COMPUWARE CORP - FORM 10-Q - November 6, 2014

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - COMPUWARE CORP	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - COMPUWARE CORP	ex31_2.htm
EX-32 - EXHIBIT 32 - COMPUWARE CORP	ex32.htm
EX-15 - EXHIBIT 15 - COMPUWARE CORP	ex15.htm
EX-31.1 - EXHIBIT 31.1 - COMPUWARE CORP	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

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		(IRS Employer
incorporation or organization)		Identification No.)

One Campus Martius, Detroit, MI 48226-5099

(Address of principal executive offices including zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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, 2014, there were outstanding 220,853,283 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, 2014 and March 31, 2014	3

	Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2014 and 2013	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended September 30, 2014 and 2013	5

	Condensed Consolidated Statements of Shareholders’ Equity for the six months ended September 30, 2014 and 2013	6

	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013	7

	Notes to Condensed Consolidated Financial Statements	8

	Report of Independent Registered Public Accounting Firm	29

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	54

Item 6.	Exhibits	58

SIGNATURES		59

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

ASSETS	September 30, 2014			March 31, 2014

CURRENT ASSETS:
Cash and cash equivalents	$	255,270		$	300,059
Accounts receivable, net		313,944			385,232
Deferred tax asset, net		37,192			35,871
Income taxes refundable		4,313			4,161
Prepaid expenses and other current assets		30,892			27,231
Total current assets		641,611			752,554

PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		279,748			287,013

CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET		95,805			98,762

ACCOUNTS RECEIVABLE		161,130			168,875

GOODWILL		632,106			648,546

DEFERRED TAX ASSET, NET		16,011			16,514

OTHER ASSETS		23,460			24,845

TOTAL ASSETS	$	1,849,871		$	1,997,109

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	18,947		$	14,251
Accrued expenses		79,451			107,452
Income taxes payable		14,998			33,093
Deferred revenue		347,092			382,558
Total current liabilities		460,488			537,354

DEFERRED REVENUE		250,646			302,565

ACCRUED EXPENSES		20,079			19,765

DEFERRED TAX LIABILITY, NET		36,378			36,391
Total liabilities		767,591			896,075

SHAREHOLDERS' EQUITY:
Common stock		2,208			2,193
Additional paid-in capital		847,172			828,264
Retained earnings		237,874			257,236
Accumulated other comprehensive loss		(21,635	)		(6,915	)
Total Compuware shareholders' equity		1,065,619			1,080,778
Non-controlling interest		16,661			20,256
Total shareholders' equity		1,082,280			1,101,034

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,849,871		$	1,997,109

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,
	2014			2013			2014			2013
REVENUES:
Software license fees	$	32,189		$	32,591		$	58,876		$	64,334
Maintenance fees		89,023			88,819			177,483			175,981
Subscription fees		19,949			19,931			39,311			40,063
Services fees		7,997			6,827			16,411			14,498
Application services fees		21,735			24,525			43,322			48,626

Total revenues		170,893			172,693			335,403			343,502

OPERATING EXPENSES:
Cost of software license fees		4,300			5,227			9,295			10,156
Cost of maintenance fees		5,942			6,846			12,864			14,185
Cost of subscription fees		8,506			8,450			16,708			16,290
Cost of services		6,901			5,892			13,633			12,534
Cost of application services		27,231			33,689			58,133			57,950
Technology development and support		19,615			21,379			39,567			45,070
Sales and marketing		50,976			47,356			104,079			99,623
Administrative and general		30,580			32,838			64,593			68,886
Restructuring costs		2,255			219			5,230			5,022

Total operating expenses		156,306			161,896			324,102			329,716

INCOME FROM CONTINUING OPERATIONS		14,587			10,797			11,301			13,786

OTHER INCOME (EXPENSE), NET		(935	)		185			(712	)		387

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION		13,652			10,982			10,589			14,173

INCOME TAX PROVISION - CONTINUING OPERATIONS		5,275			3,008			3,568			1,937

INCOME FROM CONTINUING OPERATIONS INCLUDING NON-CONTROLLING INTEREST		8,377			7,974			7,021			12,236

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX		-			7,212			-			12,917

NET INCOME INCLUDING NON-CONTROLLING INTEREST		8,377			15,186			7,021			25,153

Less: Net loss attributable to the non-controlling interest in Covisint Corporation		(774	)		(1,154	)		(2,182	)		(1,154	)

NET INCOME ATTRIBUTABLE TO COMPUWARE CORPORATION	$	9,151		$	16,340		$	9,203		$	26,307


Basic earnings per share
Continuing operations		0.04			0.04			0.04			0.06
Discontinued operations		-			0.03			-			0.06
Net income attributable to Compuware Corporation common shareholders	$	0.04		$	0.07		$	0.04		$	0.12

Diluted earnings per share
Continuing operations		0.04			0.04			0.04			0.06
Discontinued operations		-			0.03			-			0.06
Net income attributable to Compuware Corporation common shareholders	$	0.04		$	0.07		$	0.04		$	0.12

Dividends declared per common share	$	-		$	0.125		$	0.125		$	0.250

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
NET INCOME INCLUDING NON-CONTROLLING INTEREST	$	8,377		$	15,186		$	7,021		$	25,153

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Foreign currency translation adjustments		(14,839	)		9,004			(15,631	)		12,228

TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		(857	)		1,239			(917	)		983

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		(13,982	)		7,765			(14,714	)		11,245

COMPREHENSIVE INCOME (LOSS) INCLUDING NON-CONTROLLING INTEREST		(5,605	)		22,951			(7,693	)		36,398

Less: Net loss attributable to the non-controlling interest in Covisint Corporation		(774	)		(1,154	)		(2,182	)		(1,154	)

Less: Other comprehensive income attributable to the non-controlling interest in Covisint Corporation		5			-			6			-

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPUWARE CORPORATION	$	(4,836	)	$	24,105		$	(5,517	)	$	37,552

