to take possession of the software. For arrangements that contain both software and non-software deliverables (almost all of these arrangements combine software deliverables with web performance services), in accordance with ASC 605 “Revenue Recognition,” we allocate the arrangement consideration based on fair value using the following hierarchy: vendor specific objective evidence of fair value (“VSOE,” meaning price when sold separately) if available; third-party evidence if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. We currently are unable to establish VSOE or third-party evidence for our web performance services or software deliverables. Therefore, we create our best estimate of selling price by evaluating renewal amounts included in a contract, if any, and prices of deliverables sold separately, taking into consideration geography, volume discounts, and transaction size.

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Once we have allocated the arrangement consideration between software deliverables and non-software deliverables, we recognize revenue as described in the respective software license fees, maintenance fees, subscription fees, professional services fees and application services fees sections below.

In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. We evaluate collectability based on past customer history, external credit ratings and payment terms within various customer agreements.

Software license fees

The Company's software license agreements provide our customers with a right to use our software perpetually (perpetual licenses) or during a defined term (time-based licenses).

Assuming all revenue recognition criteria are met, perpetual license fee revenue is recognized using the residual method, under which the fair value, based on VSOE, of all undelivered elements of the agreement (i.e., maintenance and software related professional services) is deferred. VSOE is based on rates charged for maintenance and professional services when sold separately. The remaining portion of the fee is recognized as license fee revenue upon delivery of the products.

For revenue arrangements where there is a lack of VSOE for any undelivered elements, license fee revenue is deferred and recognized upon delivery of those elements or when VSOE can be established. However, when maintenance or software related professional services are the only undelivered elements, the license fee revenue is recognized on a ratable basis over the longer of the maintenance term or the period the software related professional services are expected to be performed. Such transactions include time-based licenses and certain unlimited capacity licenses, as the Company has not established VSOE for the undelivered elements in these arrangements. In order to comply with SEC Regulation S-X, Rule 5-03(b), which requires product, services and other categories of revenue to be displayed separately on the income statement, the Company separates the license fee, maintenance fee and software related professional services fee (which is included in professional services fees) associated with these types of arrangements based on its determination of fair value. The Company applies VSOE for maintenance related to perpetual license transactions and stand alone software related professional services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and software related professional services fee revenue for income statement classification purposes.

The Company offers flexibility to customers purchasing licenses for its products and related maintenance. Terms of these transactions range from standard perpetual license sales that include one year of maintenance to large multi-year (generally two to five years), multi-product contracts. The Company allows deferred payment terms with installments collectible over the term of the contract. Based on the Company’s successful collection history for deferred payments, license fees (net of any financing fees) are generally recognized as revenue as discussed above. In certain transactions where it cannot be concluded that the fee is fixed or determinable due to the nature of the deferred payment terms, the Company recognizes revenue as payments become due. Financing fees are recognized as interest income over the term of the related receivable.

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Maintenance fees

The Company’s maintenance arrangements allow customers to receive technical support and advice, including problem resolution services and assistance in product installation, error corrections and any product enhancements released during the maintenance period. The first year of maintenance is generally included with all license agreements. Maintenance fees are recognized ratably over the term of the maintenance arrangements, which generally range from one to five years.

Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our web performance services. Subscription fees are deferred upon contract execution and are recognized ratably over the term of the subscription.

Professional services fees

The Company provides a broad range of IT services for mainframe, distributed, web and mobile environments, including mobile computing application development and integration, package software customization, cloud computing consulting, development and integration of legacy systems, IT portfolio management services, enterprise legacy modernization services and application performance management. The Company also offers implementation, consulting and training services in tandem with the Company’s software solutions offerings, which are referred to as software related professional services.

Professional services fees are generally based on hourly or daily rates. Revenues from professional services are recognized in the period the services are performed provided that collection of the related receivable is reasonably assured. For development services rendered under fixed-price contracts, revenues are recognized using the percentage of completion method and if it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent.

Application services fees

Our application services fees consist of fees related to our Covisint on-demand software including associated services. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. Many of our application services fee contracts include a project fee and ongoing software-as-a-service (“SaaS”) operations (“recurring”) fees. Certain professional services related to these projects have stand-alone value (e.g., other vendors provide similar services) and qualify as a separate unit of accounting. Therefore, the professional services are recognized as delivered. For those professional services that do not have stand-alone value, the revenue is deferred and recognized over the longer of the customer arrangement (generally one to three years) or the expected period the customer will receive benefit (generally five years). The recurring fees are recognized over the applicable service period.

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Deferred revenue

Deferred revenue consists primarily of billed and unbilled maintenance and subscription fees related to the future service period of maintenance and subscription agreements in effect at the reporting date. Deferred license, software related services and application services fees are also included in deferred revenue for those arrangements that are being recognized over time. Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “prepaid expenses and other current assets” or non-current “other assets”, as applicable, in the condensed consolidated balance sheets and recognized as “sales and marketing” expenses in the condensed consolidated statements of comprehensive income over the revenue recognition period of the related customer contracts.

Research and development

Research and development (“R&D”) costs primarily include the cost of programming personnel and amounted to $25.6 million for the three months ended June 30, 2012 and $18.5 million for the three months ended June 30, 2011. R&D costs related to our software products and web performance services in the condensed consolidated statements of comprehensive income are reported as “technology development and support” and for our application services network, the costs are reported as “cost of application services”.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. The Company does not permanently reinvest any earnings in its foreign subsidiaries and recognizes all deferred tax liabilities that arise from outside basis differences in its investment in subsidiaries.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

Interest and penalties related to uncertain tax positions are included in the income tax provision.

The Company’s effective tax rate for the first quarter of 2013 was 37.0% compared to 17.6% for the first quarter of 2012. The effective tax rate was higher primarily due to a reversal of the valuation allowance associated with the Brownfield Redevelopment (“Brownfield”) tax credit resulting in a $5.0 million reduction to the Company’s income tax provision for the quarter ended June 30, 2011. The reversal was recorded as a result of legislation enacted in May 2011 that amended Michigan’s Income Tax Act to implement a comprehensive set of tax changes effective January 2012. One part of the legislation contains provisions that replaced the Michigan Business Tax (“MBT”) with a new corporate income tax. Certain credits allowed under the MBT, including the Brownfield tax credit, will continue to be effective under the revised Income Tax Act. This allows the Company to reduce its future tax liability for the duration of the credit carryforward period.

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Cash paid for income taxes was $3.1 million and $2.3 million during the first quarter of fiscal 2013 and 2012, respectively.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standard Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210)”. The amendments in this ASU require improved disclosure information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. This ASU should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We are currently evaluating the impact of this standard on our consolidated financial statements and plan to adopt this ASU in fiscal 2014.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350)”. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the first step of the two-step impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity must perform additional impairment testing. Otherwise, performing the two-step impairment test is not necessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The requirements of this ASU were adopted during our quarter ended June 30, 2012.

Note 2 – Financing Receivables

The Company allows deferred payment terms that exceed one year for customers purchasing licenses (perpetual or time-based) for our software products and the related maintenance services (“multi-year deferred payment arrangements”). A financing receivable exists when the license transfers to the customer or the related maintenance service has been provided (i.e., revenue recognition has occurred) prior to the due date of the related receivable. Our products financing receivables primarily consist of the perpetual license portion of outstanding multi-year deferred payment arrangements.

As of June 30, 2012, our loans receivable balance consisted of a note due from ForeSee Results, Inc. (“ForeSee”). The terms of the note require quarterly payments of principal and interest through March 31, 2015 at an annual interest rate of 7.0%.

