Edgar Filing: COMPUWARE CORP

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 September 30, 2013

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 November 4, 2013, there were outstanding 216,586,425 shares of Common Stock, par value $.01, of the registrant.

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2013 and March 31, 2013	3

	Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2013 and 2012	4

	Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended September 30, 2013 and 2012	5

	Condensed Consolidated Statement of Shareholders’ Equity for the six months ended September 30, 2013 and 2012	6

	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2013 and 2012	7

	Notes to Condensed Consolidated Financial Statements	8

	Report of Independent Registered Public Accounting Firm	30

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 6.	Exhibits	61

SIGNATURES		62

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

ASSETS	September 30, 2013			March 31, 2013

CURRENT ASSETS:
Cash and cash equivalents	$	50,372		$	89,873
Accounts receivable, net		381,892			424,587
Offering proceeds receivable		68,448			-
Deferred tax asset, net		42,837			37,618
Income taxes refundable		4,628			4,951
Prepaid expenses and other current assets		33,365			36,210
Total current assets		581,542			593,239

PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		295,264			302,492

CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET		111,162			116,663

ACCOUNTS RECEIVABLE		191,208			174,891

DEFERRED TAX ASSET, NET		30,351			31,754

GOODWILL		732,265			722,042

OTHER ASSETS		28,688			32,201
TOTAL ASSETS	$	1,970,480		$	1,973,282

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	16,894		$	18,717
Accrued expenses		92,969			103,994
Income taxes payable		18,266			14,507
Deferred revenue		387,878			417,862
Total current liabilities		516,007			555,080

LONG TERM DEBT		14,000			18,000

DEFERRED REVENUE		285,119			310,453

ACCRUED EXPENSES		18,274			27,873

DEFERRED TAX LIABILITY, NET		52,769			63,650
Total liabilities		886,169			975,056

SHAREHOLDERS' EQUITY:
Common stock		2,157			2,132
Additional paid-in capital		799,647			713,580
Retained earnings		268,937			301,298
Accumulated other comprehensive loss		(7,539	)		(18,784	)
Total Compuware shareholders' equity		1,063,202			998,226
Non-controlling interest		21,109			-
Total shareholders' equity		1,084,311			998,226
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,970,480		$	1,973,282

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2013			2012			2013			2012
REVENUES:
Software license fees	$	35,710		$	31,674		$	71,116		$	65,668
Maintenance fees		100,500			102,197			199,028			205,146
Subscription fees		20,651			20,231			41,436			40,710
Professional services fees		46,716			45,954			95,412			94,106
Application services fees		24,525			20,542			48,626			41,129

Total revenues		228,102			220,598			455,618			446,759

OPERATING EXPENSES:
Cost of software license fees		5,632			4,904			11,038			9,729
Cost of maintenance fees		7,724			9,068			15,945			18,014
Cost of subscription fees		8,656			7,827			16,803			15,220
Cost of professional services		37,610			40,085			77,959			82,386
Cost of application services		33,689			18,989			57,950			36,710
Technology development and support		24,125			27,549			50,660			54,046
Sales and marketing		53,450			56,641			112,943			118,831
Administrative and general		35,093			38,361			73,321			78,086
Restructuring costs		233			-			5,345			-

Total operating expenses		206,212			203,424			421,964			413,022

INCOME FROM OPERATIONS		21,890			17,174			33,654			33,737

OTHER INCOME (EXPENSE), NET		185			(87	)		387			(35	)

INCOME BEFORE INCOME TAX PROVISION		22,075			17,087			34,041			33,702

INCOME TAX PROVISION		6,889			6,493			8,888			12,640

NET INCOME		15,186			10,594			25,153			21,062

Less: Net income (loss) attributable to the non-controlling interest in Covisint Corporation		(1,154	)		-			(1,154	)		-

NET INCOME ATTRIBUTABLE TO COMPUWARE CORPORATION	$	16,340		$	10,594		$	26,307		$	21,062

Basic earnings per share	$	0.08		$	0.05		$	0.12		$	0.10

Diluted earnings per share	$	0.07		$	0.05		$	0.12		$	0.10

Dividends declared per common share	$	0.125		$	-		$	0.25		$	-

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 September 30,					Six Months Ended September 30,
	2013			2012		2013			2012
NET INCOME	$	15,186		$	10,594	$	25,153		$	21,062

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Foreign currency translation adjustments		9,004			4,104		12,228			(8,012	)

TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		1,239			1,191		983			(2,096	)

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		7,765			2,913		11,245			(5,916	)

COMPREHENSIVE INCOME		22,951			13,507		36,398			15,146

Less: Net income (loss) attributable to the non-controlling interest in Covisint Corp.		(1,154	)		-		(1,154	)		-

Less: Other comprehensive income attributable to the non-controlling interest in Covisint Corp.		-			-		-			-

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMPUWARE CORPORATION	$	24,105		$	13,507	$	37,552		$	15,146

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(In Thousands, Except Per Share Data)

(Unaudited)

	Common Stock						Additional Paid-In			Retained			Accumulated Other Comprehensive			Total Compuware Shareholders'			Non- controlling			Total Shareholders’
	Shares			Amount			Capital			Earnings			Loss			Equity			Interest			Equity
BALANCE AT MARCH 31, 2013		213,218,048		$	2,132		$	713,580		$	301,298		$	(18,784	)	$	998,226		$	-		$	998,226
Net income (loss)											26,307						26,307			(1,154	)		25,153
Foreign currency translation, net of tax														11,245			11,245						11,245
Dividends		8,949						796			(54,425	)					(53,629	)					(53,629	)
Sale of subsidiary shares to non-controlling interest								44,059									44,059			22,263			66,322
Issuance of common stock		124,096			1			1,301									1,302						1,302
Repurchase of common stock		(300,000	)		(5	)		(1,792	)		(4,243	)					(6,040	)					(6,040	)
Exercise/release of employee stock awards and related tax benefit (Note 6)		2,656,127			29			16,391									16,420						16,420
Stock awards compensation								25,312									25,312						25,312
BALANCE AT SEPTEMBER 30, 2013		215,707,220		$	2,157		$	799,647		$	268,937		$	(7,539	)	$	1,063,202		$	21,109		$	1,084,311

	Common Stock						Additional Paid-In			Retained			Accumulated Other Comprehensive			Total Compuware Shareholders'			Non- controlling			Total Shareholders’
	Shares			Amount			Capital			Earnings			Loss			Equity			Interest			Equity
BALANCE AT MARCH 31, 2012		217,506,319		$	2,175		$	685,904		$	372,408		$	(10,550	)	$	1,049,937					$	1,049,937
Net income (loss)											21,062						21,062						21,062
Foreign currency translation, net of tax														(5,916	)		(5,916	)					(5,916	)
Issuance of common stock		163,579			2			1,458									1,460						1,460
Repurchase of common stock		(5,059,362	)		(50	)		(16,175	)		(30,822	)					(47,047	)					(47,047	)
Exercise/release of employee stock awards and related tax benefit (Note 6)		2,149,275						7,190									7,190						7,190
Stock awards compensation					21			15,179									15,200						15,200
BALANCE AT SEPTEMBER 30, 2012		214,759,811		$	2,148		$	693,556		$	362,648		$	(16,466	)	$	1,041,886		$	-		$	1,041,886

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Six Months Ended September 30,
	2013			2012
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	25,153			21,062
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		32,501			31,126
Stock award compensation		25,312			15,179
Deferred income taxes		(16,450	)		4,812
Other		42			269
Net change in assets and liabilities, net of effects from currency fluctuations:
Accounts receivable		33,366			90,397
Prepaid expenses and other assets		5,640			4,535
Accounts payable and accrued expenses		(24,180	)		(41,426	)
Deferred revenue		(58,934	)		(114,452	)
Income taxes		4,634			4,820
Net cash provided by operating activities		27,084			16,322

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment		(5,953	)		(12,977	)
Capitalized software		(11,649	)		(15,583	)
Other		(275	)		(1,400	)
Net cash used in investing activities		(17,877	)		(29,960	)

CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from borrowings		37,500			87,300
Payments on borrowings		(41,500	)		(73,000	)
Net proceeds from exercise of stock awards including excess tax benefits		15,333			8,676
Employee contribution to stock purchase plans		1,235			1,427
Repurchase of common stock		(6,415	)		(44,828	)
Dividends		(53,629	)		-
Other		(608	)		-
Net cash used in financing activities		(48,084	)		(20,425	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(624	)		(1,601	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(39,501	)		(35,664	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		89,873			99,180

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	50,372		$	63,516

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 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 September 30, 2013, 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, 2013 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, 2013 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.

Non-controlling Interest

In September 2013, Covisint Corporation (“Covisint), previously a wholly owned subsidiary of Compuware Corporation, substantially completed the Covisint Initial Public Offering (“IPO”), and issued 7.36 million shares of its common stock (19.7 percent of shares outstanding after the issuance) at a price to the public of $10 per share. Prior to completion of the Covisint IPO, the Company contributed the assets and liabilities of the Covisint segment to Covisint Corporation.

The non-controlling equity interest in Covisint is reflected as non-controlling interest in the accompanying condensed consolidated balance sheets and was $21.1 million as of September 30, 2013.

The Covisint IPO was accounted for as an equity transaction in accordance with ASC 810, “Consolidation” and no gain or loss has been recognized as the Company retained the controlling financial interest. This transaction increased the Company’s equity attributable to non-controlling interest by $22.2 million, which represented the carrying value of the non-controlling interest and increased the Company’s additional paid in capital by $44.1 million.