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements 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			Income (Loss)			Equity			Interest			Equity
BALANCE AT APRIL 1, 2014		219,340,085	$	2,193	$	828,264		$	257,236		$	(6,915	)	$	1,080,778		$	20,256		$	1,101,034
Net income (loss)									9,203						9,203			(2,182	)		7,021
Foreign currency translation, net of tax												(14,720	)		(14,720	)		6			(14,714	)
Cash dividends declared ($0.125 per share)						242			(27,716	)					(27,474	)					(27,474	)
Impact of equity transactions of non-controlling interest						(4,166	)								(4,166	)		4,166			-
Issuance of common stock		82,739		1		756									757						757
Repurchase of common stock		-				(526	)		(849	)					(1,375	)		(5,585	)		(6,960	)
Exercise/release of employee stock awards and related tax benefit (Note 6)		1,394,217		14		7,325									7,339						7,339
Stock awards compensation						15,277									15,277						15,277
BALANCE AT SEPTEMBER 30, 2014		220,817,041	$	2,208	$	847,172		$	237,874		$	(21,635	)	$	1,065,619		$	16,661		$	1,082,280

	Common Stock						Additional Paid-In			Retained			Accumulated Other Comprehensive			Total Compuware Shareholders’			Non-controlling			Total Shareholders’
	Shares			Amount			Capital			Earnings			Income (Loss)			Equity			Interest			Equity
BALANCE AT APRIL 1, 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
Cash dividends declared ($0.25 per share)		8,949						796			(54,425	)					(53,629	)					(53,629	)
Impact of equity transactions of 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

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Six Months Ended September 30,
	2014			2013
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income including non-controlling interest	$	7,021		$	25,153
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		29,017			32,501
Stock award compensation		15,277			25,312
Deferred income taxes		(861	)		(16,450	)
Other		1,902			42
Net change in assets and liabilities, net of effects from currency fluctuations:
Accounts receivable		63,202			33,366
Prepaid expenses and other assets		(2,483	)		5,640
Accounts payable and accrued expenses		(9,153	)		(24,180	)
Deferred revenue		(72,879	)		(58,934	)
Income taxes		(19,273	)		4,634
Net cash provided by operating activities		11,770			27,084

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment		(5,923	)		(5,953	)
Capitalized software		(14,648	)		(11,649	)
Reimbursement of proceeds from divestiture of business segments		(8,046	)		-
Other		-			(275	)
Net cash used in investing activities		(28,617	)		(17,877	)

CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from borrowings		-			37,500
Payments on borrowings		-			(41,500	)
Net proceeds from exercise of stock awards including excess tax benefits		9,203			15,333
Employee contribution to stock purchase plans		617			1,235
Repurchase of common stock		(6,960	)		(6,415	)
Dividends		(27,474	)		(53,629	)
Other		-			(608	)
Net cash used in financing activities		(24,614	)		(48,084	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(3,328	)		(624	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(44,789	)		(39,501	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		300,059			89,873

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	255,270		$	50,372

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 majority owned subsidiaries (collectively, the "Company", “Compuware”, “we”, “our” and “us”). All inter-company balances and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at September 30, 2014, 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, 2014 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, 2014 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.

Merger Agreement

On September 2, 2014, the Company entered into an agreement and plan of merger with affiliates of Thoma Bravo, LLC (collectively, “Thoma Bravo”) pursuant to which the Company will become, upon completion of the merger contemplated thereby, a wholly owned subsidiary of Thoma Bravo. The transaction is subject to approval from Compuware's shareholders, regulatory approvals, and other customary closing conditions. The closing of the transaction was also subject to the completion of a distribution of Compuware's shares of Covisint Corporation (“Covisint”), a subsidiary of the Company. On October 31, 2014, the Company completed the spin-off of its Covisint shares. See note 11 for further discussion of the Covisint spin-off.

Discontinued Operations

On January 31, 2014, the Company sold substantially all of the assets and transferred certain liabilities associated with its Changepoint, Professional Services and Uniface business segments to Marlin Equity Partners (“Marlin”).

At the initial closing on January 31, 2014, Marlin paid a cash payment of $112 million. During the first quarter of fiscal 2015, the Company paid approximately $8.0 million to Marlin as reimbursement of purchase price related to customer accounts receivable which were retained by the Company in excess of the initially estimated amount.

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The Changepoint, Professional Services and Uniface segment results have been presented as discontinued operations herein for the three and six months ended September 30, 2013. The following table provides the financial results included in income from discontinued operations, net of tax during the periods presented (in thousands):

	Three Months Ended September 30, 2013		Six Months Ended September 30, 2013
Revenues	$	55,409	$	112,116
Operating expenses		44,316		92,248
Income from operations		11,093		19,868
Income tax provision		3,881		6,951
Income from discontinued operations, net of tax	$	7,212	$	12,917

Non-Controlling Interest

As of September 30, 2014, the Company owned 82.42 percent of the economic and voting interest in Covisint. The non-controlling equity interest in Covisint is reflected as non-controlling interest in the accompanying consolidated balance sheets and was $16.7 million as of September 30, 2014. On October 31, 2014, the Company completed the spin-off of its Covisint shares. See note 11 for further discussion of the Covisint spin-off.

During the six months ended September 30, 2014 the Company purchased approximately 1.4 million Covisint shares in the market and in private transactions. These purchases were made in order for the Company to maintain its 80% or greater ownership of Covisint common stock, a condition to a tax-free spin-off, in anticipation of the expiration of lock-up agreements applicable to holders of non-qualified stock options to acquire Covisint common stock and the subsequent exercise of those options.

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 intellectual property agreement, a registration rights agreement, a shared services agreement and a tax sharing agreement. All but the master separation agreement and the tax sharing agreement terminated at the spin-off.

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 software related and application services. Our software solutions are comprised of license fees, maintenance fees, subscription fees for hosted software and software related services fees.

The Company sometimes enters into arrangements that include both software related deliverables (licensed software products, maintenance services or software related services) and non-software deliverables (hosted software 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,” the Company allocates the arrangement consideration to the non-software deliverables as a group, and to the software deliverables as a group (the “Deliverable Groups”). The Company determines 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. The Company currently is 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.

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Once the Company has allocated the arrangement consideration between the Deliverable Groups, the Company recognizes revenue as described in the respective software license fees, maintenance fees, subscription fees, 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. The Company evaluates collectability based on past customer history, external credit ratings and payment terms within customer agreements.

Software license fees

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

Assuming all revenue recognition criteria are met, perpetual license fee revenue is recognized using the residual method, under which the fair value, based on VSOE, of all undelivered elements of the agreement (i.e., maintenance and software related services) is deferred. VSOE is based on rates charged for maintenance and software related 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 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 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 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 services fee 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 services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and software related 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.

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Maintenance fees

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

Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our 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.

Services fees

The Company offers implementation, consulting and training services in tandem with the Company’s software solutions.