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The following is an aged analysis of our products and loans financing receivables based on invoice date as of June 30, 2012 and March 31, 2012 (in thousands):

	As of June 30, 2012
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	2,203	$	140	$	165	$	39,904	$	42,412
Loans								5,053		5,053
Total		2,203		140		165		44,957		47,465

Watch rating
Software products		-		-				179		179
Total financing receivables	$	2,203	$	140	$	165	$	45,136	$	47,644

	As of March 31, 2012
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	4,997	$	1,165	$	68	$	36,202	$	42,432
Loans								5,467		5,467
Total		4,997		1,165		68		41,669		47,899

Watch rating
Software products								179		179
Total financing receivables	$	4,997	$	1,165	$	68	$	41,848	$	48,078

As of June 30, 2012 and March 31, 2012, the allowance for credit losses on our financing receivables was $179,000.

Note 3 - Foreign Currency Transactions and Derivatives

The Company is exposed to foreign exchange rate risks related to assets and liabilities that are denominated in non-local currency and current inter-company balances due to and from the Company’s foreign subsidiaries. The Company enters into foreign currency forward contracts to sell or buy currencies with the intent of mitigating foreign exchange rate risks related to these balances. The Company does not hedge currency risk related to anticipated revenue or expenses denominated in foreign currency. All foreign exchange derivatives are recognized in the consolidated balance sheets at fair value. See note 4 of the condensed consolidated financial statements for further information.

The foreign currency net gains or (losses) for the three months ended June 30, 2012 and 2011 were $737,000 and ($900,000), respectively. The hedging transaction net (losses) from foreign exchange derivative contracts for the three months ended June 30, 2012 and 2011 were ($213,000) and ($256,000), respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of comprehensive income.

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The Company had derivative contracts maturing through July 2012 to sell $7.1 million and purchase $12.5 million in foreign currencies at June 30, 2012 and had derivative contracts maturing through April 2012 to sell $5.5 million and purchase $9.6 million in foreign currencies at March 31, 2012.

Note 4 - Fair Value of Assets and Liabilities

The Company reports its money market funds and foreign exchange derivatives at fair value on a recurring basis using the following fair value hierarchy: (1) Level 1 - quoted prices in active markets for identical assets or liabilities; (2) Level 2 – inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and (3) Level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

As of June 30, 2012

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Estimated

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash equivalents - money market funds

3,776

Foreign exchange derivatives

As of March 31, 2012

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Estimated

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash equivalents - money market funds

25,391

Liabilities:

Foreign exchange derivatives

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Non-financial assets such as goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. See note 7 of the condensed consolidated financial statements for further information.

Note 5 - Computation of Earnings per Common Share

Earnings per common share data were computed as follows (in thousands, except per share amounts):

	Three Months Ended
	June 30,
Basic earnings per share:	2012		2011

Numerator:
Net income	$	10,468	$	16,985

Denominator:
Weighted-average common shares outstanding		217,510		218,200
Basic earnings per share	$	0.05	$	0.08

Diluted earnings per share:

Numerator:
Net income	$	10,468	$	16,985

Denominator:
Weighted-average common shares outstanding		217,510		218,200
Dilutive effect of stock awards		3,886		4,748
Total shares		221,396		222,948
Diluted earnings per share	$	0.05	$	0.08

During the three months ended June 30, 2012 and 2011, stock awards to purchase a total of 15.9 million and 5.1 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

Note 6 – Stock Benefit Plans and Stock-Based Compensation

Stock Benefit Plans

The Company has the following stock benefit plans: (1) the Amended and Restated 2007 Long Term Incentive Plan (“2007 LTIP”) allows the Company’s Compensation Committee to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and cash incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase Plan allows participating U.S. and Canadian employees the right to have up to 10% of their compensation withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock Ownership Plan and Trust/401(k) Plan (“ESOP/401(k)”), which includes a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code, allows the Company to make contributions to the ESOP/401(k) for the benefit of substantially all U.S. employees.

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Covisint Corporation (“Covisint”), a subsidiary of the Company, maintains a stock benefit plan referred to as the 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and cash incentive awards to employees and directors of Covisint.

ESOP/401(k)

Effective April 1, 2012, the Company implemented a matching program for the 401(k) component of the ESOP/401(k). The Company matches 33% of employees’ 401(k) contributions up to 2% of eligible earnings. Matching contributions by the Company vest 100% when an employee attains three years of service with the Company. During the three months ended June 30, 2012, the Company expensed $1.3 million related to this program.

Stock Option Activity

A summary of option activity under the Company’s stock-based compensation plans as of June 30, 2012, and changes during the three months then ended is presented below (shares and intrinsic value in thousands):

	Three Months Ended
	June 30, 2012
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Term in Years		Value
Options outstanding as of March 31, 2012		21,620		$	8.06
Granted		65			8.82
Exercised		(440	)		7.29			$	572
Forfeited		(266	)		10.10
Cancelled/expired		(85	)		9.94
Options outstanding as of June 30, 2012		20,894		$	8.05		6.79	$	24,675

Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2012		19,831		$	8.02		6.69	$	23,952

Options exercisable as of June 30, 2012		11,441		$	7.83		5.43	$	15,405

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The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those values using the Black-Scholes option pricing model were as follows:

	Three Months Ended
	June 30,
	2012			2011

Expected volatility		41.27	%		40.20	%
Risk-free interest rate		1.01	%		2.02	%
Expected lives at date of grant (in years)		6.1			6.0
Weighted-average fair value of the options granted	$	3.58		$	3.91

The average fair value of stock options vested during the three months ending June 30, 2012 and 2011 was $4.21 and $4.24 per share, respectively.

Restricted Stock Units and Performance-Based Stock Awards Activity

A summary of non-vested restricted stock units and performance-based stock awards (collectively “Non-vested RSU”) activity under the Company’s 2007 LTIP as of June 30, 2012 and changes during the three months then ended is presented below (shares and intrinsic value in thousands):

	Three Months Ended
	June 30, 2012
				Weighted
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair Value		Value

Non-vested RSU outstanding as of March 31, 2012		4,553
Granted		421		$	9.07
Released		(407	)			$	3,623
Forfeited		(20	)
Non-vested RSU outstanding as of June 30, 2012		4,547

Covisint Corporation 2009 Long-Term Incentive Plan

As of June 30, 2012, there were 119,000 stock options outstanding from the 2009 Covisint LTIP. These options will vest only if, prior to August 26, 2015, Covisint completes an initial public offering (“IPO”) or if there is a change of control of Covisint.

The individuals who received stock options from the 2009 Covisint LTIP were also awarded performance-based restricted stock unit awards (“PSAs”) from the Company’s 2007 LTIP. There were 1.4 million PSAs outstanding as of June 30, 2012. These PSAs will vest only if Covisint does not complete an IPO or a change of control transaction by August 25, 2015, and the Covisint business meets a pre-defined revenue target for any four consecutive calendar quarters ending prior to August 26, 2015.

Stock Awards Compensation

Stock award compensation expense was allocated as follows (in thousands):

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	Three Months Ended
	June 30,
	2012		2011
Stock-based compensation classified as:

Cost of maintenance fees	$	217	$	128
Cost of subscription fees		35		28
Cost of professional services		92		193
Cost of application services		322		427
Technology development and support		644		330
Sales and marketing		1,784		1,286
Administrative and general		5,195		2,931

Total stock-based compensation expense before income tax provision	$	8,289	$	5,323

As of June 30, 2012, total unrecognized compensation cost of $35.6 million, net of estimated forfeitures, related to nonvested equity awards is expected to be recognized over a weighted-average period of approximately 2.22 years.