Upon completion of the Covisint IPO, Compuware owned 80.3 percent of the economic and voting interest in Covisint. The Company has announced its intention to effect a tax-free spin-off of Covisint shares following the March 2014 expiration of the lock-up period under the Covisint IPO underwriting agreement. The Company has requested a private letter ruling from the Internal Revenue Service (“IRS”) providing that, subject to certain conditions, the anticipated spin-off will be tax-free to Compuware and its stockholders for U.S. federal income tax purposes. The spin-off or other disposition is subject to various conditions, including Board approval, the receipt of any necessary regulatory or other approvals, the receipt of the private letter ruling from the IRS with confirmation of the tax-free nature of the proposed transaction, the receipt of an opinion of counsel and the existence of satisfactory market conditions.

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There can be no assurance as to when the proposed spin-off or any other disposition will be completed, if at all. Unless and until Compuware ceases to own a controlling financial interest in Covisint, the Company will consolidate Covisint for financial reporting purposes, with a non-controlling interest adjustment for the economic interest in Covisint that Compuware does not own.

In connection with the Covisint IPO, the Company entered into various agreements relating to the separation of the Covisint business from the rest of Compuware’s businesses, including a master separation agreement, an employee benefits agreement, a Compuware services agreement, an intellectual property agreement, a registration rights agreement, a shared services agreement and a tax sharing agreement.

Basis for Revenue Recognition

The Company derives its revenue from licensing software products; providing maintenance and support services for those products; providing hosted software; and rendering professional and application services. Our software solutions are comprised of license fees, maintenance fees, subscription fees for hosted software 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 (hosted software, professional services unrelated to our software products or application services). Our hosted software 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, in accordance with ASC 605 “Revenue Recognition,” we allocate the arrangement consideration to the non-software deliverables as a group, and to the software deliverables as a group (the “Deliverable Groups”). We determine the selling price to allocate the arrangement consideration to the Deliverable Groups based on the following hierarchy of evidence: vendor specific objective evidence of selling price (“VSOE,” meaning price when sold separately) if available; third-party evidence of selling price 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 of selling price for either our software related deliverables or our non-software deliverables as a group. Therefore, the best estimate of selling price for each Deliverable Group is determined primarily by considering various factors, including, but not limited to stated renewal rates in a contract, if any, the historical selling price of these deliverables in similar stand-alone transactions and pricing practices. Total arrangement consideration is then allocated on the basis of the Deliverable Group’s relative selling price.

Once we have allocated the arrangement consideration between the Deliverable Groups, 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 customer agreements.

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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 multi-year (generally two to five years), multi-product contracts. The Company allows deferred payment terms with installments collectable 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.

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.

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Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our hosted software delivered on a software-as-a-service (“SaaS”) basis. 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 proportional performance 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 contracts include a services project fee and a recurring fee for ongoing platform-as-a-service (“PaaS”) operations. Certain services related to these projects have stand-alone value (e.g., other vendors provide similar services) and qualify as a separate unit of accounting. Services that have stand-alone value are recognized as delivered. For those services that do not have stand-alone value, the revenue is deferred and recognized over the longer of the committed term of the subscription agreement (generally one to five years) or the expected period over which the customer will receive benefit (generally five years). The recurring fees are recognized ratably over the applicable service period.

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 "cost of application services" or “sales and marketing” expenses, as applicable, in the condensed consolidated statements of operations over the revenue recognition period of the related customer contracts.

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Research and development

Research and development (“R&D”) costs primarily include the cost of programming personnel and amounted to $31.4 million and $25.9 million for the three months ended September 30, 2013 and 2012, respectively, and $56.6 million and $51.5 million for the six months ended September 30, 2013 and 2012, respectively. R&D costs related to our software solutions are reported as “technology development and support” and for our application services network, the costs are reported as “cost of application services” in the condensed consolidated statements of operations.

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 six months ended September 30, 2013 was 26.1% as compared to 37.5% for the six months ended September 30, 2012. The decline in the effective rate was primarily due to the recording of a benefit related to stock compensation as a result of a change in our expectation regarding the tax deductibility of compensation for a certain officer during the first six months of 2014. The tax deductibility of this officer’s compensation is no longer subject to the tax deduction threshold for officer compensation. Accordingly, a deferred tax asset was recorded related to the stock compensation that was previously expected to be disallowed for tax purposes.

Cash paid for income taxes was $17.9 million and $4.6 million for the six months ended September 30, 2013 and 2012, respectively.

Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We plan to adopt this ASU in fiscal 2015 and do not expect it to have a significant impact on our financial statements.

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In December 2011, the FASB issued 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. Subsequently in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. These ASUs 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. The requirements of these ASUs were adopted during our quarter ended June 30, 2013 and did not have a significant impact on our disclosures.

Note 2 – Financing Receivables

In accordance with ASU No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” 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 September 30, 2013, our loans receivable balance consisted of a note due from ForeSee Results, Inc. 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 dates as of September 30, 2013 and March 31, 2013 (in thousands):

	As of September 30, 2013
	0-29 days past invoice date		30-90 days past invoice date		Greater than 90 days past invoice date		Unbilled		Total financing receivables
Pass rating
Software products	$	2,597	$	222	$	573	$	41,290	$	44,682
Loans								2,875		2,875
Total		2,597		222		573		44,165		47,557

Watch rating
Software products						170				170

Total financing receivables	$	2,597	$	222	$	743	$	44,165	$	47,727

	As of March 31, 2013
	0-29 days past invoice date		30-90 days past invoice date		Greater than 90 days past invoice date		Unbilled		Total financing receivables
Pass rating
Software products	$	3,311	$	679	$	1,324	$	42,659	$	47,973
Loans								3,771		3,771
Total		3,311		679		1,324		46,430		51,744

Watch rating
Software products						179				179

Total financing receivables	$	3,311	$	679	$	1,503	$	46,430	$	51,923

As of September 30, 2013 and March 31, 2013, the allowance for credit losses on our financing receivables was $170,000 and $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 condensed consolidated balance sheets at fair value. See note 4 of the condensed consolidated financial statements for further information.

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The foreign currency net gains or (losses) for the three months ended September 30, 2013 and 2012 were ($2.4 million) and ($1.8 million), respectively and for the six months ended September 30, 2013 and 2012 were ($3.0 million) and ($1.1 million), respectively. The hedging transaction net gains or (losses) from foreign exchange derivative contracts for the three months ended September 30, 2013 and 2012 were $887,000 and $684,000, respectively and for the six months ended September 30, 2013 and 2012 were $897,000 and $471,000, respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of operations.

The Company has derivative contracts maturing through October 2013 to sell $1.8 million and purchase $30.1 million in foreign currencies at September 30, 2013 and had derivative contracts maturing through April 2013 to sell $1.8 million and purchase $15.5 million in foreign currencies at March 31, 2013.

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.

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

	As of September 30, 2013
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:

Cash equivalents - money market funds	$	2,672	$	2,672		-		-

Liabilities:

Foreign exchange derivatives	$	61		-	$	61		-

	As of March 31, 2013
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:

Cash equivalents - money market funds	$	11,525	$	11,525		-		-

Foreign exchange derivatives	$	31		-	$	31		-

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.

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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 September 30,				Six Months Ended September 30,
Basic earnings per share:	2013		2012		2013		2012

Numerator:
Net income attributable to Compuware Corporation	$	16,340	$	10,594	$	26,307	$	21,062

Denominator:
Weighted-average common shares outstanding		214,926		215,633		214,287		216,566

Basic earnings per share	$	0.08	$	0.05	$	0.12	$	0.10

Diluted earnings per share:

Numerator:
Net income attributable to Compuware Corporation	$	16,340	$	10,594	$	26,307	$	21,062

Denominator:
Weighted-average common shares outstanding		214,926		215,633		214,287		216,566
Dilutive effect of stock awards		5,503		4,337		5,720		4,142

Total shares		220,429		219,970		220,007		220,708

Diluted earnings per share	$	0.07	$	0.05	$	0.12	$	0.10

During the three months ended September 30, 2013 and 2012, stock awards to purchase 3.3 million and 6.9 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 5.1 million and 1.7 million shares, respectively, were excluded from the calculation because the performance conditions for vesting had not yet been met. During the six months ended September 30, 2013 and 2012, stock awards to purchase 2.6 million and 11.5 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 5.2 million and 1.6 million shares, respectively, were excluded from the calculation because the performance conditions for vesting had not yet been met. See note 6 for a discussion of options with performance conditions and performance based stock awards.

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 and the Company.

ESOP/401(k)

The Company provides 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 both the three months ended September 30, 2013 and 2012, the Company expensed $1.1 million and for the six months ended September 30, 2013 and 2012, the Company expensed $2.3 million and $2.4 million, respectively, related to this plan.

Compuware Stock Option Activity

Options that Vest Based on Service Conditions Only

A summary of activity for options that vest based on service conditions only under the Company’s stock-based compensation plans as of September 30, 2013, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended September 30, 2013
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2013		19,076		$	8.44
Granted		1,146			10.63
Exercised		(1,950	)		7.51			$	6,945
Forfeited		(91	)		10.73
Cancelled/expired		(87	)		9.36
Options outstanding as of September 30, 2013		18,094		$	8.66		6.69	$	44,756

Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2013		17,416		$	8.61		6.09	$	43,869

Options exercisable as of September 30, 2013		12,317		$	8.30		5.80	$	34,919

The average fair value of stock options vested during the six months ending September 30, 2013 and 2012 was $3.98 and $4.00 per share, respectively.