Services fees are generally based on hourly or daily rates. Revenues from services are recognized in the period the services are performed provided that collection of the related receivable is reasonably assured.

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). For 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. 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 from continuing operations, that include primarily the cost of programming personnel, amounted to $21.8 million and $22.1 million for the three months ended September 30, 2014 and 2013, respectively, and $41.8 million and $43.7 million for the six months ended September 30, 2014 and 2013, 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, 2014 was 33.7% compared to 13.7% for the six months ended September 30, 2013. The effective rate for the six months ended September 30, 2014, reflects a benefit due to the recording of interest income resulting from a refund claim approved by the IRS during the first quarter of fiscal year 2015. The effective rate for the six months ended September 30, 2013, reflects the recording of a benefit related to stock compensation that was previously expected to not result in a tax deduction. This benefit resulted due to a change in the Company’s expectation regarding the tax deductibility of compensation for certain officers during the first quarter of fiscal year 2014.

Cash paid for income taxes was $22.0 million and $17.9 million for the six months ended September 30, 2014 and 2013, respectively.

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Recently Issued Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About An Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 will require management to assess an entity’s ability to continue as a going concern for each annual and interim reporting period, and to provide related footnote disclosure in circumstances in which substantial doubt exists. This ASU is effective for us for the annual period beginning April 1, 2016 , and we will continue to assess the impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. ASU No. 2014-9 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. This ASU is effective for us beginning April 1, 2017 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has not yet evaluated the impact of the update on its financial statements.

In April 2014, the FASB issued ASU No. 2014-8, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-8 changes the requirements for reporting discontinued operations to only allow presentation of a disposal of an entity or component of an entity as a discontinued operation if it represents a strategic shift that has (or will have) a major effect on an entity’s operations or financial results. This ASU is effective for the first annual period beginning after December 15, 2014. The impact of this update on the Company’s financial statements will depend on future changes in operations.

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830) — Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. This ASU was effective prospectively for the first annual period beginning after December 15, 2013. The adoption of ASU No. 2013-05 did not have a significant impact on the Company’s consolidated balance sheet, statement of operations or cash flows.

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.

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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, 2014 and March 31, 2014 (in thousands):

	As of September 30, 2014
	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	$	761	$	157	$	164	$	38,207	$	39,289

	As of March 31, 2014
	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	$	2,684	$	628	$	26	$	33,807	$	37,145

As of September 30, 2014 and March 31, 2014, the Company had no financing receivables with a “watch” rating and no allowance for credit losses on our financing receivables.

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 on the condensed consolidated balance sheets at fair value. See note 4 of the condensed consolidated financial statements for further information.

The foreign currency net gains or (losses) for the three months ended September 30, 2014 and 2013 were $327,000 and ($2.4 million), respectively and for the six months ended September 30, 2014 and 2013 were $123,000 and ($3.0 million), respectively. The hedging transaction net gains or (losses) from foreign exchange derivative contracts for the three months ended September 30, 2014 and 2013 were ($510,000) and $887,000, respectively and for the six months ended September 30, 2014 and 2013 were ($728,000) and $897,000, respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of operations.

The Company has derivative contracts maturing through October 2014 to sell $4.7 million and purchase $14.3 million in foreign currencies at September 30, 2014 and had derivative contracts maturing through April 2014 to sell $3.1 million and purchase $24.1 million in foreign currencies at March 31, 2014.

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Note 4 - Fair Value of Assets and Liabilities

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

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

	As of September 30, 2014
	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	$	165,693	$	165,693		-		-

Liabilities:

Foreign exchange derivatives	$	59		-	$	59		-

	As of March 31, 2014
	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	$	232,252	$	232,252		-		-

Liabilities:

Foreign exchange derivatives	$	39		-	$	39		-

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,
	2014			2013			2014			2013
Amounts attributable to Compuware common shareholders
Income from continuing operations	$	8,377		$	7,974		$	7,021		$	12,236
Loss attributable to non-controlling interests		(774	)		(1,154	)		(2,182	)		(1,154	)

Income from continuing operations, net of tax		9,151			9,128			9,203			13,390
Income from discontinued operations, net of tax		-			7,212			-			12,917

Net income attributable to Compuware Corporation common shareholders	$	9,151		$	16,340		$	9,203		$	26,307

Basic earnings per share:
Continuing operations		0.04			0.04			0.04			0.06
Discontinued operations		-			0.03			-			0.06
Basic earnings per share	$	0.04		$	0.07		$	0.04		$	0.12

Weighted-average common shares outstanding		220,285			214,926			219,978			214,287

Diluted earnings per share:
Continuing operations		0.04			0.04			0.04			0.06
Discontinued operations		-			0.03			-			0.06
Diluted earnings per share	$	0.04		$	0.07		$	0.04		$	0.12

Weighted-average common shares outstanding		220,285			214,926			219,978			214,287
Dilutive effect of stock awards		3,385			5,503			3,511			5,720
Total shares		223,670			220,429			223,489			220,007

During the three months ended September 30, 2014 and 2013, stock awards to purchase 6.1 million and 3.3 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 2.5 million and 5.1 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, 2014 and 2013, stock awards to purchase 5.2 million and 2.6 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 2.5 million and 5.2 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 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 the three months ended September 30, 2014 and 2013, the Company expensed $666,000 and $733,000, respectively, and for the six months ended September 30, 2014 and 2013, the Company expensed $1.5 million and $1.6 million, respectively, related to this plan.

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, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended September 30, 2014
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2014		14,236		$	8.80
Granted		2,631			9.87
Exercised		(918	)		7.69			$	2,428
Forfeited		(92	)		9.99
Cancelled/expired		(85	)		9.65
Options outstanding as of September 30, 2014		15,772		$	9.03		6.67	$	26,278

Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2014		15,167		$	8.99		6.58	$	25,907

Options exercisable as of September 30, 2014		10,860		$	8.59		5.70	$	22,848

The average fair value of stock options vested during the six months ending September 30, 2014 and 2013 was $3.50 and $3.98 per share, respectively.

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

As of September 30, 2014, 2.6 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, 2014, it is deemed probable that the performance targets for approximately 1.1 million of these options will be achieved. Expense totaling $205,000 and $323,000 was recorded in the condensed consolidated statement of operations related to these stock options during the three and six months ended September 30, 2014.