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Note 7 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

The Company has the following reporting units: Application Performance Management (“APM”), Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”). The changes in the carrying amount of goodwill by reporting unit during the three months ended June 30, 2012 are summarized as follows (in thousands):

	APM			MF		CP		UF		PS			AS		Total
Goodwill as of March 31, 2012	$	477,632		$	140,591	$	22,084	$	21,285	$	114,912		$	25,385	$	801,889

Effect of foreign currency translation		(9,808	)		5		1		1		(142	)		-		(9,943	)

Goodwill as of June 30, 2012	$	467,824		$	140,596	$	22,085	$	21,286	$	114,770		$	25,385	$	791,946

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Capitalized software and other intangible assets

The components of the Company’s capitalized software and other intangible assets are as follows (in thousands):

	As of June 30, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,428				$	4,428

Amortized intangible assets:
Capitalized software
Internally developed	$	226,896		(178,489	)	$	48,407
Purchased		165,691		(136,107	)		29,584
Customer relationship		51,999		(22,159	)		29,840
Other		19,781		(13,697	)		6,084
Total amortized intangible assets	$	464,367	$	(350,452	)	$	113,915

	As of March 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,443				$	4,443

Amortized intangible assets:
Capitalized software
Internally developed		218,049	$	(175,018	)		43,031
Purchased		167,041		(133,925	)		33,116
Customer relationship		52,196		(21,153	)		31,043
Other		20,247		(12,907	)		7,340
Total amortized intangible assets	$	457,533	$	(343,003	)	$	114,530

Capitalized software includes the costs of internally developed software technology and software technology purchased through acquisitions. Internally developed capitalized software costs and capitalized purchased software technology are being amortized over periods up to five years.

Customer relationship agreements are related to acquisition activity and are being amortized over periods up to ten years.

Other amortized intangible assets include amortizable trademarks and patents relating to acquisition activity and are being amortized over periods up to three years.

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Unamortized trademarks were acquired as part of the Covisint and Changepoint acquisitions in 2004 and 2005. These trademarks are deemed to have an indefinite life.

Amortization of intangible assets

Amortization expense of capitalized software, customer relationship and other intangible assets were as follows (in thousands):

	Three Months Ended
	June 30,
	2012		2011
Amortized intangible assets:
Capitalized software
Internally developed	$	3,470	$	2,975
Purchased		2,407		1,182
Customer relationship		1,044		1,087
Other		919		488
Total amortization expense	$	7,840	$	5,732

Capitalized software amortization related to our on-premises software is reported as “cost of software license fees”, amortization related to our web performance services (“Gomez SaaS”) is reported as “cost of subscription fees” and amortization related to our application services is reported as “cost of application services” in the condensed consolidated statements of comprehensive income.

Customer relationship amortization related to our software solutions segments is reported as “sales and marketing” and amortization related to our application services segment is reported as “cost of application services” in the condensed consolidated statements of comprehensive income.

Amortization expense associated with trademarks and trade names related to our software solutions segments is reported as “cost of license fees” and amortization related to our application services segment is reported as “cost of application services” in the condensed consolidated statements of comprehensive income.

Based on the capitalized software, customer relationship and other intangible assets recorded through June 30, 2012, the annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (in thousands):

	Fiscal Year Ended March 31,
	2013		2014		2015		2016		2017		Thereafter
Amortized intangible assets:
Capitalized software	$	24,772	$	22,085	$	16,769	$	13,493	$	6,155	$	594
Customer relationship		4,162		4,114		4,114		4,114		3,949		10,431
Other		3,372		2,913		718		-		-		-

Total amortization expense	$	32,306	$	29,112	$	21,601	$	17,607	$	10,104	$	11,025

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Note 8 – Segment Information

The Company evaluates the performance of its segments based primarily on operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). The allocation of income taxes is not evaluated at the segment level. Financial information for the Company’s business segments was as follows (in thousands):

	Three Months Ended
	June 30, 2012
															Unallocated
	APM			MF		CP			UF		PS		AS		Expenses			Total

Software license fees	$	22,357		$	9,050	$	793		$	1,794	$	-	$	-	$	-		$	33,994

Maintenance fees		20,765			70,546		4,130			7,508		-		-		-			102,949

Subscription fees		19,852			-		627			-		-		-		-			20,479

Professional services fees		8,195			293		3,444			1,176		35,044		-		-			48,152

Application services fees		-			-		-			-		-		20,587		-			20,587

Total revenues		71,169			79,889		8,994			10,478		35,044		20,587		-			226,161

Operating expenses		76,096			22,845		9,689			5,419		28,920		18,016		48,613			209,598

Contribution / operating margin	$	(4,927	)	$	57,044	$	(695	)	$	5,059	$	6,124	$	2,571	$	(48,613	)	$	16,563

	Three Months Ended
	June 30, 2011
																Unallocated
	APM			MF		CP			UF		PS		AS			Expenses			Total

Software license fees	$	11,453		$	18,698	$	1,994		$	1,981	$	-	$	-		$	-		$	34,126

Maintenance fees		18,433			76,975		3,839			7,738		-		-			-			106,985

Subscription fees		18,661			-		463			-		-		-			-			19,124

Professional services fees		6,966			1,833		3,670			1,206		39,897		-			-			53,572

Application services fees		-			-		-			-		-		16,167			-			16,167

Total revenues		55,513			97,506		9,966			10,925		39,897		16,167			-			229,974

Operating expenses		69,439			24,076		11,362			5,400		31,589		16,834			51,657			210,357

Contribution / operating margin	$	(13,926	)	$	73,430	$	(1,396	)	$	5,525	$	8,308	$	(667	)	$	(51,657	)	$	19,617

The Company does not evaluate assets and capital expenditures on a segment basis, and accordingly such information is not provided.

Financial information regarding geographic operations is presented in the table below (in thousands):

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	Three Months Ended
	June 30,
	2012		2011
Revenues:
United States	$	144,844	$	149,239
Europe and Africa		49,374		54,604
Other international operations		31,943		26,131
Total revenues	$	226,161	$	229,974

	As of		As of
	June 30, 2012		March 31, 2012
Long-lived assets
United States	$	960,785	$	961,202
Austria		202,389		214,615
Other		23,126		24,210
Total long-lived assets	$	1,186,300	$	1,200,027

Long-lived assets are comprised of property, plant and equipment, goodwill and capitalized software.

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Note 9 - Debt

The Company has an unsecured revolving credit agreement (the “credit facility”) with Comerica Bank and other lenders. The credit facility, as amended, provides for a revolving line of credit in the amount of $300 million and expires on March 21, 2017. The credit facility also permits the Company to increase the revolving line of credit by an additional $200 million subject to receiving further commitments from lenders and certain other conditions.

As of June 30, 2012 and March 31, 2012, the Company’s debt balance under its credit facility was $36.5 million and $45.0 million, respectively, and was classified as long term.

The credit facility contains various covenant requirements, including limitations on liens; indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans and advances from the Company; transactions with affiliates; and limits additional borrowing outside of the facility to $250 million. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. Additionally, the Company is required to maintain at least a 0.25 to 1.0 cushion below its consolidated total leverage ratio maximum of 2.5 to 1.0 on a pro forma basis in the case of any stock repurchases, acquisitions or dividends in excess of $50 million in any fiscal year. The Company was in compliance with the covenants under the credit facility at June 30, 2012.

Borrowings under the credit facility bear interest at the base rate (the greatest of the prime rate, the federal funds effective rate plus one percent, or the daily LIBOR rate plus one percent) or the Eurodollar rate, at the Company’s option, plus the applicable margin (which is based on the level of maximum total debt to EBITDA ratio). As of June 30, 2012, interest rates on outstanding borrowings were at a weighted average rate of 2.8%. The Company pays a quarterly fee on the credit facility based on the applicable margin grid. Interest and fees related to the credit facility were $482,000 and $47,000 during the three months ended June 30, 2012 and 2011, respectively.

Cash paid for interest during the first quarter of 2013 and the first quarter of 2012 was $512,000 and $428,000, respectively.

Note 10 – Contingencies

The Company is subject to various legal actions and claims incidental to its business. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. Based on information currently known, the Company does not believe these will have a material impact on the Company’s financial position, results of operations or cash flows.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Compuware Corporation

Detroit, Michigan

We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and subsidiaries (the "Company") as of June 30, 2012, and the related condensed consolidated statements of comprehensive income and cash flows for the three-month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and subsidiaries as of March 31, 2012, and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 25, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan

August 6, 2012

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COMPUWARE CORPORATION AND SUBSIDIARIES

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. The MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year ended March 31, 2012, particularly “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”. References to years are to fiscal years ended March 31.