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Options that Vest Based on both Performance and Service Conditions (“Performance Options”)

As of September 30, 2013, 3.2 million stock options that vest based on both service and performance conditions were outstanding. The performance vesting conditions for these options are based on company-wide revenue and earnings targets. As of September 30, 2013, it is deemed probable that the performance targets for approximately 479,000 of these options will be achieved. Expense totaling $415,000 and $88,000, respectively, was recorded in the condensed consolidated statement of operations related to these stock options during the six months and three months ended September 30, 2013, respectively. No expense was recorded in the condensed consolidated statement of operations related to these stock options during the six months and three months ended September 30, 2012.

A summary of activity for options that vest based on the achievement of both service and performance conditions under the Company’s stock-based compensation plans as of September 30, 2013, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended September 30, 2013
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2013		3,648		$	9.79
Granted		594			11.30
Forfeited/Cancelled		(1,031	)		9.91
Options outstanding as of September 30, 2013		3,211		$	10.03		9.00	$	3,583

Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2013		479		$	11.30		9.62	$	-

Options exercisable as of September 30, 2013		-		$	-		-	$	-

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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:

	Six Months Ended September 30,
	2013			2012

Expected volatility		39.52	%		40.81	%
Risk-free interest rate		1.59	%		0.95	%
Expected lives at date of grant (in years)		6.3			6.3
Weighted-average fair value of the options granted	$	2.69		$	4.03
Dividend yield assumption (1)		4.42	%		0.00	%

(1)	In January 2013, our Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually. Prior to that, the Company had never paid a dividend or announced any intentions to pay a dividend.

Restricted Stock Units and Performance-Based Stock Awards Activity

A summary of non-vested restricted stock units (“RSUs”) and performance-based stock awards (“PSAs” and collectively “Non-vested RSU”) activity under the Company’s LTIP as of September 30, 2013, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended September 30, 2013
	Shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value

Non-vested RSU outstanding as of March 31, 2013		4,850
Granted		508		$	11.26
Dividend equivalents issued		78			10.94
Released		(945	)			$	10,166
Forfeited		(52	)
Non-vested RSU outstanding as of September 30, 2013		4,439

Approximately 31,000 PSAs with performance conditions based on company-wide revenue and earnings targets were outstanding as of September 30, 2013. It is not deemed probable that these targets will be achieved as of September 30, 2013.

During the first six months of 2014, the Company paid two quarterly dividends of $0.125 per share. In connection with this, approximately 35,000 and 78,000 dividend equivalent shares were issued to participants holding non-vested RSUs as of the dividend record date during the three and six months ended September 30, 2013, respectively.

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Covisint Corporation 2009 Long-Term Incentive Plan

As of September 30, 2013, there were 4.4 million stock options outstanding from the 2009 Covisint LTIP, which reflects the Covisint board of directors approved 30-for-1 stock split on May 23, 2013. These options include a performance condition requiring a change in control or IPO of Covisint prior to vesting. Many of these options vest upon the October 1, 2013, closing of Covisint’s IPO. Cumulative expense related to these options of $12.5 million was recorded to cost of application services during the three months ended September 30, 2013.

Certain employees who received stock options from the 2009 Covisint LTIP were also awarded PSAs from the Company’s 2007 LTIP. As of September 30, 2013, there were 1.5 million PSAs outstanding. Approximately 1.1 million of these PSAs will be cancelled upon the closing of the Covisint IPO. As the awards were no longer deemed probable, $2.9 million of expense associated with the PSAs was reversed from cost of application services during the quarter ended September 30, 2013.

Stock Awards Compensation

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation classified as:

Cost of maintenance fees	$	170	$	235	$	348	$	452
Cost of subscription fees		1		18		30		53
Cost of professional services		93		68		177		160
Cost of application services		10,020		387		10,506		709
Technology development and support		530		730		1,105		1,374
Sales and marketing		808		1,403		3,584		3,187
Administrative and general		3,253		4,049		7,771		9,244
Restructuring costs		-		-		1,791		-

Total stock-based compensation expense before income tax provision	$	14,875	$	6,890	$	25,312	$	15,179

As of September 30, 2013, it is expected that total unrecognized compensation cost of $38.0 million, net of estimated forfeitures, related to nonvested Compuware and Covisint equity awards that are expected to vest will be recognized over a weighted-average period of approximately 2.07 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 six months ended September 30, 2013 are summarized as follows (in thousands):

	APM		MF		CP		UF		PS		AS		Total
Goodwill as of March 31, 2013	$	469,947	$	140,557	$	22,079	$	21,280	$	42,794	$	25,385	$	722,042

Effect of foreign currency translation		10,223		-		-		-		-		-		10,223

Goodwill as of September 30, 2013	$	480,170	$	140,557	$	22,079	$	21,280	$	42,794	$	25,385	$	732,265

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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 September 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,418				$	4,418

Amortized intangible assets:
Capitalized software
Internally developed		255,521	$	(194,653	)		60,868
Purchased		166,523		(147,785	)		18,738
Customer relationship		52,208		(27,371	)		24,837
Other		20,364		(18,063	)		2,301
Total amortized intangible assets	$	494,616	$	(387,872	)	$	106,744

	As of March 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,428				$	4,428

Amortized intangible assets:
Capitalized software
Internally developed		243,872	$	(184,732	)		59,140
Purchased		165,117		(142,453	)		22,664
Customer relationship		52,036		(25,281	)		26,755
Other		19,884		(16,208	)		3,676
Total amortized intangible assets	$	480,909	$	(368,674	)	$	112,235

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. These trademarks are deemed to have an indefinite life.

Amortization of intangible assets

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Amortized intangible assets:
Capitalized software
Internally developed	$	5,103	$	3,793	$	9,922	$	7,263
Purchased		2,391		2,372		4,761		4,779
Customer relationship		1,032		1,041		2,063		2,085
Other		770		898		1,532		1,817

Total amortization expense	$	9,296	$	8,104	$	18,278	$	15,944

Capitalized software amortization related to our on-premises software is reported as “cost of software license fees”, amortization related to our hosted software 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 operations.

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 operations.

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 operations.

Based on the capitalized software, customer relationship and other intangible assets recorded through September 30, 2013, 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,
	2014		2015		2016		2017		2018		Thereafter
Amortized intangible assets:
Capitalized software	$	29,008	$	25,237	$	21,622	$	11,946	$	5,470	$	1,006
Customer relationship		4,131		4,136		4,136		3,972		3,828		6,697
Other		3,067		766		-		-		-		-

Total amortization expense	$	36,206	$	30,139	$	25,758	$	15,918	$	9,298	$	7,703

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Note 8 – Segment Information

The Company evaluates the performance of its segments based primarily on revenue growth and contribution margin which is operating profit before certain charges such as restructuring, internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). Transactions between segments are eliminated. 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 September 30, 2013
	APM		MF		CP		UF		PS		AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	24,256	$	8,335	$	958	$	2,161	$	-	$	-		$	-		$	35,710

Maintenance fees		24,394		64,425		4,247		7,434		-		-			-			100,500

Subscription fees		19,931		-		720		-		-		-			-			20,651

Professional services fees		6,796		31		3,202		986		36,013		-			(312	)		46,716

Application services fees		-		-		-		-		-		24,525			-			24,525

Total revenues		75,377		72,791		9,127		10,581		36,013		24,525			(312	)		228,102

Operating expenses		68,757		17,324		8,827		4,694		28,918		34,362			43,330			206,212

Contribution / operating margin	$	6,620	$	55,467	$	300	$	5,887	$	7,095	$	(9,837	)	$	(43,642	)	$	21,890

(1)

Unallocated operating expenses include $233,000 in restructuring expenses. See note 10 for additional information.

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

Software license fees	$	17,942		$	9,773	$	2,068		$	1,891	$	-	$	-	$	-		$	31,674

Maintenance fees		22,410			68,378		4,052			7,357		-		-		-			102,197

Subscription fees		19,544			-		687			-		-		-		-			20,231

Professional services fees		7,184			674		3,317			1,095		33,684		-		-			45,954

Application services fees		-			-		-			-		-		20,542		-			20,542

Total revenues		67,080			78,825		10,124			10,343		33,684		20,542		-			220,598

Operating expenses		74,059			20,284		10,752			4,606		28,138		20,051		45,534			203,424

Contribution / operating margin	$	(6,979	)	$	58,541	$	(628	)	$	5,737	$	5,546	$	491	$	(45,534	)	$	17,174

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	Six Months Ended September 30, 2013
	APM		MF		CP		UF		PS		AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	46,267	$	18,067	$	3,154	$	3,628	$	-	$	-		$	-		$	71,116

Maintenance fees		48,098		127,883		8,374		14,673		-		-			-			199,028

Subscription fees		40,063		-		1,373		-		-		-			-			41,436

Professional services fees		14,398		100		6,771		2,110		72,999		-			(966	)		95,412

Application services fees		-		-		-		-		-		48,626			-			48,626

Total revenues		148,826		146,050		19,672		20,411		72,999		48,626			(966	)		455,618

Operating expenses		142,803		36,500		19,141		9,864		59,550		59,785			94,321			421,964

Contribution / operating margin	$	6,023	$	109,550	$	531	$	10,547	$	13,449	$	(11,159	)	$	(95,287	)	$	33,654

(1)

Unallocated operating expenses include $5.3 million in restructuring expenses. See note 10 for additional information.