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, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended September 30, 2014
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2014		2,150		$	10.07
Granted		1,116			10.11
Forfeited/Cancelled		(708	)		9.83
Options outstanding as of September 30, 2014		2,558		$	10.16		8.74	$	1,476

Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2014		1,116		$	10.11		9.64	$	-

Options exercisable as of September 30, 2014		-		$	-		-	$	-

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,
	2014			2013

Expected volatility		34.09	%		39.52	%
Risk-free interest rate		1.88	%		1.59	%
Expected lives at date of grant (in years)		5.7			6.3
Weighted-average fair value of the options granted	$	1.96		$	2.69
Dividend yield assumption		4.99	%		4.42	%

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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, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

	Six Months Ended
	September 30, 2014
	Shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value

Non-vested RSU outstanding as of March 31, 2014		2,124
Granted		1,416		$	10.10
Dividend Equivalents Issued		32			9.98
Released		(614	)			$	5,869
Forfeited		(38	)
Non-vested RSU outstanding as of September 30, 2014		2,920

Approximately 270,760 PSAs with performance conditions based on company-wide revenue and earnings targets were outstanding as of September 30, 2014. It is deemed probable that the targets will be achieved for 254,928 PSAs as of September 30, 2014.

During the six months ended September 30, 2014 and 2013, approximately 32,000 and 78,000 dividend equivalent shares were issued to participants holding non-vested RSUs as of each quarter’s respective dividend record date.

Covisint Corporation 2009 Long-Term Incentive Plan

As of September 30, 2014, there were 4.6 million stock options outstanding from the 2009 Covisint LTIP. The majority of these options vested upon the October 1, 2013 closing of Covisint’s IPO.

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Stock Awards Compensation

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
Stock-based compensation classified as:

Cost of maintenance fees	$	78	$	169	$	171	$	348
Cost of subscription fees		4		1		32		30
Cost of services		22		21		31		41
Cost of application services		1,255		10,020		3,874		10,506
Technology development and support		256		528		523		1,100
Sales and marketing		1,888		803		3,782		3,573
Administrative and general		2,974		3,253		6,864		7,771
Restructuring costs		-		-		-		1,791
Discontinued operations		-		80		-		152

Total stock-based compensation expense before income tax provision	$	6,477	$	14,875	$	15,277	$	25,312

As of September 30, 2014, total unrecognized compensation cost of $33.6 million, net of estimated forfeitures is expected to be recognized over a weighted-average period of approximately 2.14 years. Unrecognized compensation cost includes $6.5 million, net of estimated forfeitures, related to nonvested Covisint stock options which is expected to be recognized over a weighted-average period of approximately 1.77 years.

Note 7 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

The Company has the following reporting units: Dynatrace (formerly “Application Performance Management” or “APM”), Mainframe (“MF”), 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, 2014 are summarized as follows (in thousands):

	Dynatrace			MF		AS		Total

Goodwill as of March 31, 2014	$	482,857		$	140,304	$	25,385	$	648,546

Effect of foreign currency translation		(16,440	)		-		-		(16,440	)

Goodwill as of September 30, 2014	$	466,417		$	140,304	$	25,385	$	632,106

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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, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Unamortized intangible assets	$	667				$	667

Amortized intangible assets:
Capitalized software
Internally developed		239,895	$	(176,359	)		63,536
Purchased		120,141		(109,084	)		11,057
Customer relationship		46,706		(26,161	)		20,545
Other		19,756		(19,756	)		-
Total amortized intangible assets	$	426,498	$	(331,360	)	$	95,138

	As of March 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Unamortized intangible assets	$	358				$	358

Amortized intangible assets:
Capitalized software
Internally developed		225,249	$	(165,720	)		59,529
Purchased		122,396		(107,116	)		15,280
Customer relationship		47,000		(24,185	)		22,815
Other		20,530		(19,750	)		780
Total amortized intangible assets	$	415,175	$	(316,771	)	$	98,404

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 amortized over periods up to three years.

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Unamortized intangibles include a trademark acquired as part of the Covisint acquisition and a domain name, each of which 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,
	2014		2013		2014		2013
Amortized intangible assets:
Capitalized software
Internally developed	$	5,366	$	4,817	$	10,640	$	9,353
Purchased		1,664		2,391		3,378		4,761
Customer relationship		1,032		1,032		2,067		2,063
Other		-		770		780		1,532

Total amortization expense	$	8,062	$	9,010	$	16,865	$	17,709

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 Dynatrace segment 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 Dynatrace segment is reported as “cost of software license fees” and amortization related to our application services segment is reported as “cost of application services” in the condensed consolidated statements of operations. These intangibles are fully amortized as of September 30, 2014.

Based on the capitalized software, customer relationship and other intangible assets recorded through September 30, 2014, 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,
	2015		2016		2017		2018		2019		Thereafter
Amortized intangible assets:
Capitalized software	$	28,426	$	26,787	$	17,549	$	9,727	$	4,777	$	1,345
Customer relationship		4,124		4,113		3,949		3,805		3,805		2,816
Other		780

Total amortization expense	$	33,330	$	30,900	$	21,498	$	13,532	$	8,582	$	4,161

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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”). 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, 2014
	Dynatrace		MF		AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	25,883	$	6,306							$	32,189

Maintenance fees		29,400		59,623								89,023

Subscription fees		19,949										19,949

Services fees		7,923		74								7,997

Application service fees					$	21,735						21,735

Total revenues		83,155		66,003		21,735						170,893

Operating expenses		73,285		15,907		28,899			38,215			156,306

Income (loss) from continuing operations	$	9,870	$	50,096	$	(7,164	)		(38,215	)	$	14,587

(1)	Unallocated operating expenses include $2.3 million in restructuring expenses. See note 9 for additional information.

	Three Months Ended September 30, 2013
	Dynatrace			MF			AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	25,027	(2)	$	7,564	(2)							$	32,591

Maintenance fees		24,596	(2)		64,223	(2)								88,819

Subscription fees		19,931												19,931

Services fees		6,796			31									6,827

Application service fees							$	24,525						24,525

Total revenues		76,350			71,818			24,525						172,693

Operating expenses		69,260	(2)		16,821	(2)		34,362			41,453			161,896

Income (loss) from continuing operations	$	7,090		$	54,997		$	(9,837	)	$	(41,453	)	$	10,797

(1)	Unallocated operating expenses include $219,000 in restructuring expenses. See note 9 for additional information.

(2)	Prior year amounts have been reclassified to reflect the transition of Dynatrace for Mainframe from the Mainframe segment to the Dynatrace segment.