In this section, we first discuss our results of operations on a business unit and segment basis. We evaluate segment performance based primarily on operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges. Following the segment discussion, we then provide a separate discussion of the material period-to-period changes in our operating expenses, other income and income taxes as reflected on our income statement.

We collectively refer to the solutions offered within our APM, Mainframe, Changepoint and Uniface segments as “software solutions”. In order to provide a supplementary view of this business, aggregated financial data for our software solutions is presented herein.

Forward-Looking Statements

The following discussion contains certain forward-looking statements within the meaning of the federal securities laws. When we use words such as “may”, “might”, “will”, “should”, “believe”, “expect”, “anticipate”, “estimate”, “continue”, “predict”, “forecast”, “projected”, “intend” or similar expressions, or make statements regarding our future plans, objectives or expectations, we are making forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results and could cause actual results to differ materially from the results implied by these or any other forward-looking statements made by us, or on our behalf.

The material risks and uncertainties that we believe affect us are summarized below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in this report and the other reports we file with the Securities and Exchange Commission (see for example Item 1A Risk Factors in our 2012 Form 10-K), as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by applicable law, we do not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Summary of Risk Factors

A substantial portion of our mainframe segment revenue is dependent on our customers’ continued use of International Business Machines Corporation and IBM-compatible products.

Changes in the financial services industry could have a negative impact on our revenue and margins.

Our product revenue is dependent on the acceptance of our pricing structure for software licenses, maintenance services and web performance services.

Maintenance revenue could decline.

Our primary source of profitability is from our mainframe segment. If revenues in this segment decline before we significantly increase margins in other operating segments, our profitability may decline.

The markets for web performance services are at an early stage of development with emerging competitors. If these markets do not develop or develop more slowly than we expect, or if there is an increase in competition, our revenue may decline or fail to grow.

The success of our combined dynaTrace enterprise and Gomez SaaS solutions is dependent on customer acceptance of these offerings.

The market for application services is in its early stages of development with emerging competitors. As the market matures, competition may increase and could have a material negative impact on our results of operations.

If we are not successful in maintaining our professional services strategy, our margins may decline materially.

We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other unpredictable factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

Economic uncertainties or slowdowns may reduce demand for our products and services, which may have a material adverse effect on our revenues and operating results.

Defects or disruptions in our web performance services or application services networks or interruptions or delays in service would impair the delivery of our on-demand service and could diminish demand for our services and subject us to substantial liability.

Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our professional services and Covisint application services, which may have a material negative effect on our revenues and operating results.

If the fair value of our long-lived assets deteriorated below the carrying value of these assets, recognition of an impairment loss would be required, which could materially and adversely affect our financial results.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Our software technology may infringe the proprietary rights of others.

Our results could be adversely affected by increased competition, pricing pressures and technological changes within the software products market.

The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.

We must develop or acquire product enhancements and new products to maintain our success.

Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected.

We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.

Current laws may not adequately protect our proprietary rights.

The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.

Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.

Our stock repurchase plan may be suspended or terminated at any time, which may result in a decrease in our stock price.

Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.

Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.

OVERVIEW

We deliver value to businesses by providing software solutions (both on-premises and SaaS models), professional services and application services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our mainframe productivity tools (“mainframe”) that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have experienced lower volumes of software license transactions for our mainframe solutions in preceding years and in the first quarter causing an overall downward trend in our mainframe product revenues which we expect to continue. Changes in our current customer IT computing environments and spending habits have impacted their need for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. Customers utilize our products to reduce operating costs, increase programmer productivity and create a smooth transition to the next generation of mainframe environment programmers. We will continue to make strategic enhancements to our mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a maintenance renewal rate of approximately 90%. The cash flow generated from our mainframe business supports our growth segments.

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COMPUWARE CORPORATION AND SUBSIDIARIES

We have identified the APM market as a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company’s brand awareness, revenue growth and overall market share. Because of this, the market for APM solutions is significant and growing rapidly. Our APM solutions are marketed under the brand names “Gomez” and “dynaTrace”. These solutions provide our customers with on-premises software (“dynaTrace Enterprise” which includes our former Vantage products) and SaaS platform based web application performance services (“Gomez SaaS”). These solutions ensure the optimal performance of each customer’s enterprise, web, streaming, mobile and cloud applications. We are investing in our APM solutions with the goal of providing solutions that are best-in-class within the APM market. Specifically, our investments include: (1) enhancements to our global web performance services network with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities and in video streaming performance; (2) enhancements to our dynaTrace Enterprise solutions that are focused on optimizing application performance and accelerating time to market; and (3) enhancements which combine our on-premises software and SaaS solution into a single platform that provides performance metrics for web, non-web, mobile, streaming and cloud applications in a single solution.

We have also identified the secure collaboration services market, served by our Covisint application services, as a key source of revenue growth. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Our Covisint services, which are provided on a SaaS platform to customers primarily in the automotive and healthcare industries, create an environment that simplifies and secures this collaboration atmosphere. The need for these services is growing, particularly in the healthcare industry as hospitals, physicians and the United States government move toward establishing electronic patient health and medical records that will require secure computerized databases and environments for storing and sharing of information.

We also continue to enhance our Changepoint and Uniface solutions primarily through research and development expenditures.

Our Changepoint solution provides a single automated solution for professional services organizations to forecast and plan, as well as, manage resources, projects and client engagements. In addition, for project-centric organizations, Changepoint provides a cohesive and consolidated view of projects, investments, resources and applications to help manage the entire business portfolio.

Our Uniface solution is mature with over 25 years on the market. Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications. Our strategy with the Uniface solution is to enhance the product with additional features making it more effective for enterprise applications and to expand the capabilities of the product to other technology applications.

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COMPUWARE CORPORATION AND SUBSIDIARIES

The professional services reporting segment is focused on achieving modest revenue growth and improved margins by delivering high quality solutions and resources to our customers that meet their needs from application development through project management. Our goal is to provide the expertise, best practices and agility needed to meet our customers’ critical technology challenges. Areas of growth that we have identified are cloud and mobile application development services. Enhancing our competencies in these areas will provide an opportunity to continue growing the segment’s revenue and contribution margin.

Quarterly Update

The following occurred during the first quarter of 2013:

Experienced a decline in total revenue of $3.8 million for the first quarter of 2013 as compared to the first quarter of 2012 due primarily to a $5.4 million decline in professional services fees and a $4.0 million decline in maintenance fees, partially offset by a $4.4 million increase in application services fees and a $1.4 million increase in subscription fees.

Experienced a decline in operating margin to 7.3% during the first quarter of 2013 as compared to 8.5% during the first quarter of 2012 due to the decline in mainframe and professional services segment revenue (see “Business Segment Analysis” for additional information).

Software solutions revenue declined $3.4 million or 1.9% for the first quarter of 2013 as compared to the first quarter of 2012 due primarily to a $17.6 million decline in mainframe revenue and a $1.0 million decline in Changepoint revenue partially offset by a $15.7 million increase in APM revenue. Software solutions contribution margin declined to 33.1% during the first quarter of 2013 from 36.6% during the first quarter of 2012 due to the decline in mainframe revenue which generates higher margins than other segments.

Professional services segment revenue declined $4.9 million or 12.2% during the first quarter of 2013 as compared to the first quarter of 2012. Contribution margin declined to 17.5% in the first quarter of 2013 from 20.8% during the first quarter of 2012 due to the reduction in revenue (see “Professional Services” for additional information).

Covisint revenue increased $4.4 million or 27.3% from the first quarter of 2012. Contribution margin increased to 12.5% in the first quarter of 2013 from negative 4.1% during the first quarter of 2012 due to the increase in revenue.