	Six Months Ended September 30, 2012
	APM			MF		CP			UF		PS		AS		Unallocated Expenses			Total

Software license fees	$	40,299		$	18,823	$	2,861		$	3,685	$	-	$	-	$	-		$	65,668

Maintenance fees		43,175			138,924		8,182			14,865		-		-		-			205,146

Subscription fees		39,396			-		1,314			-		-		-		-			40,710

Professional services fees		15,379			967		6,761			2,271		68,728		-		-			94,106

Application services fees		-			-		-			-		-		41,129		-			41,129

Total revenues		138,249			158,714		19,118			20,821		68,728		41,129		-			446,759

Operating expenses		150,155			43,129		20,441			10,025		57,058		38,067		94,147			413,022

Contribution / operating margin	$	(11,906	)	$	115,585	$	(1,323	)	$	10,796	$	11,670	$	3,062	$	(94,147	)	$	33,737

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

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
Revenues:
United States	$	145,346	$	138,032	$	287,313	$	282,876
Europe and Africa		49,768		46,527		101,492		95,901
Other international operations		32,988		36,039		66,813		67,982
Total revenues	$	228,102	$	220,598	$	455,618	$	446,759

	As of September 30, 2013		As of March 31, 2013
Long-lived assets
United States	$	879,347	$	888,032
Austria		209,681		201,224
Other		18,107		17,082
Total long-lived assets	$	1,107,135	$	1,106,338

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

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 in March 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 September 30, 2013 and March 31, 2013, the Company’s debt balance under its credit facility was $14.0 million and $18.0 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; stock repurchases; dividends; investments, loans and advances from the Company; transactions with affiliates; minimum net worth requirements; and limits additional borrowing outside of the facility. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. Additionally, the Company's stock repurchases are limited to $50 million from August 8, 2013 through the end of the agreement. The Company was in compliance with the covenants under the credit facility at September 30, 2013.

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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 September 30, 2013, interest rates on outstanding borrowings were at a weighted average rate of 1.8%. 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 $266,000 and $404,000 during the three months ended September 30, 2013 and 2012, respectively, and were $495,000 and $886,000 during the six months ended September 30, 2013 and 2012, respectively.

Cash paid for interest during the second quarters of 2014 and 2013 was $281,000 and $419,000, respectively. Cash paid for interest during the first six months of 2014 and 2013 was $547,000 and $931,000, respectively.

Note 10 – Restructuring Charges

In February 2013, the Company approved the initial phase of a restructuring plan designed to achieve cost savings, which involves reductions in our global workforce of approximately 220 employees (less than 5% of our total workforce), including employees across all operating and administrative divisions, and the early termination of certain operating leases and the closing or reduction in size of 20 office facilities worldwide.

During the three and six months ended September 30, 2013, the Company recorded a charge of approximately $233,000 and $5.3 million, respectively, for costs associated with these reductions, primarily related to severance costs for 78 terminated employees. The Company anticipates that approximately $6.3 million in additional employee termination charges and $4.3 million in lease abandonment costs will be taken during the remainder of fiscal 2014 for the initial phase of the restructuring plan, and it is expected that the activities in the initial phase will be completed before March 31, 2014.

The following table summarizes the restructuring accrual as of March 31, 2013 and changes to the accrual during the three months and six months ended September 30, 2013 (in thousands):

	Employee Termination Benefits			Lease Abandonment Costs			Other			Total Restructuring Activity
Accrual at March 31, 2013	$	4,670		$	2,717		$	80		$	7,467

Restructuring charge		5,110			-			2			5,112

Payments		(4,770	)		(405	)		(67	)		(5,242	)

Non-cash charges		(1,791	)		-			-			(1,791	)

Accrual at June 30, 2013	$	3,219		$	2,312		$	15		$	5,546

Restructuring charge		196			37			-			233

Payments		(1,815	)		(309	)		(8	)		(2,132	)

Accrual at September 30, 2013	$	1,600		$	2,040		$	7		$	3,647

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The Company evaluates its business segments prior to restructuring charges. Lease abandonment and other restructuring charges were not related to any specific segment. Employee termination benefits related to employees across the business units as follows (in thousands):

	Quarter Ended September 30, 2013
	APM		MF		CP		UF		PS		AS		Unallocated Expenses		Total

Employee termination benefits	$	94	$	-	$	-	$	-	$	14	$	9	$	79	$	196

	Six Months Ended September 30, 2013
	APM		MF		CP		UF		PS		AS		Unallocated Expenses		Total

Employee termination benefits	$	1,134	$	384	$	36	$	189	$	98	$	104	$	3,361	$	5,306

As of September 30, 2013, $2.8 million of the restructuring accrual was recorded in current “accrued expenses” with the remaining balance of $800,000 recorded in long-term “accrued expenses” in the condensed consolidated balance sheets.

The accruals for employee termination benefits at September 30, 2013 primarily represent the amounts to be paid to employees that have been terminated as a result of initiatives described above.

The accruals for lease abandonment costs at September 30, 2013 represent the expected payments related to leases that have been terminated before the end of the contractual term. For terminated operating leases, the accrual includes the remaining fair value of lease obligations for exited and demised locations, as determined at the cease-use dates of those facilities, net of estimated sublease income that could be reasonably obtained in the future, and will be paid out over the remaining lease terms, the last of which ends in fiscal 2017. Projected sublease income is based on management’s estimates, which are subject to change.

Note 11 – 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.

Note 12 – Subsequent Event

Effective October 1, 2013, the Company terminated a post-retirement consulting agreement with a former executive for cause under the terms of the agreement. Termination of the agreement is anticipated to result in the reversal of various accrued liabilities and the claw back of certain equity awards previously granted to the executive under the terms of the original grant agreements.

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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 September 30, 2013, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended September 30, 2013 and 2012, and of shareholders’ equity and cash flows for the six-month periods ended September 30, 2013 and 2012. 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, 2013, and the related consolidated statements of comprehensive income (loss), shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 29, 2013, 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, 2013 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

November 5, 2013

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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 in item 8 of this report and our annual report on Form 10-K for the fiscal year ended March 31, 2013, 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 unless otherwise specified.

We evaluate the performance of our segments based primarily on revenue growth and contribution margin which represents 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 statements of operations.

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 2013 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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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.

Our product revenue is dependent on the acceptance of our pricing structure for our software solutions.

Maintenance revenue could continue to decline.

Our primary source of profitability is from our mainframe segment. As revenues in this segment decline, our profitability will decline unless we are able to significantly increase margins in other operating segments.

If we are not able to grow our APM revenue, we may fail to achieve our forecasted financial results and we may fail to meet the expectations of analysts or investors which could cause our stock price to decline.

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

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.

Our business could be negatively affected as a result of actions of shareholders or others.

If we fail to achieve the results we expect from our expense reduction program, our results of operations and financial condition may be adversely affected.

If our planned distribution of our remaining shares of common stock in Covisint Corporation, (the "Tax-Free Distribution") does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our shareholders could be subject to significant tax liability.

The market for application services is highly competitive 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 revenue and margins may further decline.

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 hosted software 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.

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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.

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 succeed.

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

We are exposed to exchange rate risks on foreign currencies and to other international risks 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 and future dividend payments 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.

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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 recent years 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.

We have identified the APM market as a key source of future revenue growth. Mobile, web, big data 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. APM includes both software licensed for use on the customer’s premises and hosted software delivered through a SaaS model. The SaaS solutions are designed to test and monitor the performance, availability and quality of companies’ mobile and web applications. SaaS solutions are delivered to customers entirely through on-demand, hosted technology in which a single instance of the software serves multiple customers. The on-premises licensed solutions provide detailed application insight that identifies and helps correct the causes of poor application performance within client devices, network, server, Java, .NET, PHP, big data, mainframe and other environments, and enable continuous tracking of transactions and provide exact identification of performance problems. 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 hosted APMaaS (APM as a service) offering with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities; (2) enhancements to our on-premises 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 mobile, web, non-web, 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 platform-as-a-service (“PaaS”) basis to customers primarily in the automotive and U.S. healthcare industries, create an environment that simplifies and secures this collaboration atmosphere. The need for these services is growing across all business segments. Our focus in the manufacturing industry is on enabling automakers to connect, engage and collaborate on mission critical business processes with their suppliers, customers and business partners. Our focus in the healthcare industry is on enabling hospitals, physicians and government entities to share electronic patient health and medical records.

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

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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.

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, machine to machine and legacy 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 second quarter of 2014:

Substantially completed the initial public offering of 7.36 million shares of the common stock of our subsidiary Covisint Corporation, which closed on October 1, 2013. The shares sold represent 19.7% of Covisint’s outstanding shares after the offering. The shares began trading on the Nasdaq Global Select Market on September 26, 2013, under the symbol “COVS.”

Total revenue increased $7.5 million during the second quarter of 2014 as compared to the second quarter of 2013 due to a $4.0 million increase in application services fees, a $4.0 million increase in software license fees, a $762,000 increase in professional services fees and a $420,000 increase in subscription fees, partially offset by a $1.7 million decline in maintenance fees.

Operating margin increased to 9.6% during the second quarter of 2014 as compared to 7.8% during the second quarter of 2013 due primarily to an increase in APM, Changepoint, Mainframe and Professional Services contribution margins, offset in part, by additional stock compensation related to the Covisint IPO.