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	Six Months Ended September 30, 2014
	Dynatrace		MF		AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	47,270	$	11,606							$	58,876

Maintenance fees		57,695		119,788								177,483

Subscription fees		39,311										39,311

Services fees		16,255		156								16,411

Application service fees					$	43,322						43,322

Total revenues		160,531		131,550		43,322						335,403

Operating expenses		148,918		33,023		62,291			79,870			324,102

Income (loss) from continuing operations	$	11,613	$	98,527	$	(18,969	)	$	(79,870	)	$	11,301

(1)	Unallocated operating expenses include $5.2 million in restructuring expenses. See note 9 for additional information.

	Six Months Ended September 30, 2013
	Dynatrace			MF			AS			Unallocated Expenses & Eliminations (1)			Total

Software license fees	$	48,557	(2)	$	15,777	(2)							$	64,334

Maintenance fees		48,397	(2)		127,584	(2)								175,981

Subscription fees		40,063												40,063

Services fees		14,398			100									14,498

Application service fees							$	48,626						48,626

Total revenues		151,415			143,461			48,626						343,502

Operating expenses		143,671	(2)		35,632	(2)		59,785			90,628			329,716

Income (loss) from continuing operations	$	7,744		$	107,829		$	(11,159	)	$	(90,628	)	$	13,786

(1)	Unallocated operating expenses include $5.0 million in restructuring expenses. See note 9 for additional information.

(2)	Prior year amounts have been reclassified to reflect the transition of Dynatrace for Mainframe from the Mainframe segment to the Dynatrace segment.

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,
	2014		2013		2014		2013
Revenues:
United States	$	101,161	$	104,156	$	197,282	$	203,473
Europe and Africa		42,074		40,251		83,321		82,370
Other international operations		27,658		28,286		54,800		57,659
Total revenues	$	170,893	$	172,693	$	335,403	$	343,502

	As of September 30, 2014		As of March 31, 2014
Long-lived assets
United States	$	782,696	$	785,403
Austria		190,843		210,755
Other		12,908		14,210
Total long-lived assets	$	986,447	$	1,010,368

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

Note 9 – Restructuring Charges

In February 2013, the Company approved the initial phase of a restructuring plan designed to achieve cost savings. In January 2014, the Company announced the final phase of its restructuring plan designed to reduce the Company’s annual cost base and substantially improve the Company’s operating margins, increasing the aggregate targeted annualized cost savings to a total of $110 million to $120 million. This final phase includes additional reductions in the global workforce primarily across all general, administrative and shared services divisions of the Company, along with the early termination of certain operating leases and the closing or reduction in size of office facilities worldwide.

These cost reduction efforts, which are expected to be substantially completed by the end of fiscal 2015, are expected to result in cumulative charges of $50 million to $60 million. Substantially all of the estimated charges will result in future cash expenditures.

During the three and six months ended September 30, 2014, the Company recorded a charge of approximately $2.3 million and $5.2 million, respectively, for costs associated with these reductions, primarily related to severance costs for 30 terminated employees and facilities reductions. The timing of additional charges is dependent upon certain actions to be taken in the future. During the three and six months ended September 30, 2013, the Company recorded a charge of approximately $219,000 and $5.0 million, respectively, for costs associated with these reductions, primarily related to severance costs for 78 terminated employees.

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The following table summarizes the restructuring accrual as of March 31, 2014 and changes to the accrual during the three and six months ended September 30, 2014 (in thousands):

	Employee Termination Benefits			Lease Abandonment Costs			Other			Total Restructuring Activity
Accrual at March 31, 2014	$	3,031		$	1,544		$	17		$	4,592

Restructuring charge		2,350			557			68			2,975

Payments		(2,487	)		(884	)		(17	)		(3,388	)

Accrual at June 30, 2014		2,894			1,217			68			4,179


Restructuring charge		731			1,511			13			2,255

Payments		(1,842	)		(1,351	)		(42	)		(3,235	)

Accrual at September 30, 2014	$	1,783		$	1,377		$	39		$	3,199

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

	Three Months Ended September 30, 2014
	Dynatrace		MF		AS		Unallocated Expenses		Total

Employee termination benefits	$	136	$	83	$	-	$	512	$	731
Lease abandonment costs		-		-		-		1,511		1,511
Other		-		-		-		13		13
Total restructuring charges	$	136	$	83	$	-	$	2,036	$	2,255

	Six Months Ended
	September 30, 2014
	Dynatrace		MF		AS		Unallocated Expenses		Total

Employee termination benefits	$	895	$	313	$	-	$	1,873	$	3,081
Lease abandonment costs		-		-		-		2,068		2,068
Other		-		-		-		81		81
Total restructuring charges	$	895	$	313	$	-	$	4,022	$	5,230

As of September 30, 2014, substantially all of the restructuring accrual was recorded in current “accrued expenses” in the condensed consolidated balance sheets.

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The accruals for employee termination benefits at September 30, 2014 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, 2014 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 10 – Contingencies

Effective October 1, 2013, the Company terminated a post-retirement consulting agreement with its former Chairman for “Cause”, and all outstanding equity awards he held terminated pursuant to the applicable agreements. On November 13, 2013, the former Chairman filed a lawsuit against the Company regarding his termination. The Company and the former Chairman have agreed to binding arbitration of this dispute. The accounting impact of the termination of the vested and unvested stock options and unvested RSUs was recognized in other income net of a portion of the estimated liability related to the pending lawsuit. The Company believes its accruals as of September 30, 2014, related to this dispute are reasonably estimated.

A number of putative class action complaints have been filed by purported shareholders against the Company related to the merger agreement with Thoma Bravo. The complaints generally allege that the Board of Directors breached its fiduciary duties in negotiating and approving the proposed merger transaction. The Company believes these lawsuits are without merit and intends to vigorously defend against these claims.

The Company has been named as a co-defendant in a consolidated class action complaint filed against Covisint, its directors and certain officers at the time of Covisint's initial public offering ("IPO") alleging violation of securities laws in connection with Covisint's IPO and seeking unspecified damages. The Company believes the lawsuit is without merit and intends to vigorously defend against it.

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 11 – Subsequent Events

On October 31, 2014, the Company distributed all of its 31,384,920 shares of Covisint common stock as a pro rata dividend on shares of Compuware common stock, and on shares of Compuware common stock deliverable under restricted stock units relating to Compuware common stock (“the Distribution”).