Instituted a stock repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934 pursuant to which we repurchase shares pursuant to a predetermined formula without regard to the quarterly black-out periods.

Repurchased 1,714,263 shares of our common stock at an average price of $8.99 per share.

Our ability to execute our strategies and achieve our objectives is subject to a number of risks and uncertainties. See "Forward-Looking Statements".

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COMPUWARE CORPORATION AND SUBSIDIARIES

BUSINESS SEGMENT ANALYSIS

The following table sets forth, for the periods indicated, certain business segment operational data. We evaluate the performance of our segments based primarily on contribution margin which is operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). Comparisons are to the comparable period of the prior year. Financial information for our business segments was as follows (in thousands):

	Software Solutions																					Unallocated
Three Months Ended:	APM			MF			CP			UF			Total			PS			AS			Expenses			Total

June 30, 2012

Total revenues	$	71,169		$	79,889		$	8,994		$	10,478		$	170,530		$	35,044		$	20,587		$	-		$	226,161

Operating expenses		76,096			22,845			9,689			5,419			114,049			28,920			18,016			48,613			209,598

Contribution / operating margin	$	(4,927	)	$	57,044		$	(695	)	$	5,059		$	56,481		$	6,124		$	2,571		$	(48,613	)	$	16,563

Operating margin %		(6.9	%)		71.4	%		(7.7	%)		48.3	%		33.1	%		17.5	%		12.5	%		N/A			7.3	%

June 30, 2011

Total revenues	$	55,513		$	97,506		$	9,966		$	10,925		$	173,910		$	39,897		$	16,167		$	-		$	229,974

Operating expenses		69,439			24,076			11,362			5,400			110,277			31,589			16,834			51,657			210,357

Contribution / operating margin	$	(13,926	)	$	73,430		$	(1,396	)	$	5,525		$	63,633		$	8,308		$	(667	)	$	(51,657	)	$	19,617

Operating margin %		(25.1	%)		75.3	%		(14.0	%)		50.6	%		36.6	%		20.8	%		(4.1	%)		N/A			8.5	%

Software Solutions as a Group

Our software solutions are comprised of the following business segments: (1) Application Performance Management; (2) Mainframe; (3) Changepoint; and (4) Uniface.

Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services). Software solutions revenues are presented in the table below (in thousands):

	Three Months Ended June 30,
	2012		2011		% Change
Software license fees	$	33,994	$	34,126	(0.4	)%
Maintenance fees		102,949		106,985	(3.8	)
Subscription fees		20,479		19,124	7.1
Professional services fees		13,108		13,675	(4.1	)
Total software solutions revenue	$	170,530	$	173,910	(1.9	)%

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Software license fees (“license fees”) decreased $132,000 during the first quarter of 2013, which included a negative impact from foreign currency fluctuations of $1.6 million. Excluding the impact from foreign currency fluctuations, license fees increased $1.5 million for the first quarter of 2013 as compared to the same period of the prior year. The increase was primarily due to an increase in APM software license revenue, partially offset by a decline in mainframe license revenue (see the discussion within “Software Solutions by Business Segment” for more details).

During the first quarters of 2013 and 2012, for software license transactions that were required to be recognized ratably, we deferred $4.2 million and $2.9 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $7.9 million and $13.6 million of previously deferred license revenue during the first quarters of 2013 and 2012, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees decreased $4.0 million during the first quarter of 2013, which included a negative impact from foreign currency fluctuations of $4.4 million. Excluding the impact from foreign currency fluctuations, maintenance fees increased $400,000 for the first quarter of 2013 as compared to the same period of the prior year. Although we continue to experience a high maintenance renewal rate with our current mainframe customers, the decline in mainframe license transactions throughout the past several years is impacting mainframe maintenance revenue as new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements. The decline was offset for the first quarter of 2013 by an increase in APM and Changepoint software maintenance fees.

Subscription fees increased $1.4 million during the first quarter of 2013. The improvement in subscription fees over the prior year is primarily a result of new SaaS solution sales exceeding customer cancellations during the previous year.

Professional services fees within our software solutions business segments decreased $567,000 during the first quarter of 2013. The decline in professional services fees over the prior year primarily occurred within our mainframe segment due to the decline in new software license sales.

Software solutions revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	91,802	$	95,967
Europe and Africa		48,404		53,011
Other international operations		30,324		24,932
Total software solutions revenue	$	170,530	$	173,910

Software Solutions by Business Segment

Application Performance Management

The financial results of operations for our APM segment were as follows (in thousands):

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	Three Months Ended June 30,
	2012			2011			% Change
Revenue
Software license fees	$	22,357		$	11,453			95.2	%
Maintenance fees		20,765			18,433			12.7
Subscription fees		19,852			18,661			6.4
Professional services fees		8,195			6,966			17.6
Total revenue		71,169			55,513			28.2

Operating expenses		76,096			69,439			9.6

Contribution margin	$	(4,927	)	$	(13,926	)		64.6	%

Contribution margin %		(6.9	%)		(25.1	%)

APM segment revenue increased $15.7 million during the first quarter of 2013. The increases in software license fees and maintenance fees are primarily due to additional revenue related to the acquisition of dynaTrace during the second quarter of 2012. The increase in subscription fees for the first quarter of 2013 is primarily the result of new SaaS solution sales exceeding customer cancellations during the previous year, and the increase in professional services fees primarily relates to an increase in demand for our managed service offerings which are marketed as Guardian Services, and to a lesser extent, additional revenue related to the acquisition of dynaTrace.

Operating expenses increased $6.7 million during the first quarter of 2013. This increase can be attributed primarily to the acquisition of dynaTrace. Revenue growth for the first quarter of 2013 exceeded the ongoing costs associated with these investments, which had a positive impact on our contribution margin for the first quarter of 2013 as compared to the same period of the prior year.

Application performance management revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	40,058	$	29,549
Europe and Africa		19,653		17,414
Other international operations		11,458		8,550
Total APM segment revenue	$	71,169	$	55,513

Mainframe

The financial results of operations for our Mainframe segment were as follows (in thousands):

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	Three Months Ended June 30,
	2012			2011			% Change
Revenue
Software license fees	$	9,050		$	18,698			(51.6	)%
Maintenance fees		70,546			76,975			(8.4	)
Professional services fees		293			1,833			(84.0	)
Total revenue		79,889			97,506			(18.1	)

Operating expenses		22,845			24,076			(5.1	)

Contribution margin	$	57,044		$	73,430			(22.3	)%

Contribution margin %		71.4	%		75.3	%

Mainframe segment revenue decreased $17.6 million for the first quarter of 2013. The decline in revenue is partially related to two large deals which closed in the first quarter of 2012 totaling $4.4 million and is consistent with the overall downward trend in our mainframe product revenues we have experienced throughout the past several years. Changes in our current customers’ IT computing environments and spending habits have reduced their demand for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. We intend to continue to make strategic enhancements to our mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a maintenance renewal rate of approximately 90%.

Because many of our costs are relatively fixed, the decline in mainframe revenue resulted in a decline in contribution margin for the first quarter of 2013 as compared to the same period of the prior year.

Mainframe revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	46,208	$	59,675
Europe and Africa		19,638		25,072
Other international operations		14,043		12,759
Total Mainframe segment revenue	$	79,889	$	97,506

Changepoint

The financial results of operations for our Changepoint segment were as follows (in thousands):

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	Three Months Ended June 30,
	2012			2011			% Change
Revenue
Software license fees	$	793		$	1,994			(60.2	)%
Maintenance fees		4,130			3,839			7.6
Subscription fees		627			463			35.4
Professional services fees		3,444			3,670			(6.2	)
Total revenue		8,994			9,966			(9.8	)

Operating expenses		9,689			11,362			(14.7	)

Contribution margin	$	(695	)	$	(1,396	)		50.2	%

Contribution margin %		(7.7	%)		(14.0	%)

Changepoint segment revenue decreased $972,000 for the first quarter of 2013 due primarily to a decline in software license fees, partially offset by an increase in maintenance fees. The improvement in contribution margin is related to the $1.7 million decline in expenses resulting from the capitalization of research and development expenses for the Changepoint software upgrade, which was in the technological feasibility phase of development during the first quarter of 2013. During the first quarter of 2012, this project was in the preliminary project stage of development, so all costs were expensed when incurred. We released this upgrade in July 2012.