Net income attributable to Compuware Corporation increased to $16.3 million compared to $10.6 million during the second quarter of last year. On a non-GAAP basis, excluding stock compensation expense, amortization of purchased software and other acquired intangibles, restructuring charges and certain advisory fees, earnings increased 62.5% in the second quarter of 2014 as compared to the second quarter of 2013. See the “GAAP to non-GAAP Reconciliation” section below for a complete reconciliation of net income and earnings per share.

APM segment revenue increased $8.3 million or 12.4% during the second quarter of 2014 as compared to the second quarter of 2013. Contribution margin increased 195% from negative $7.0 million in the second quarter of 2013 to positive $6.6 million in the second quarter of 2014.

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Professional services segment revenue increased $2.3 million or 6.9% during the second quarter of 2014 as compared to the second quarter of 2013. Contribution margin increased from 16.5% to 19.7%. See “Professional Services” for additional information.

Covisint revenue increased $4.0 million or 19.4% from the second quarter of 2013. Contribution margin declined to negative 40.1% in the second quarter of 2014 from positive 2.4% during the second quarter of 2013 primarily due to additional stock compensation costs. See “Business Segment Analysis” for additional information.

Declared and paid the Company’s second quarterly cash dividend of $0.125 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".

GAAP TO NON-GAAP RECONCILIATION

In an effort to provide investors with additional information regarding the Company's results as determined by U.S. generally accepted accounting principles (“GAAP”), the Company has provided non-GAAP net income and non-GAAP diluted earnings per share. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. These non-GAAP financial measures exclude stock compensation expense; amortization of acquired software and intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items. Each of the non-GAAP adjustments is described in more detail below. The table below provides a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

We believe that inclusion of these non-GAAP financial measures provides better comparability with our historical financial results and with the results of many of our competitors. In addition, we believe these non-GAAP financial measures are useful to investors because they allow investors to review supplemental information used internally by management to evaluate our financial results. These non-GAAP measures also represent the means by which we communicate our earnings guidance to investors.

While we believe that these non-GAAP financial measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not audited, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Items such as stock compensation expense; amortization of acquired software and intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items that are excluded from our non-GAAP financial measures can have a material impact on net income. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net income or loss, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial measure. We have procedures in place to ensure that these measures are calculated using the appropriate GAAP components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Management reviews the non-GAAP adjustments on a net-of-tax basis when evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

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The following discusses the reconciling items from our non-GAAP financial measures to the most comparable GAAP financial measures:

Stock compensation expense. Our non-GAAP financial measures exclude the compensation expenses required to be recorded by GAAP for equity awards to employees and directors. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are generally fixed at the time an award is granted, are then expensed over several years and generally cannot be changed or influenced by management in the current period.

Amortization of acquired software and intangible assets. Our non-GAAP financial measures exclude costs associated with the amortization of acquired software and intangible assets. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are fixed at the time of acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management in the current period.

Restructuring charges. Our non-GAAP financial measures exclude restructuring charges, and any subsequent changes in estimates as they relate to our ongoing corporate restructuring activities. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding restructuring charges in order to provide comparability and consistency with historical operating results.

Advisory fees associated with certain shareholder actions and business transformation. During the fourth quarter of fiscal 2013, in response to an unsolicited, nonbinding offer to purchase the outstanding shares of the Company from a shareholder, the Board of Directors announced its willingness to consider other viable offers. We continue to incur consultant fees to analyze the business, review additional requests for information from other interested parties and to implement business transformation plans. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding such costs in order to provide comparability and consistency with historical operating results.

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Our reconciliation of GAAP to non-GAAP financial information is presented below (in thousands, except for per share data):

	Three Months Ended September 30,						Six Months Ended September 30,
	2013			2012			2013			2012

Net income	$	16,340		$	10,594		$	26,307		$	21,062

Stock compensation (excl. restructuring & impact of non-controlling interest)		12,985			6,890			21,631			15,179
Amortization of purchased software (excl. impact of non-controlling interest)		2,389			2,372			4,759			4,779
Amortization of acquired intangibles (excl. impact of non-controlling interest)		1,801			1,939			3,594			3,902
Restructuring expenses		233			-			5,345
Advisory fees		1,977			-			3,133

Total adjustments		19,385			11,201			38,462			23,860

Income tax effect of adjustments		(7,280	)		(3,489	)		(13,907	)		(7,531	)

Net income before items	$	28,445		$	18,306		$	50,862		$	37,391


Diluted earnings per share - GAAP	$	0.07		$	0.05		$	0.12		$	0.10

Stock compensation (excl. restructuring & impact of non-controlling interest)		0.06			0.03			0.10			0.07
Amortization of purchased software (excl. impact of non-controlling interest)		0.01			0.01			0.02			0.02
Amortization of acquired intangibles (excl. impact of non-controlling interest)		0.01			0.01			0.02			0.02
Restructuring expenses		0.00			-			0.02
Advisory fees		0.01			-			0.01

Total adjustments		0.09			0.05			0.17			0.11

Income tax effect of adjustments		(0.03	)		(0.02	)		(0.06	)		(0.04	)

Diluted earnings per share before items	$	0.13		$	0.08		$	0.23		$	0.17

Diluted shares outstanding		220,429			219,970			220,007			220,708

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 restructuring, internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). Transactions between segments are eliminated. The allocation of income taxes is not evaluated at the segment level. Comparisons are to the comparable period of the prior year. Financial information for our business segments was as follows (in thousands):

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		Software Solutions																					Unallocated
Three Months Ended:		APM			MF			CP			UF			Total			PS			AS			Expenses & Eliminations (1)			Total

September 30, 2013

Total revenues		$	75,377		$	72,791		$	9,127		$	10,581		$	167,876		$	36,013		$	24,525		$	(312	)	$	228,102

Operating expenses			68,757			17,324			8,827			4,694			99,602			28,918			34,362			43,330			206,212

Contribution / operating margin		$	6,620		$	55,467		$	300		$	5,887		$	68,274		$	7,095		$	(9,837	)	$	(43,642	)	$	21,890

Margin %			8.8	%		76.2	%		3.3	%		55.6	%		40.7	%		19.7	%		(40.1	%)		N/A			9.6	%

(1	)		Unallocated expenses for fiscal 2014 include $233,000 in restructuring expenses. See note 10 for additional information.

September 30, 2012

Total revenues		$	67,080		$	78,825		$	10,124		$	10,343		$	166,372		$	33,684		$	20,542		$	-		$	220,598

Operating expenses			74,059			20,284			10,752			4,606			109,701			28,138			20,051			45,534			203,424

Contribution / operating margin		$	(6,979	)	$	58,541		$	(628	)	$	5,737		$	56,671		$	5,546		$	491		$	(45,534	)	$	17,174

Margin %			(10.4	%)		74.3	%		(6.2	%)		55.5	%		34.1	%		16.5	%		2.4	%		N/A			7.8	%

		Software Solutions																					Unallocated
Six Months Ended:		APM			MF			CP			UF			Total			PS			AS			Expenses & Eliminations (1)			Total

September 30, 2013

Total revenues		$	148,826		$	146,050		$	19,672		$	20,411		$	334,959		$	72,999		$	48,626		$	(966	)	$	455,618

Operating expenses			142,803			36,500			19,141			9,864			208,308			59,550			59,785			94,321			421,964

Contribution / operating margin		$	6,023		$	109,550		$	531		$	10,547		$	126,651		$	13,449		$	(11,159	)	$	(95,287	)	$	33,654

Margin %			4.0	%		75.0	%		2.7	%		51.7	%		37.8	%		18.4	%		(22.9	%)		N/A			7.4	%

(1	)		Unallocated expenses for fiscal 2014 include $5.3 million in restructuring expenses. See note 10 for additional information.

September 30, 2012

Total revenues		$	138,249		$	158,714		$	19,118		$	20,821		$	336,902		$	68,728		$	41,129		$	-		$	446,759

Operating expenses			150,155			43,129			20,441			10,025			223,750			57,058			38,067			94,147			413,022

Contribution / operating margin		$	(11,906	)	$	115,585		$	(1,323	)	$	10,796		$	113,152		$	11,670		$	3,062		$	(94,147	)	$	33,737

Margin %			(8.6	%)		72.8	%		(6.9	%)		51.9	%		33.6	%		17.0	%		7.4	%		N/A			7.6	%

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COMPUWARE CORPORATION AND SUBSIDIARIES

Software Segments

Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services).

Application Performance Management

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Revenue
Software license fees	$	24,256		$	17,942			35.2	%	$	46,267		$	40,299			14.8	%
Maintenance fees		24,394			22,410			8.9			48,098			43,175			11.4
Subscription fees		19,931			19,544			2.0			40,063			39,396			1.7
Professional services fees		6,796			7,184			(5.4	)		14,398			15,379			(6.4	)
Total revenue		75,377			67,080			12.4			148,826			138,249			7.7

Operating expenses		68,757			74,059			(7.2	)		142,803			150,155			(4.9	)

Contribution margin	$	6,620		$	(6,979	)		194.9	%	$	6,023		$	(11,906	)		150.6	%

Contribution margin %		8.8	%		(10.4	%)					4.0	%		(8.6	%)

APM segment revenue increased during both the three months and six months ended September 30, 2013 due primarily to an increase in software license and maintenance fees partially offset by a decline in professional services fees. The increase in software license and maintenance fees was related to our growing customer base. Professional services fees declined due to a reduced need for implementation services for our APM products as newer product offerings tend to be easier to implement.