Based on the number of Covisint shares outstanding owned by the Company and shares deliverable under RSUs as of October 20, 2014, the record date for the distribution, holders of Compuware common stock received 0.14025466 shares of Covisint common stock in the distribution with respect to each outstanding share of Compuware common stock they owned as of the close of business on the record date, and holders of RSUs received 0.14025466 shares of Covisint common stock in the distribution with respect to each share of Compuware common stock deliverable under the RSUs they held at the close of business on the record date.

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Fractional shares of Covisint common stock were not distributed to Compuware shareholders or RSU holders. Instead, the fractional shares of Covisint common stock were aggregated and sold in the open market, with the net proceeds distributed pro rata in the form of cash payments to Compuware shareholders and RSU holders who would otherwise receive Covisint fractional shares.

In anticipation of the merger with Thoma Bravo, Compuware intends to treat the distribution as a taxable distribution of the Covisint common stock by Compuware for U.S. federal income tax purposes. Any corporate-level income tax incurred on the distribution if the acquisition by Thoma Bravo is completed will be paid by Compuware.

The distribution of shares of Covisint common stock was made in book entry form, and no physical share certificates of Covisint were issued. An information statement describing the distribution was mailed to Compuware stockholders. Compuware shareholders were not required to pay cash or other consideration for the shares of Covisint common stock distributed to them or surrender or exchange their shares of Compuware common stock to receive the distribution.

As a result of this distribution, the Company no longer owns any shares of Covisint common stock. The operating results of Covisint will be reflected in discontinued operations in the third quarter of fiscal year 2015.

As of September 30, 2014, the carrying value of the Covisint assets and liabilities included in our consolidated balance sheet were as follows (in thousands):

Cash and cash equivalents	$	44,168
Other current assets		26,607
Property and equipment, net		5,446
Capitalized software and other intangible assets, net		20,878
Goodwill		25,385
Other assets		5,142

Total assets	$	127,626

Current liabilities	$	25,754
Long-term liabilities		10,576

Total liabilities	$	36,330

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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, 2014, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended September 30, 2014 and 2013, and of shareholders’ equity and cash flows for the six-month periods ended September 30, 2014 and 2013. 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, 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 30, 2014, 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, 2014 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 6, 2014

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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 1 of this report and our annual report on Form 10-K for the fiscal year ended March 31, 2014, 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.

In this section, we discuss our results of operations on a segment basis. We have two software segments, Dynatrace and Mainframe. We also had a platform-as-a-service (“PaaS”) offering called Covisint or Application Services through October 31, 2014. 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 2014 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

If we are not able to grow our Dynatrace revenue at anticipated levels, 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.

A substantial portion of our Mainframe segment revenue is dependent on our customers’ continued use of IBM 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 our Dynatrace segment.

Our intended acquisition by Thoma Bravo may not be consummated and our stock price may decline.

If the merger with Thoma Bravo is completed, our distribution of Covisint shares to our shareholders will subject us to tax liability which reduces the cash price to be paid to shareholders in the merger, and the distribution may be taxable to us even if the merger does not occur.

If the merger with Thoma Bravo is not completed, we may be required to pay a termination fee, we may not resume our stock repurchase plan or dividend payments and our plans to undertake a return of capital transaction may change, any of which may result in a decrease in our stock price.

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 the merger with Thoma Bravo is not completed, our previously announced evaluation of a strategic separation of our Dynatrace and Mainframe businesses may take multiple forms, may not produce the intended benefits to shareholders or may not result in a separation of the businesses.

Substantial changes in our operations, including business segregations and divestitures, may disrupt our business, divert the attention of our management or cause us to incur additional costs and may result in financial results that are worse than expected.

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.

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We may not achieve the results we expect from our expense reduction program, the timing could be delayed, or the restructuring charges necessary to achieve the targeted expense reductions could be higher than expected, any of which could materially and adversely affect our results of operations and financial condition.

Economic uncertainties or slowdowns may reduce demand for our offerings, which may have a material adverse 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.

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.

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

Acts of terrorism, acts of war, cyber-attacks 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), software related services and application services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our Mainframe productivity tools that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have generally 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 high maintenance renewal rate. The cash flow generated from our Mainframe business helps to support our Dynatrace business segment.

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Our Dynatrace products serve the Application Performance Management (“APM”) market which is a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company’s brand awareness, revenue growth and overall market share. Because of this development, the market for APM solutions is significant and growing rapidly. Our Dynatrace solutions provide our customers with on-premises software and SaaS platform based hosted software. These solutions are designed to ensure the optimal performance of each customer’s enterprise, web, streaming, mobile and cloud applications. We are investing in our Dynatrace 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 software network with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities and in video streaming performance; (2) enhancements to our 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, streaming and cloud applications in a single solution.

The secure collaboration services market was served by our Covisint application services business, which we distributed to our shareholders on October 31, 2014. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Covisint services, which are provided on a PaaS basis to customers primarily in the automotive, healthcare and energy industries, create an environment that simplifies and secures this collaboration atmosphere. Covisint’s focus in the automotive and manufacturing industries is on enabling customers to connect, engage and collaborate on mission-critical business processes with their suppliers, customers and business partners. Covisint’s focus in the healthcare industry is on enabling hospitals, physicians and government entities to share electronic patient health and medical records.

Quarterly Update

The following occurred during the second quarter of 2015:

On September 2, 2014, we entered into an Agreement and Plan of Merger, which we refer to as the Merger Agreement, with affiliates of Thoma Bravo, LLC. We refer to these entities collectively as Thoma Bravo. Upon completion of the merger contemplated by the Merger Agreement, we will become a wholly owned subsidiary of Thoma Bravo.

Dynatrace revenue increased 8.9% driven by increases in maintenance revenue.

Mainframe revenue decreased 8.1% with decreases in both license and maintenance revenue.

Covisint revenue decreased 11.4% primarily due to declines in its services revenue.

Operating margin increased to 8.5% during the second quarter of 2015 as compared to 6.3% during the second quarter of 2014 due primarily to the impact of our cost reduction efforts.

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Net income of $9.2 million was comparable to $9.1 million of income from continuing operations 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, net income decreased $1.3 million in the second quarter of 2015 as compared to the second quarter of 2014. See the “GAAP to non-GAAP Reconciliation” section below for a complete reconciliation of net income and earnings 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 purchased software and acquired 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 purchased software and acquired 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 charges 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 purchased software and acquired intangibles. Our non-GAAP financial measures exclude costs associated with the amortization of purchased software and acquired 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 our business transformation initiative. In response to certain shareholder actions dating back to fiscal 2013, we have taken various actions to drive shareholder value. These actions have resulted in significant consultant fees to investigate business alternatives and 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.