Changepoint revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	4,104	$	4,922
Europe and Africa		1,867		2,906
Other international operations		3,023		2,138
Total Changepoint segment revenue	$	8,994	$	9,966

Uniface

The financial results of operations for our Uniface segment were as follows (in thousands):

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	Three Months Ended June 30,
	2012			2011			% Change
Revenue
Software license fees	$	1,794		$	1,981			(9.4	)%
Maintenance fees		7,508			7,738			(3.0	)
Professional services fees		1,176			1,206			(2.5	)
Total revenue		10,478			10,925			(4.1	)

Operating expenses		5,419			5,400			0.4

Contribution margin	$	5,059		$	5,525			(8.4	)%

Contribution margin %		48.3	%		50.6	%

Uniface segment revenue decreased $447,000 for the first quarter of 2013 due primarily to the negative impact of foreign currency on software license and maintenance fees. Operating expenses for the first quarter of 2013 were consistent with operating expenses for the same period of the prior year, but contribution margin declined due to the decrease in revenue.

Uniface revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	1,432	$	1,821
Europe and Africa		7,246		7,619
Other international operations		1,800		1,485
Total Uniface segment revenue	$	10,478	$	10,925

Professional Services

The financial results of operations for our professional services segment were as follows (in thousands):

	Three Months Ended June 30,
	2012			2011			% Change
Professional services fees	$	35,044		$	39,897			(12.2	)%

Operating expenses		28,920			31,589			(8.4	)

Contribution margin	$	6,124		$	8,308			(26.3	)%

Contribution margin %		17.5	%		20.8	%

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Professional services segment fees decreased $4.9 million for the first quarter of 2013 primarily due to a decline in application development services for customers within the financial services industry. Several large projects for these customers were completed during 2012 and have not yet been replaced, resulting in the decline in revenue for the first quarter of 2013.

Operating expenses decreased $2.7 million for the first quarter of 2013 primarily due to a decline in subcontractor costs associated with the large financial services projects noted above. The reduction in contribution margin for the first quarter of 2013 was due to a decline in our utilization rate associated with the decline in revenue.

Professional services segment revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	35,028	$	39,379
Europe and Africa		-		517
Other international operations		16		1
Total professional services segment revenue	$	35,044	$	39,897

Application Services

The financial results of operations for our Covisint application services segment were as follows (in thousands):

	Three Months Ended June 30,
	2012			2011			% Change
Application services fees	$	20,587		$	16,167			27.3	%

Operating expenses		18,016			16,834			7.0

Contribution margin	$	2,571		$	(667	)		485.5	%

Contribution margin %		12.5	%		(4.1	%)

Covisint services are provided to customers primarily in the automotive and healthcare industries. Application services segment fees increased $4.4 million for the first quarter of 2013 primarily due to growth from automotive customers. We anticipate demand in the healthcare industry will grow as hospitals, physicians and the United States government move toward establishing electronic patient health and medical records which will require secure computerized databases and environments for storing and sharing of information. Our application services are designed to meet this demand for secure sharing of information which we believe will be a factor in the future growth of the Covisint segment.

As of June 30, 2012 and June 30, 2011, backlog for the application services segment was approximately $99.1 million and $87.0 million, respectively. Backlog represents contractually committed arrangements that have yet to be recognized.

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Operating expenses increased $1.2 million during the first quarter of 2013 due to investments in our Covisint business throughout fiscal 2012 partially offset by an increase in capitalized research and development costs. In anticipation of capitalizing on the growth of the secure collaboration services market, we hired additional developers, customer support and sales personnel, and we increased the capacity of our global application services network. During the first quarter of 2013, our revenue growth exceeded the ongoing additional costs from these investments, resulting in the increase in contribution margin over the prior year.

Application services segment revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2012		2011
United States	$	18,014	$	13,893
Europe and Africa		970		1,076
Other international operations		1,603		1,198
Total application services segment revenue	$	20,587	$	16,167

Unallocated Expenses

Costs related to internal information system support, finance, human resources, legal, administration and other corporate charges are not allocated to our business units when management analyzes business unit operating results.

Unallocated expenses are presented in the table below (in thousands):

	Three Months Ended
	June 30,				%
	2012		2011		Change
Unallocated expenses	$	48,613	$	51,657		(5.9	)%

Unallocated expenses declined $3.0 million for the first quarter of 2013 primarily due to a decline in administrative and general expense. See “administrative and general” within the “operating expenses” section for additional information.

OPERATING EXPENSES

Our operating expenses include cost of software license fees; cost of maintenance fees; cost of subscription fees; cost of professional services; cost of application services; technology development and support costs; sales and marketing expenses; and administrative and general expenses. These expenses are described below without regard to the relevant segment(s) to which they are allocated.

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Cost of Software License Fees

Cost of software license fees includes amortization of capitalized software related to our licensed software products, the cost of duplicating and disseminating products to customers, including associated hardware costs, and the cost of author royalties.

Cost of software license fees is presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Cost of software license fees	$	4,825		$	3,536			36.5	%

Percentage of software license fees		14.2	%		10.4	%

Cost of software license fees increased $1.3 million during the first quarter of 2013 due primarily to amortization expense on intangible assets acquired as part of the dynaTrace acquisition during the second quarter of 2012.

Cost of Maintenance Fees

Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support.

Cost of maintenance fees is presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Cost of maintenance fees	$	8,946		$	9,531			(6.1	)%

Percentage of maintenance fees		8.7	%		8.9	%

Cost of maintenance fees decreased $585,000 during the first quarter of 2013 primarily resulting from a reduction in maintenance costs related to our APM products.

Cost of Subscription Fees

Cost of subscription fees consists of the amortization of capitalized software related to our web performance services offerings, depreciation and maintenance expense associated with our web performance services network related computer equipment; data center costs; and payments to individuals for tests conducted from their Internet-connected personal computers (“peer”).

Cost of subscription fees is presented in the table below (in thousands):

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	Three Months Ended
	June 30,						%
	2012			2011			Change
Cost of subsription fees	$	7,393		$	7,127			3.7	%

Percentage of subscription fees		36.1	%		37.3	%

Cost of subscription fees increased $266,000 during the first quarter of 2013 primarily due to increased amortization of capitalized research and development costs. We continued to invest in research and development throughout fiscal 2012 which increased the amortizable base.

The decrease in the cost of subscription fees as a percentage of subscription fees was due to the increase in subscription fees proportionately exceeding the increase in cost of subscription fees.

Cost of Professional Services

Cost of professional services consists primarily of personnel-related costs of providing professional services, including billable and technical staff, subcontractors and sales personnel both for our professional services segment and our software related services.

Cost of professional services is presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Cost of professional services	$	42,301		$	45,119			(6.2	)%

Percentage of professional services fees		87.8	%		84.2	%

Cost of professional services decreased $2.8 million during the first quarter of 2013. The decrease was primarily due to a decline in subcontractor costs to support the activity in our professional services segment (see “Professional Services” discussion above for additional information).

The increase in cost of professional services as a percentage of professional services fees for the first quarter of 2013 was primarily due to the decline in professional services fees associated with the decline in our utilization rate. Many of the costs associated with our professional services fees, specifically salary and benefits expenses, do not fluctuate with changes in revenue.