Operating expenses decreased during both the three months and six months ended September 30, 2013 due to a decline in salary and benefits expense related to headcount reductions associated with our restructuring initiatives and a reduction in advertising expense, partially offset by an increase in expenses related to stock compensation and amortization of capitalized software.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	43,052	$	36,342	$	82,983	$	76,400
Europe and Africa		19,937		16,756		39,369		36,409
Other international operations		12,388		13,982		26,474		25,440
Total APM segment revenue	$	75,377	$	67,080	$	148,826	$	138,249

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Mainframe

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Revenue
Software license fees	$	8,335		$	9,773			(14.7	)%	$	18,067		$	18,823			(4.0	)%
Maintenance fees		64,425			68,378			(5.8	)		127,883			138,924			(7.9	)
Professional services fees		31			674			(95.4	)		100			967			(89.7	)
Total revenue		72,791			78,825			(7.7	)		146,050			158,714			(8.0	)

Operating expenses		17,324			20,284			(14.6	)		36,500			43,129			(15.4	)

Contribution margin	$	55,467		$	58,541			(5.3	)%	$	109,550		$	115,585			(5.2	)%

Contribution margin %		76.2	%		74.3	%					75.0	%		72.8	%

Mainframe segment revenue declined $6.0 million and $12.7 million for the second quarter of 2014 and the first six months of 2014, respectively, primarily due to a reduction in maintenance fees and to a lesser extent a decline in license fees, which was 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 pricing pressures, competition and the effects of foreign exchange rate changes 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.

The increase in contribution margin resulted from the proportionately larger decline in operating expenses for the second quarter and first six months of 2014, which was primarily due to a decline in salaries and benefits expense resulting from headcount reductions associated with our restructuring initiatives.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	40,088	$	44,190	$	78,640	$	90,398
Europe and Africa		18,446		19,708		39,345		39,346
Other international operations		14,257		14,927		28,065		28,970
Total Mainframe segment revenue	$	72,791	$	78,825	$	146,050	$	158,714

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Changepoint

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Revenue
Software license fees	$	958		$	2,068			(53.7	)%	$	3,154		$	2,861			10.2	%
Maintenance fees		4,247			4,052			4.8			8,374			8,182			2.3
Subscription fees		720			687			4.8			1,373			1,314			4.5
Professional services fees		3,202			3,317			(3.5	)		6,771			6,761			0.1
Total revenue		9,127			10,124			(9.8	)		19,672			19,118			2.9

Operating expenses		8,827			10,752			(17.9	)		19,141			20,441			(6.4	)

Contribution margin	$	300		$	(628	)		147.8	%	$	531		$	(1,323	)		140.1	%

Contribution margin %		3.3	%		(6.2	%)					2.7	%		(6.9	%)

Changepoint segment revenue decreased $997,000 for the second quarter of 2014, primarily due to a decrease in software license fees. Software license fees declined due to a number of agreements which did not close near the end of the quarter.

Changepoint segment revenue increased $554,000 for the six months ended September 30, 2013, primarily due to an increase in software license fees during the first quarter. Software license fees were low in the first quarter of the prior year due to turnover in the sales organization.

Operating expenses decreased from the prior year primarily due to reduced headcount and changes in capitalized research and development costs. Capitalized research and development costs fluctuate based on the timing and stage of various development projects.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	4,339	$	5,103	$	9,655	$	9,207
Europe and Africa		2,451		1,743		5,025		3,610
Other international operations		2,337		3,278		4,992		6,301
Total Changepoint segment revenue	$	9,127	$	10,124	$	19,672	$	19,118

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Uniface

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Revenue
Software license fees	$	2,161		$	1,891			14.3	%	$	3,628		$	3,685			(1.5	)%
Maintenance fees		7,434			7,357			1.0			14,673			14,865			(1.3	)
Professional services fees		986			1,095			(10.0	)		2,110			2,271			(7.1	)
Total revenue		10,581			10,343			2.3			20,411			20,821			(2.0	)

Operating expenses		4,694			4,606			1.9			9,864			10,025			(1.6	)

Contribution margin	$	5,887		$	5,737			2.6	%	$	10,547		$	10,796			(2.3	)%

Contribution margin %		55.6	%		55.5	%					51.7	%		51.9	%

Uniface segment revenue and margins in the three and six month periods of 2014 were comparable to the prior year.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	1,512	$	1,311	$	2,863	$	2,743
Europe and Africa		7,050		7,301		14,039		14,547
Other international operations		2,019		1,731		3,509		3,531
Total Uniface segment revenue	$	10,581	$	10,343	$	20,411	$	20,821

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Software Solutions as a Group

Our Application Performance Management, Mainframe, Changepoint and Uniface segments combined represent our software solutions. Software solutions revenues are presented in the table below (in thousands):

	Three Months Ended September 30,							Six Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Software license fees	$	35,710	$	31,674		12.7	%	$	71,116	$	65,668		8.3	%
Maintenance fees		100,500		102,197		(1.7	)		199,028		205,146		(3.0	)
Subscription fees		20,651		20,231		2.1			41,436		40,710		1.8
Professional services fees		11,015		12,270		(10.2	)		23,379		25,378		(7.9	)
Total software solutions revenue	$	167,876	$	166,372		0.9	%	$	334,959	$	336,902		(0.6	)%

Software license fees (“license fees”) increased $4.0 million during the second quarter of 2014 and $5.4 million during the first six months of 2014. The increases can primarily be attributed to the increases in APM license revenue.

During the second quarter of 2014 and 2013, for software license transactions that were required to be recognized ratably, we deferred $6.1 million and $4.7 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $5.7 million and $7.3 million of previously deferred license revenue during the second quarter of 2014 and 2013, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

During the first six months of 2014 and 2013, for software license transactions that were required to be recognized ratably, we deferred $9.6 million and $8.9 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $12.3 million and $15.2 million of previously deferred license revenue during the first six months of 2014 and 2013, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees decreased $1.7 million and $6.1 million during the three months and six months ended September 30, 2013, respectively. 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 reducing 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 in mainframe maintenance fees was partially offset by an increase in APM maintenance fees.

Subscription fees increased $420,000 during the second quarter and $726,000 during the first six months of 2014, as new APM SaaS solution sales out paced non-renewals of existing customer agreements.

Professional services fees within our software solutions business segments decreased $1.3 million during the second quarter and $2.0 million during the first six months of 2014, respectively. The decline in professional services fees occurred primarily within our APM business unit due to a reduced need for implementation services for our APM products.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	88,991	$	86,946	$	174,141	$	178,748
Europe and Africa		47,884		45,508		97,778		93,912
Other international operations		31,001		33,918		63,040		64,242
Total software solutions revenue	$	167,876	$	166,372	$	334,959	$	336,902

Professional Services

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Professional services fees	$	36,013		$	33,684			6.9	%	$	72,999		$	68,728			6.2	%

Operating expenses		28,918			28,138			2.8			59,550			57,058			4.4

Contribution margin	$	7,095		$	5,546			27.9	%	$	13,449		$	11,670			15.2	%

Contribution margin %		19.7	%		16.5	%					18.4	%		17.0	%

Professional services segment fees increased $2.3 million during the second quarter of 2014 primarily due to a $2.7 million increase in services performed for a customer within the insurance industry and a $1.3 million increase related to collection on past services provided to a municipal customer that had not been recognized previously due to uncertainties regarding collectability. These increases were offset, in part, by declines in other customer activity.

Professional services segment fees increased $5.0 million for the six months ended September 30, 2013 due to an increase in services performed for a customer within the insurance industry and $2.9 million related to collection on past services provided to a municipal customer that had not been recognized previously due to uncertainties regarding collectability. These increases were offset, in part, by declines in other customer activity.

Operating expenses increased $780,000 for the second quarter of 2014 and $2.5 million for the six months ended September 30, 2013, primarily due to increased salary and benefits expense associated with the increase in revenue. Expense increases during the three and six months ended September 30, 2013, were partially offset by the reversal of a bad debt reserve recorded in prior periods.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	35,651	$	33,526	$	72,288	$	68,554
Europe and Africa		16		22		58		22
Other international operations		346		136		653		152
Total professional services segment revenue	$	36,013	$	33,684	$	72,999	$	68,728

Application Services

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

	Three Months Ended September 30,									Six Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Application services fees	$	24,525		$	20,542			19.4	%	$	48,626		$	41,129			18.2	%

Operating expenses		34,362			20,051			71.4			59,785			38,067			57.1

Contribution margin	$	(9,837	)	$	491			(2103.5	)%	$	(11,159	)	$	3,062			(464.4	)%

Contribution margin %		(40.1	%)		2.4	%					(22.9	%)		7.4	%

Application services segment fees increased $4.0 million and $7.5 million for the three months and six months ended September 30, 2013, respectively, primarily due to growth in the customer subscription base.

As of September 30, 2013 and 2012, backlog for the application services segment was approximately $113.3 million and $108.9 million, respectively. Backlog represents contractually committed arrangements that have yet to be recognized.