Provision for income taxes on above pre-tax non-GAAP adjustments. Our non-GAAP financial measures exclude the tax impact of the above pre-tax non-GAAP adjustments. This amount is calculated using the tax rates of each country to which these pre-tax non-GAAP adjustments relate. Management excludes the non-GAAP adjustments on a net-of-tax basis in evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

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Following is a reconciliation of GAAP to non-GAAP financial information based on net income from continuing operations (in thousands, except for per share data):

	Three Months Ended September 30,						Six Months Ended September 30,
	2014			2013			2014			2013

NET INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO COMPUWARE CORPORATION	$	9,151		$	9,128		$	9,203		$	13,390
ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST
Stock compensation (excluding restructuring stock compensation)		6,260			12,905			14,564			21,479
Amortization of purchased software		1,648			2,389			3,344			4,759
Amortization of acquired intangibles		1,019			1,801			2,819			3,594
Restructuring expenses		2,255			219			5,230			5,022
Advisory fees		5,351			1,977			8,095			3,133
Income tax effect of above adjustments		(5,811	)		(7,245	)		(12,083	)		(13,738	)
Total adjustments		10,722			12,046			21,969			24,249

NON-GAAP NET INCOME FROM CONTINUING OPERATIONS	$	19,873		$	21,174		$	31,172		$	37,639


DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS - GAAP	$	0.04		$	0.04		$	0.04		$	0.06
ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST
Stock compensation (excluding restructuring)		0.03			0.06			0.07			0.10
Amortization of purchased software		0.01			0.01			0.01			0.02
Amortization of acquired intangibles		0.00			0.01			0.01			0.02
Restructuring expenses		0.01			0.00			0.02			0.02
Advisory fees		0.02			0.01			0.04			0.01
Income tax effect of above adjustments		(0.03	)		(0.03	)		(0.05	)		(0.06	)
Total adjustments		0.05			0.05			0.10			0.11

NON-GAAP EPS FROM CONTINUING OPERATIONS	$	0.09		$	0.10		$	0.14		$	0.17

Diluted shares outstanding		223,670			220,429			223,489			220,007

EPS amounts may not add to the total due to rounding

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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 results for our business segments, including the portion allocated to non-controlling interest, were as follows (in thousands):

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Three Months Ended:	Dynatrace			MF			Total Software			AS			Unallocated Expenses ⁽¹⁾			Total

September 30, 2014

Total revenues	$	83,155		$	66,003		$	149,158		$	21,735		$	-		$	170,893

Operating expenses		73,285			15,907			89,192			28,899			38,215			156,306

Income (loss) from continuing operations	$	9,870		$	50,096		$	59,966		$	(7,164	)	$	(38,215	)	$	14,587

Margin %		11.9	%		75.9	%		40.2	%		(33.0	%)		N/A			8.5	%

September 30, 2013⁽²⁾

Total revenues	$	76,350		$	71,818		$	148,168		$	24,525		$	-		$	172,693

Operating expenses		69,260			16,821			86,081			34,362			41,453			161,896

Income (loss) from continuing operations	$	7,090		$	54,997		$	62,087		$	(9,837	)	$	(41,453	)	$	10,797

Margin %		9.3	%		76.6	%		41.9	%		(40.1	%)		N/A			6.3	%

(1)	Unallocated expenses for the three months ended September 30, 2014 and 2013 include $2.3 million and $219,000, respectively, in restructuring expenses. See note 9 for additional information.

(2)	September 30, 2013 amounts have been reclassified to reflect the transition of the Dynatrace for Mainframe product from our Mainframe business segment to our Dynatrace business segment.

Six Months Ended:	Dynatrace			MF			Total Software			AS			Unallocated Expenses ⁽¹⁾			Total

September 30, 2014

Total revenues	$	160,531		$	131,550		$	292,081		$	43,322		$	-		$	335,403

Operating expenses		148,918			33,023			181,941			62,291			79,870			324,102

Income (loss) from continuing operations	$	11,613		$	98,527		$	110,140		$	(18,969	)	$	(79,870	)	$	11,301

Margin %		7.2	%		74.9	%		37.7	%		(43.8	%)		N/A			3.4	%

September 30, 2013⁽²⁾

Total revenues	$	151,415		$	143,461		$	294,876		$	48,626		$	-		$	343,502

Operating expenses		143,671			35,632			179,303			59,785			90,628			329,716

Income (loss) from continuing operations	$	7,744		$	107,829		$	115,573		$	(11,159	)	$	(90,628	)	$	13,786

Margin %		5.1	%		75.2	%		39.2	%		(22.9	%)		N/A			4.0	%

(1)	Unallocated expenses for the six months ended September 30, 2014 and 2013 include $5.2 million and $5.0 million, respectively, in restructuring expenses. See note 9 for additional information.

(2)	September 30, 2013 amounts have been reclassified to reflect the transition of the Dynatrace for Mainframe product from our Mainframe business segment to our Dynatrace business segment.

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Software Segments

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

Dynatrace

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Revenue
Software license fees	$	25,883		$	25,027			3.4	%	$	47,270		$	48,557			(2.7	)%
Maintenance fees		29,400			24,596			19.5			57,695			48,397			19.2
Subscription fees		19,949			19,931			0.1			39,311			40,063			(1.9	)
Services Fees		7,923			6,796			16.6			16,255			14,398			12.9
Total revenue		83,155			76,350			8.9			160,531			151,415			6.0

Operating expenses		73,285			69,260			5.8			148,918			143,671			3.7

Contribution margin	$	9,870		$	7,090			39.2	%	$	11,613		$	7,744			50.0	%

Contribution margin %		11.9	%		9.3	%					7.2	%		5.1	%

Dynatrace segment revenue increased during both the three months and six months ended September 30, 2014 due primarily to an increase in maintenance and services fees. The increase in maintenance and service fees was related to our growing customer base and a focus on higher margin professional services.

Operating expenses increased during both the three months and six months ended September 30, 2014 due primarily to an increase in salary and benefits expense related to headcount increases and increases in bonus and commissions expense.