Cost of Application Services

Cost of application services consists primarily of personnel-related costs of providing application services, including billable and technical staff, subcontractors and sales personnel.

Cost of application services is presented in the table below (in thousands):

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	Three Months Ended
	June 30,						%
	2012			2011			Change
Cost of application services	$	17,721		$	16,834			5.3	%

Percentage of application services fees		86.1	%		104.1	%

Cost of application services increased $887,000 during the first quarter of 2013 primarily due to a $677,000 increase in compensation and benefits costs related to the hiring of additional developers, sales and customer support personnel to support the growth of the application services business segment as well as increased amortization expense on capitalized research and development projects.

The decrease in cost of application services as a percentage of application services fees was primarily due to the proportionately larger increase in application services fees than the increase in cost of application services fees.

Technology Development and Support

Technology development and support includes, primarily, the costs of programming personnel associated with software technology development and support of our products and the web performance services network less the amount of capitalized internal software costs during the reporting period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives.

Technology development and support costs incurred internally and capitalized are presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Technology development and support costs incurred	$	31,940		$	27,128			17.7	%

Capitalized internal software costs		(5,443	)		(2,427	)		124.3

Technology development and support costs expensed	$	26,497		$	24,701			7.3	%

Technology development and support costs expensed as a percentage of software solutions revenue		15.5	%		14.2	%

Technology development and support increased $4.8 million before capitalized internal software costs during the first quarter of 2013. The increase primarily relates to higher compensation and benefits costs due to the hiring of developers and customer support personnel to support the growth of the APM segment, including those hired through the dynaTrace acquisition in the second quarter of fiscal 2012.

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Technology development and support as a percentage of software solutions revenues increased from the prior year as the additional investment in our products and technology proportionally exceeded the increase in software solutions revenue.

The increase in capitalized internal software costs during the first quarter of 2013 relates primarily to the timing of projects that are in the capitalization phase of development. Specifically, new product releases within our APM and Changepoint segments were in this phase of development during the first quarter of 2013.

Sales and Marketing

Sales and marketing costs consist primarily of personnel related costs associated with product sales, sales support and marketing for our product offerings.

Sales and marketing costs are presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Sales and marketing costs	$	62,190		$	61,995			0.3	%

Percentage of software solutions revenue		36.5	%		35.6	%

Sales and marketing costs remained consistent with costs during the previous year.

Administrative and General

Administrative and general expenses consist primarily of costs associated with the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, administrative and general expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities, associated with our worldwide offices.

Administrative and general expenses are presented in the table below (in thousands):

	Three Months Ended
	June 30,				%
	2012		2011		Change
Administrative and general expenses	$	39,725	$	41,514		(4.3	)%

Administrative and general costs decreased $1.8 million during the first quarter of 2013 due to a $1.7 million net gain on foreign exchange primarily related to assets and liabilities of a country that are denominated in non-local currency and a decline in bonus and commission expense due to lower revenue attainment, partially offset by an increase in salaries and benefits expense.

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OTHER INCOME

Other income, net consists primarily of interest income realized from our cash and cash equivalents, interest earned on our financing receivables and income generated from our investment in a partially owned company offset by interest expense primarily associated with our long-term debt.

Other income (expense) is presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Interest income	$	570		$	1,001			(43.1	)%
Interest expense		(571	)		(423	)		(35.0	)%
Other		53			420			(87.4	)%
Other income, net	$	52		$	998			(94.8	)%

The decline in interest income is primarily due to the decline in cash and cash equivalents resulting from cash used to purchase dynaTrace in fiscal 2012, repayments on our outstanding debt, our share repurchases and, to a lesser extent, a decline in interest income related to our installment receivables.

The increase in interest expense is related to interest on borrowings under the line of credit. Borrowings were incurred primarily to fund a portion of the dynaTrace acquisition during the second quarter of 2012 and to continue the share repurchase program.

INCOME TAXES

Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in the financial statements and net operating loss and credit carryforwards.

The income tax provision and effective tax rate are presented in the table below (in thousands):

	Three Months Ended
	June 30,						%
	2012			2011			Change
Income tax provision	$	6,147		$	3,630			69.3	%

Effective tax rate		37.0	%		17.6	%

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MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at June 30, 2012. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of our annual report on Form 10-K for the year ended March 31, 2012 are considered by management to be the most important to an understanding of the financial statements, because their application places the most significant demands on management's judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in note 1 of the consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2012.

Goodwill Impairment Evaluation

The goodwill balance by reporting unit as of June 30, 2012 is presented as follows (in thousands):

	APM			MF		CP		UF		PS			AS		Total
Goodwill as of March 31, 2012	$	477,632		$	140,591	$	22,084	$	21,285	$	114,912		$	25,385	$	801,889

Effect of foreign currency translation		(9,808	)		5		1		1		(142	)		-		(9,943	)

Goodwill as of June 30, 2012	$	467,824		$	140,596	$	22,085	$	21,286	$	114,770		$	25,385	$	791,946

We evaluated our goodwill for impairment on a reporting unit basis at March 31, 2012. This evaluation indicated that none of our reporting units failed step one of our goodwill impairment analysis. Our professional services reporting unit was the only reporting unit where the estimated fair value was not substantially in excess of the carrying value, as the estimated fair value exceeded the reporting unit’s carrying value by approximately 14% at March 31, 2012.

We continue to believe the risk of future goodwill impairment for the professional services reporting unit, which has a goodwill balance of $114.8 million at June 30, 2012, is low due to the overall improvement in the reporting unit’s contribution margin. The contribution margin percentage for the first quarter of 2013 was 17.5% as compared to 16.1%, 16.7% and 10.0% for fiscal years 2012, 2011 and 2010, respectively. There has been no triggering event since March 31, 2012. See “Professional Services” above for information on the segment’s results of operations.

Application of the goodwill and other intangibles impairment test requires judgment, including the assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow model in combination with a market approach. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, estimation of market interest rates, determination of our weighted average cost of capital and selection and application of peer groups.

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The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and estimated future cash flows. While we believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable, a change in assumptions underlying these estimates could materially affect the determination of fair value and goodwill impairment for each reporting unit.

The fair value of the professional services reporting unit was estimated at the balance sheet date primarily using a discounted cash flow model. Assumptions used in the model that have the most significant effect are our estimated growth rates and estimated weighted average cost of capital.

The events and circumstances that could affect our key assumptions for the professional services reporting unit and the analysis of fair value include the following:

Our ability to achieve sales productivity at a level to achieve the profitability in the forecast period.

Failure of our billable staff to meet their utilization or rate targets.

Our ability to hire and retain sales, technology and management personnel.

Future negative changes in the U.S. economy.

Increased competition and pricing pressures within the professional services market.

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LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2012, cash and cash equivalents totaled $83.5 million, compared to $99.2 million at March 31, 2012.

Net cash provided by operating activities

Net cash provided by operating activities during the first quarter of 2013 was $18.1 million, which represents a $2.9 million increase from the first quarter of 2012. The increase was primarily due to an $11.8 million decrease in cash paid to suppliers primarily related to fewer subcontractors, partially offset by a $3.2 million increase in cash paid to employees, a $2.8 million reduction in interest received due to a large interest payment received from ForeSee Results, Inc. during the first quarter of 2012 and a $1.9 million reduction in cash received from customers.

The condensed consolidated statements of cash flows compute net cash from operating activities using the indirect cash flow method. Therefore non-cash adjustments and net changes in assets and liabilities (net of effects from currency fluctuations) are adjusted from net income to derive net cash from operating activities.

Changes in accounts receivable and deferred revenue have typically represented the most significant adjustments to net income to arrive at operating cash flow as we allow for deferred payment terms on multi-year products contracts. The impact of the net change in accounts receivable as compared to the prior year was $20.1 million and primarily related to the timing of billings from multi-year product arrangements during the first quarter of 2013 compared to the first quarter of 2012. The impact of the net change in deferred revenue was $15.7 million and primarily related to the decline in multi-year mainframe maintenance contracts during the first quarter of 2013 compared to the first quarter of 2012.