During the second quarter, Covisint substantially completed its initial public offering of common shares (the "Covisint IPO"), which constituted 19.7% of its outstanding shares immediately following the offering. This resulted in a cumulative catch up of expense associated with certain options to purchase Covisint shares and the reversal of expense associated with performance awards to receive Compuware shares which were no longer expected to vest since the shares terminated upon closing the offering on October 1, 2013. Operating expenses for the three months ended September 30, 2013 included $10.0 million of stock compensation expense which is comprised of $12.5 million recorded for the cumulative stock compensation expense related to options with a performance condition based on the Covisint IPO being satisfied, the reversal of $2.9 million recorded in conjunction with the cancellation of the performance share awards and $0.4 million of stock compensation expense unrelated to the IPO. Operating expenses also increased due to higher salaries and benefits expense resulting from an increase in headcount to support the expected growth of the business, a reduction in capitalized research and development costs, increased use of subcontractors and an increase in amortization of capitalized research and development costs.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2013		2012		2013		2012
United States	$	21,016	$	17,560	$	41,850	$	35,574
Europe and Africa		1,868		997		3,656		1,967
Other international operations		1,641		1,985		3,120		3,588
Total application services segment revenue	$	24,525	$	20,542	$	48,626	$	41,129

Unallocated Expenses and Eliminations

Unallocated expenses include costs associated with internal technology and the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, unallocated expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities associated with our worldwide offices. Significant changes in these areas are discussed in “Operating Expenses” under “Technology Development and Support” and “Administrative and General”.

Eliminations represent services performed by our professional services segment on behalf of Covisint. All intercompany revenue, expenses and profit are eliminated in our consolidated financial statements.

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.

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.

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

	Three Months Ended September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Cost of software license fees	$	5,632		$	4,904			14.8	%	$	11,038		$	9,729			13.5	%

Percentage of software license fees		15.8	%		15.5	%					15.5	%		14.8	%

During the three months and six months ended September 30, 2013, cost of license fees increased $728,000 and $1.3 million, respectively, due primarily to increased amortization of capitalized research and development costs, additional hardware costs associated with certain offerings and, to a lesser extent, an increase in author royalty expense.

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 September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Cost of maintenance fees	$	7,724		$	9,068			(14.8	)%	$	15,945		$	18,014			(11.5	)%

Percentage of maintenance fees		7.7	%		8.9	%					8.0	%		8.8	%

Cost of maintenance fees decreased $1.3 million and $2.1 million during the three and six months ended September 30, 2013, respectively, primarily due to a reduction in customer support costs.

Cost of Subscription Fees

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

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

	Three Months Ended September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Cost of subscription fees	$	8,656		$	7,827			10.6	%	$	16,803		$	15,220			10.4	%

Percentage of subscription fees		41.9	%		38.7	%					40.6	%		37.4	%

Cost of subscription fees increased $829,000 and $1.6 million during the three and six months ended September 30, 2013, respectively, primarily due to increased amortization of capitalized research and development costs related to on-going product enhancements. Additionally, costs increased, to a lesser extent, due to continued investment in our mobile network.

Cost of Professional Services

Cost of professional services consists primarily of personnel-related costs of providing professional services in the professional services segment and for software related services. Costs include billable and technical staff and subcontractors as well as 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 September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Cost of professional services	$	37,610		$	40,085			(6.2	)%	$	77,959		$	82,386			(5.4	)%

Percentage of professional services fees		80.5	%		87.2	%					81.7	%		87.5	%

Cost of professional services decreased $2.5 million and $4.4 million during the three months and six months ended September 30, 2013, respectively. The decrease was primarily due to a decline in salaries and benefits expense resulting from headcount reduction related to professional services employees within our software solutions segments.

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 net of the amounts capitalized for development of internal use software.

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

	Three Months Ended September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Cost of application services	$	35,080		$	22,551			55.6	%	$	61,291		$	43,676			40.3	%

Capitalized internal software costs	$	(1,391	)	$	(3,562	)		(60.9	)	$	(3,341	)	$	(6,966	)		(52.0	)

Cost of application services expensed	$	33,689		$	18,989			77.4	%	$	57,950		$	36,710			57.9	%

Percentage of application services fees		137.4	%		92.4	%					119.2	%		89.3	%

Cost of application services before capitalized internal software costs increased $12.5 million and $17.6 million, respectively, during the three and six months ended September 30, 2013 primarily due to stock compensation resulting from the Covisint IPO. As of September 30, 2013, there were 4.4 million Covisint stock options outstanding. These options include a performance condition requiring a change in control or IPO of Covisint prior to vesting. Many of these options vest upon the October 1, 2013 closing of the Covisint IPO. Cumulative expense of $12.5 million related to these options was recorded during the three months ended September 30, 2013. Certain employees who received Covisint stock options were also awarded Compuware performance share awards. Approximately 1.1 million of these performance share awards will be cancelled upon the closing of the Covisint IPO on October 1, 2013. As the awards were no longer deemed probable, $2.9 million of expense associated with the performance share awards was reversed during the quarter ended September 30, 2013. The remaining change was primarily the result of higher salaries and benefits expense resulting from an increase in headcount during fiscal 2014 to support the expected growth of the business including additional sales resources.

Capitalization of internally developed software costs decreased $2.2 million and $3.6 million during the three and six months ended September 30, 2013, respectively, due to a recent change to the agile delivery methodology for our platform enhancements, which has resulted in significantly shorter development cycles thereby reducing our capitalized costs.

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 our hosted software 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.

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

	Three Months Ended September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Technology development and support costs incurred	$	28,638		$	30,723			(6.8	)%	$	58,969		$	62,663			(5.9	)%

Capitalized internal software costs		(4,513	)		(3,174	)		42.2			(8,309	)		(8,617	)		(3.6	)

Technology development and support costs expensed	$	24,125		$	27,549			(12.4	)%	$	50,660		$	54,046			(6.3	)%

Technology development and support costs expensed as a percentage of software solutions revenue		14.4	%		16.6	%					15.1	%		16.0	%

Technology development and support before capitalized internal software costs declined $2.1 million for the second quarter of 2014 and $3.7 million during the six months ended September 30, 2013. The decrease primarily related to a decline in salaries and benefits expense resulting from headcount reductions associated with our restructuring initiatives.

During the second quarter of 2014, capitalized internal software costs increased related primarily to the timing of projects that are in the capitalization phase of development.

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 September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Sales and marketing costs	$	53,450		$	56,641			(5.6	)%	$	112,943		$	118,831			(5.0	)%

Percentage of software solutions revenue		31.8	%		34.0	%					33.7	%		35.3	%

Sales and marketing costs declined $3.2 million for the second quarter of 2014 and $5.9 million for the six months ended September 30, 2013, due primarily to decreased compensation and travel expense associated with headcount reductions related to our restructuring initiatives and to decreased marketing costs related to planned cost reductions. These decreases were partially offset by increased bonus and commissions compared to the prior year due to increases in license fees.

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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 September 30,				%			Six Months Ended September 30,				%
	2013		2012		Change			2013		2012		Change
Administrative and general expenses	$	35,093	$	38,361		(8.5	)%	$	73,321	$	78,086		(6.1	)%

Administrative and general costs decreased $3.3 million during the second quarter of 2014 and $4.8 million for the six months ended September 30, 2013, due primarily to a decrease in salaries and benefits expense related to headcount reductions associated with our restructuring initiatives. Other decreases associated with our restructuring including decreases in rent, contributions, travel and corporate advertising were offset by increases primarily associated with consulting fees related to shareholder activities and our on-going cost reduction efforts.

RESTRUCTURING CHARGE

As part of our announced plan to increase shareholder value, we are implementing significant cost reduction actions with the intention to eliminate approximately $80 million to $100 million of administrative and general and other operational costs. In February 2013, we approved the initial phase of a restructuring plan designed to achieve a portion of these savings, which involves reductions in our global workforce of approximately 220 employees (less than 5% of our total workforce), including employees across all operating and administrative divisions, the early abandonment of certain operating leases and the closing or reduction in size of 20 office facilities worldwide.

During the three months and six months ended September 30, 2013, the Company recorded charges of approximately $233,000 and $5.3 million, respectively, for costs associated with these reductions, primarily related to severance costs for 78 terminated employees. The Company anticipates that approximately $6.3 million in additional employee termination charges and $4.3 million in lease abandonment costs will be taken during the remainder of fiscal 2014 for the initial phase of the restructuring plan, which is currently expected to result in approximately $32.5 million of total restructuring costs including costs incurred during the fourth quarter of fiscal 2013. It is expected that the activities in the initial phase will be completed before March 31, 2014.

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OTHER INCOME (EXPENSE)

Other income (expense), net consists primarily of interest income realized from our cash and cash equivalents, interest earned on our financing receivables, our share of the income or loss from our investments in partially owned companies and interest expense primarily associated with our long-term debt.

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

	Three Months Ended September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Interest income	$	528		$	397			33.0	%	$	1,072		$	967			10.9	%
Interest expense		(281	)		(415	)		32.3			(567	)		(986	)		42.5
Other		(62	)		(69	)		10.1			(118	)		(16	)		(637.5	)
Other income (expense), net	$	185		$	(87	)		312.6	%	$	387		$	(35	)		1205.7	%

The decrease in interest expense is related to interest on reduced borrowings under the line of credit. Borrowings were incurred primarily to fund the share repurchase program during 2013. The average outstanding debt balance during the first six months of 2014 was $10 million as compared to $41 million during the first six months of 2013.

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 September 30,						%			Six Months Ended September 30,						%
	2013			2012			Change			2013			2012			Change
Income tax provision	$	6,889		$	6,493			6.1	%	$	8,888		$	12,640			(29.7	)%

Effective tax rate		31.2	%		38.0	%					26.1	%		37.5	%

Our effective tax rate for the six months ended September 30, 2013 was 26.1% compared to 37.5% for the six months ended September 30, 2012. The decline in the effective rate was primarily due to the recording of a benefit related to stock compensation as a result of a change in our expectation regarding the tax deductibility of compensation for a certain officer during the first six months of 2014. The tax deductibility of this officer’s compensation is no longer subject to the tax deduction threshold for officer compensation. Accordingly, a deferred tax asset was recorded related to the stock compensation that was previously expected to be disallowed for tax purposes.