We believe our existing cash resources and cash flow from operations will be sufficient to meet operating cash needs for the foreseeable future.

Net cash used in investing activities

Net cash used in investing activities during the first quarter of 2013 was $11.7 million, which represents a $3.1 million increase in cash used as compared to the first quarter of 2012 due primarily to a $5.2 million increase in purchases of capitalized software, partially offset by a $2.8 million decline in purchases of property, plant and equipment.

We will continue to evaluate business acquisition opportunities that fit our strategic plans. If the cash consideration for a future acquisition or combination of acquisitions were to exceed our operating cash balance resources, we would further utilize our credit facility and may need to seek additional financing.

Net cash provided by (used in) financing activities

Net cash used in financing activities during the first quarter of 2013 was $19.2 million. Net cash provided by financing activities during the first quarter of 2012 was $5.9 million, resulting in a net decrease to cash of $25.2 million for the first quarter of 2013 as compared to the same period of the prior year.

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COMPUWARE CORPORATION AND SUBSIDIARIES

The decrease was primarily due to a $14.1 million increase in repurchases of common stock, an $8.5 million increase in net payments on borrowings under our credit facility and a $2.6 million reduction in proceeds from the exercise of stock awards.

Since May 2003, the Board of Directors has authorized the Company to repurchase a total of $1.7 billion of our common stock under a discretionary stock repurchase plan (“Discretionary Plan”). Purchases of common stock under the Discretionary Plan may occur on the open market, or through negotiated or block transactions based upon market and business conditions, subject to applicable legal limitations.

As of June 30, 2012, approximately $208.3 million remains authorized for future purchases under the Discretionary Plan. The authorization will remain in effect until exhausted absent further action of the Board.

Our long-term goal for the Discretionary Plan is to reduce our outstanding common share count to approximately 200 million shares, though we may adjust our goals based on our cash position and market conditions. Share repurchases under the Discretionary Plan are funded primarily through our operating cash flow and funds from our credit facility.

In May 2012, the Board of Directors authorized a Rule 10b5-1 repurchase program that was implemented during the first quarter of fiscal 2013 through which we repurchase shares pursuant to a predetermined formula without regard to the quarterly black-out periods. This plan utilizes funds under the previous authorization described above and will expire in October 2012.

The Company has an unsecured revolving credit agreement (the “credit facility”) with Comerica Bank and other lenders to provide leverage for the Company if needed. Refer to note 9 of the condensed consolidated financial statements for additional information related to the credit facility. The timing for ultimate repayment of the amount currently outstanding will depend on cash flows and share repurchases.

Recently Issued Accounting Pronouncements

See note 1 of the condensed consolidated financial statements included in this report for recently issued accounting pronouncements that may affect the Company.

CONTRACTUAL OBLIGATIONS

Our contractual obligations are described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our annual report on Form 10-K for the year ended March 31, 2012. Except as described elsewhere in this report on Form 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the end of fiscal 2012.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed primarily to market risks associated with movements in interest rates and foreign currency exchange rates. There have been no material changes to our foreign exchange risk management strategy or our investment standards subsequent to March 31, 2012. Therefore, the market risks remain substantially unchanged since we filed the annual report on Form 10-K for the fiscal year ending March 31, 2012.

The value of the Euro has been adversely affected by recent developments in Europe and has had a negative effect on our revenues. Our foreign currency denominated expenses supply a natural offset to the majority of revenues denominated in foreign currencies resulting in a much less significant impact from currency fluctuations on income from operations. Annually, we perform a sensitivity analysis to assess the potential loss that a 10% positive or negative change in foreign currency exchange rates would have on our income from operations. Based on that analysis, we believe such a change would not materially affect our consolidated financial position, results of operations or cash flows.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, at the reasonable assurance level, to cause information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II OTHER INFORMATION

Item 1A.

Risk Factors

For information regarding risk factors affecting us, see “Item 1A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. There have been no material changes to the risk factors previously disclosed in our Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the repurchases of common stock for the quarter ended June 30, 2012:

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans		Approximate dollar value of shares that may yet be purchased under the plans or programs (1)

For the month ended April 30, 2012		-	$	-		-	$	223,682,000

For the month ended May 31, 2012		285,000		9.05		285,000		221,103,000

For the month ended June 30, 2012		1,429,263		8.98		1,429,263		208,268,000

Total		1,714,263	$	8.99		1,714,263

(1)	The total dollar value of shares that may yet be purchased under the plans or programs applies to purchases made under both the Discretionary Plan and the Rule 10b5-1 Plan.

Our purchases of common stock may occur on the open market or in negotiated or block transactions based upon market and business conditions. Unless terminated earlier or extended by resolution of our Board of Directors, the Discretionary Plan will expire when we have repurchased all shares authorized for repurchase thereunder. The maximum amount of repurchase activity under the Discretionary Plan continues to be limited on a daily basis to 25% of the average trading volume of our common stock for the previous four week period. In addition, no purchases are made during our self-imposed trading black-out periods in which the Company and our insiders are prohibited from trading in our common shares. Our standard quarterly black-out period commences 10 business days prior to the end of each quarter and terminates one full market day following the public release of our operating results for the period. We reserve the right to change the timing and volume of our repurchases at any time without notice. For further details regarding the Discretionary Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

In May 2012, the Board of Directors adopted a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to repurchase our common stock. A broker selected by us has the authority under the terms and limitations specified in the plan to repurchase shares on our behalf in accordance with the terms of the plan without further direction from us. This repurchase program allows us to repurchase shares pursuant to a predetermined formula without regard to the quarterly black-out periods. This plan utilizes funds under the previous authorization described above and will expire in October 2012.

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Item 5.

Other Information

Revised Form of the Company’s Stock Option and Restricted Stock Unit Award Agreements

Effective April 1, 2012, the Compensation Committee (“Committee”) of the Board of Directors approved modifications to the form of the Company’s Stock Option Agreement (“NQSO Agreement”) that was attached as Exhibit 10.131 to the Form 8-K filed July 1, 2011 and to the form of the Company’s Restricted Stock Unit Award Agreement (“RSU Agreement”) that was attached as Exhibit 10.123 to the Form 8-K filed June 12, 2009 (collectively, the “Agreements”). As modified, the Agreements provide that unvested equity awards granted under the Agreements will immediately vest and be exercisable on the date of a recipient’s termination from the Company for specified reasons within 12 months following a Change in Control of the Company, as defined in the Company’s Amended and Restated 2007 Long Term Incentive Plan, rather than immediately upon a Change in Control. Copies of the modified NQSO Agreement and RSU Agreement are attached as Exhibits 10.138 and 10.139, respectively, and are incorporated herein by reference.

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Item 6.

Exhibits

The following exhibits are filed herewith or incorporated by reference to the filing indicated with which it was previously filed. The Company’s SEC file number is 000-20900.

Exhibit Number

Description of Document

10.137

Compuware Corporation Claw-Back Policy, adopted June 30, 2012 (Company’s Form 8-K filed July 6, 2012)

10.138

Form of Stock Option Agreement (as of April 2012)

10.139

Form of Restricted Stock Unit Award Agreement (as of April 2012)

Independent Registered Public Accounting Firm’s Awareness Letter

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

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COMPUWARE CORPORATION AND SUBSIDIARIES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMPUWARE CORPORATION

Date:	August 6, 2012	By: /s/ Robert C. Paul

		Robert C. Paul
		Chief Executive Officer
		(principal executive officer)

Date:	August 6, 2012	By: /s/ Laura L. Fournier

		Laura L. Fournier
		Executive Vice President,
		Chief Financial Officer and
		Treasurer
		(principal financial officer and
		principal accounting officer)