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MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our condensed 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 September 30, 2013. 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, 2013 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 2013.

Goodwill Impairment Evaluation

The goodwill balance by reporting unit as of September 30, 2013 is presented as follows (in thousands):

	APM		MF		CP		UF		PS		AS		Total
Goodwill as of March 31, 2013	$	469,947	$	140,557	$	22,079	$	21,280	$	42,794	$	25,385	$	722,042

Effect of foreign currency translation		10,223		-		-		-		-		-		10,223

Goodwill as of September 30, 2013	$	480,170	$	140,557	$	22,079	$	21,280	$	42,794	$	25,385	$	732,265

We evaluated our goodwill for impairment on a reporting unit basis at March 31, 2013, and our professional services reporting unit failed Step 1 of our goodwill impairment analysis. After performing Step 2 of the goodwill impairment test, we determined that it was necessary to record a $71.8 million impairment to the goodwill associated with our professional services division, reducing the goodwill balance to the calculated implied fair value. Since March 31, 2013, there have been no events or changes in circumstances that would require the completion of an interim impairment analysis.

We continue to monitor the risk of additional goodwill impairment for the professional services reporting unit, which has a goodwill balance of $42.8 million at September 30, 2013. During the three and six months ended September 30, 2013, professional services revenue increased 6.9% and 6.2%, respectively, and contribution margin increased 27.9% and 15.2%, respectively. We believe we can maintain or grow our professional services revenue and margin. If our professional services revenues or margin decline, we could be required to further reduce the value of goodwill associated with the professional services reporting unit.

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 are 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 March 31, 2013, 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.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2013, cash and cash equivalents totaled $50.4 million, compared to $89.9 million at March 31, 2013.

Net cash provided by operating activities

Net cash provided by operating activities during the first six months of 2014 was $27.1 million, which represents a $10.8 million increase from the first six months of 2013. The increase was primarily due to a decline in cash paid to employees due to lower company-wide bonus attainment for fiscal 2013 as compared to fiscal 2012 and to reductions in headcount associated with our cost reduction efforts. Bonuses related to the previous fiscal year are paid during the first fiscal quarter of each year.

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 a $57.0 million reduction to operating cash flows and was primarily related to a large receivable recorded in the fourth quarter of 2012 that was collected during the first quarter of 2013. The impact of the net change in deferred revenue was a $55.5 million increase in operating cash flows compared to the prior year and was primarily related to an increase in multiyear maintenance contracts recorded during the first quarter of 2014 as compared to the first quarter of 2013.

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We believe our existing cash resources, including our line of credit and its expansion provision, and cash flow from operations will be sufficient to meet our short-term and long-term liquidity requirements, including the additional liquidity needed to fund the anticipated restructuring, business transformation and quarterly dividends.

Net cash used in investing activities

Net cash used in investing activities during the first six months of 2014 was $17.9 million, which represents a $12.1 million decrease in cash used as compared to the first six months of 2013 due primarily to a decrease in purchases of capitalized software and property and equipment of $11.0 million.

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 probably further utilize our credit facility and may need to seek additional financing.

Net cash used in financing activities

Net cash used in financing activities during the first six months of 2014 was $48.1 million, which represents a $27.7 million increase in cash used as compared to the first six months of 2013.

The increase in cash used was primarily due to $53.6 million in dividends paid and in a net increase of $18.3 million in payments on borrowings. We first paid dividends during fiscal 2014. The dividend and net debt payments were partially offset by a decline in share repurchases of $38.4 million and an increase in net proceeds from the exercise of stock awards of $6.7 million.

The receipt of the $68.4 million of proceeds from the Covisint IPO will be reflected in cash flows from financing activities during the third quarter due to the offering closing on October 1, 2013.

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. This agreement was most recently amended in August 2013. 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 operating cash flows, share repurchases and dividend payments.

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. 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.

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In December 2012, the Board of Directors authorized a Rule 10b5-1 repurchase program that was implemented during the third quarter of 2013 through which we repurchased shares pursuant to a predetermined formula during our quarterly trading black-out periods. This plan utilized funds under the previous Discretionary Plan authorization described above and expired in May 2013.

As of September 30, 2013, approximately $140 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 credit facility limits stock repurchases from August 8, 2013 through the end of the agreement to a total of $50 million without approval of the lenders.

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, 2013. 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 2013.

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, 2013. Therefore, the market risks remain substantially unchanged since we filed the annual report on Form 10-K for the year ending March 31, 2013.

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.

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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 September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II OTHER INFORMATION

Item 1A. Risk Factors

In September 2013, Covisint Corporation, previously a wholly owned subsidiary of ours, completed their IPO, and issued 7.36 million shares of its common stock (approximately 20 percent of shares outstanding after the issuance). We have previously announced our intention to distribute our remaining shares in Covisint to our shareholders. As a result of the Covisint IPO and proposed distribution, a new risk factor entitled "If our planned distribution of our remaining shares of common stock in Covisint Corporation, (the "Tax-Free Distribution") does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our shareholders could be subject to significant tax liability." is added, as set forth below:

If our planned distribution of our remaining shares of common stock in Covisint Corporation, which we refer to as the Tax-Free Distribution, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our shareholders could be subject to significant tax liability.

· Although we have no obligation to complete the Tax-Free Distribution, on January 25, 2013, we announced plans to distribute our shares of Covisint common stock within one year following its IPO. We have submitted to the IRS a request for a private letter ruling, substantially to the effect that, among other things, the Tax-Free Distribution will qualify as a tax-free transaction for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code or the Code. The private letter ruling and the tax opinion that we expect to receive from counsel will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of Covisint’s business, and neither the private letter ruling nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling will not address all the issues that are relevant to determining whether the distribution will qualify as a tax-free transaction. Notwithstanding the private letter ruling and opinion, the IRS could determine the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the representations, assumptions or undertakings that were included in the request for the private letter ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling. If the Tax-Free Distribution fails to qualify as a tax-free transaction, in general, we would be subject to tax as if we had sold our shares of Covisint common stock in a taxable sale for its fair market value, and our shareholders who receive shares of our common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

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· One requirement for the Tax-Free Distribution is that we maintain greater than 80% ownership in Covisint until the distribution. We currently own 80.3% of Covisint's outstanding shares. We have entered into agreements with Covisint and put procedures in place to allow us to purchase additional shares of Covisint prior to any Covisint equity transaction which are intended to ensure we maintain greater than 80% ownership in Covisint. Such purchases may result in significant cash outlays from us to Covisint which could have a negative impact on our available cash and to our equity subsequent to a Tax-Free Distribution.

· Even if the Tax-Free Distribution would otherwise qualify as a tax-free transaction for U.S. federal income tax purposes, such distribution may be taxable to us if Section 355(d) of the Code or Section 355(e) of the Code applies to the distribution. Section 355(d) of the Code may apply to the distribution if any person purchases 50% or more of our stock, by vote or value, during the five-year period ending on the date of any distribution of our shares of Covisint to our shareholders. Section 355(e) of the Code will apply to the distribution if 50% or more of Covisint's stock or of our stock, by vote or value, is acquired by one or more persons, other than the holders of our stock who received Covisint stock in the distribution, acting pursuant to a plan or a series of related transactions that includes the distribution. Any shares of Covisint stock or of our stock acquired directly or indirectly within two years before or after the Tax-Free Distribution generally are presumed to be part of such a plan unless that presumption can be rebutted.

· Substantial uncertainty exists on the scope of Section 355(e) of the Code, and we or Covisint may have undertaken, may contemplate undertaking or may otherwise undertake in the future transactions that may cause Section 355(e) of the Code to apply to the distribution notwithstanding our desire or intent to avoid application of Section 355(e) of the Code. Accordingly, we cannot provide you any assurance that we will not have tax-related obligations related to the application of Section 355(e) of the Code to the Tax-Free Distribution.

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Except as set forth above, there have been no material changes to the risk factors set forth in “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

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

There were no repurchases of common stock for the quarter ended September 30, 2013.

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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

	4.15		Third Amendment to Credit Agreement dated as of August 8, 2013

	10.152		Performance Unit Award Agreement for Robert C. Paul dated as of December 7, 2009 (corrected version)

	10.153		Form of Amendment, dated as of June 16, 2013, to Performance Unit Award Agreement footed with “PU Covisint IPO,” dated as of December 7, 2009, granted to Peter Karmanos, Jr. and Laura Fournier

	10.154		Form of Amendment, dated as of June 16, 2013, to Performance Unit Award Agreement footed with “PU Covisint Revenue 162m,” dated as of December 7, 2009, granted to Peter Karmanos, Jr. and Laura Fournier

	10.155		Amendment Number 1 to Performance Unit Award Agreement footed with “PU Covisint Revenue K2” granted to Peter Karmanos, Jr., dated as of December 7, 2009

	10.156		Form of Severance Agreement with Robert C. Paul and Joseph R. Angileri dated as of October 28, 2013

	15		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.

	32		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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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:	November 5, 2013		By: /s/ Robert C. Paul

			Robert C. Paul
			President and Chief Executive Officer
			(duly authorized officer)

Date:	November 5, 2013		By: /s/ Joseph R. Angileri

			Joseph R. Angileri
			Chief Financial Officer and Treasurer
			(principal financial officer and principal accounting officer)