The improvements in contribution margin resulted from the proportionately larger increase in revenue than expenses during both the three months and six months ended September 30, 2014.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
United States	$	45,850	$	43,957	$	86,174	$	85,042
Europe and Africa		22,611		20,002		45,146		39,839
Other international operations		14,694		12,391		29,211		26,534
Total Dynatrace segment revenue	$	83,155	$	76,350	$	160,531	$	151,415

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Mainframe

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Revenue
Software license fees	$	6,306		$	7,564			(16.6	)%	$	11,606		$	15,777			(26.4	)%
Maintenance fees		59,623			64,223			(7.2	)		119,788			127,584			(6.1	)
Services Fees		74			31			138.7			156			100			56.0
Total revenue		66,003			71,818			(8.1	)		131,550			143,461			(8.3	)

Operating expenses		15,907			16,821			(5.4	)		33,023			35,632			(7.3	)

Contribution margin	$	50,096		$	54,997			(8.9	)%	$	98,527		$	107,829			(8.6	)%

Contribution margin %		75.9	%		76.6	%					74.9	%		75.2	%

Mainframe segment revenue decreased during both the three months and six months ended September 30, 2014 due to reductions in both license and maintenance fees, which was consistent with the general 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. Some of the decline in license fees was a result of a greater percentage of customer license agreements during the period being term licenses. Because term licenses are recognized ratably, a greater portion of license revenue associated with current customer agreements was deferred and will be recognized over the term of the agreement.

The decrease in contribution margin resulted primarily from the decline in revenue during the first two quarters of 2015.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
United States	$	35,076	$	39,183	$	70,740	$	76,581
Europe and Africa		19,003		18,381		37,187		38,875
Other international operations		11,924		14,254		23,623		28,005
Total Mainframe segment revenue	$	66,003	$	71,818	$	131,550	$	143,461

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Software Revenue Combined

Software revenue includes both Dynatrace and Mainframe.

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

	Three Months Ended September 30,				% Change			Six Months Ended September 30,				% Change
	2014		2013		% Change			2014		2013		% Change
Software license fees	$	32,189	$	32,591		(1.2	)%	$	58,876	$	64,334		(8.5	)%
Maintenance fees		89,023		88,819		0.2			177,483		175,981		0.9
Subscription fees		19,949		19,931		0.1			39,311		40,063		(1.9	)
Services fees		7,997		6,827		17.1			16,411		14,498		13.2
Total software solutions revenue	$	149,158	$	148,168		0.7	%	$	292,081	$	294,876		(0.9	)%

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2014		2013		2014		2013
United States	$	80,926	$	83,140	$	156,914	$	161,623
Europe and Africa		41,614		38,383		82,333		78,714
Other international operations		26,618		26,645		52,834		54,539
Total software solutions revenue	$	149,158	$	148,168	$	292,081	$	294,876

Changes in the various revenue line items are discussed previously in the “Dynatrace” and “Mainframe” sections.

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Application Services

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Application services fees	$	21,735		$	24,525			(11.4	)%	$	43,322		$	48,626			(10.9	)%

Operating expenses		28,899			34,362			(15.9	)		62,291			59,785			4.2

Contribution margin	$	(7,164	)	$	(9,837	)		27.2	%	$	(18,969	)	$	(11,159	)		(70.0	)%

Contribution margin %		(33.0	%)		(40.1	%)					(43.8	%)		(22.9	%)

Covisint application services are provided to customers primarily in the automotive and healthcare industries. Application services segment fees decreased during both the three months and six months ended September 30, 2014 due primarily to declines in services performed for customers. The services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of Covisint’s services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of the Covisint platform that results in quicker/less costly installations, 4) improvements in the platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) relatively low subscription bookings in fiscal 2014.

Operating expenses decreased $5.5 million during the second quarter of 2015 due primarily to lower salaries and benefits expense and stock compensation expense resulting from a reduction in the size of our Covisint workforce including our delivery, sales and marketing and research and development personnel, as well as a cumulative catch-up of stock compensation expense which was incurred in the second quarter of 2014 due to Covisint’s IPO. Operating expenses increased for the six months ended September 30, 2014 due primarily to an increase in headcount during fiscal 2014 to support the expected growth and separation of the business, following the planned spin-off of Covisint.

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,
	2014		2013		2014		2013
United States	$	20,233	$	21,016	$	40,368	$	41,850
Europe and Africa		460		1,868		988		3,656
Other international operations		1,042		1,641		1,966		3,120
Total application services segment revenue	$	21,735	$	24,525	$	43,322	$	48,626

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Unallocated Expenses

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”.

OPERATING EXPENSES

Our operating expenses include costs from continuing operations for software license fees; cost of maintenance fees; cost of subscription fees; cost of services; cost of application services; technology development and support costs; sales and marketing expenses; administrative and general expenses; and restructuring. 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.

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Cost of software license fees	$	4,300		$	5,227			(17.7	)%	$	9,295		$	10,156			(8.5	)%

Percentage of software license fees		13.4	%		16.0	%					15.8	%		15.8	%

During both the three months and six months ended September 30, 2014, cost of license fees decreased due primarily to a decline in amortization of tradenames and a decline in hardware costs associated with certain offerings.

Cost of Maintenance Fees

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

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Cost of maintenance fees	$	5,942		$	6,846			(13.2	)%	$	12,864		$	14,185			(9.3	)%

Percentage of maintenance fees		6.7	%		7.7	%					7.2	%		8.1	%

Cost of maintenance fees declined during both the three months and six months ended September 30, 2014, primarily resulting from a reduction in customer support costs.

Cost of Subscription Fees

Cost of subscription fees consists of the amortization of capitalized software related to our Dynatrace hosted software, 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”).

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Cost of subscription fees	$	8,506		$	8,450			0.7	%	$	16,708		$	16,290			2.6	%

Percentage of subscription fees		42.6	%		42.4	%					42.5	%		40.7	%

Cost of subscription fees increased slightly during the three months and six months ended September 30, 2014, primarily due to increased amortization of capitalized research and development costs. We continued to invest in research and development throughout 2014 and the first half of 2015 which increased the amortizable base.

Cost of Services

Cost of services consists primarily of the personnel-related costs of providing our software related services.

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Cost of services	$	6,901		$	5,892			17.1	%	$	13,633		$	12,534			8.8	%

Percentage of services fees		86.3	%		86.3	%					83.1	%		86.5	%

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Cost of services increased $1.0 million during both the three months and six months ended September 30, 2014 due primarily to an increase in revenue from certain Dynatrace services.

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. As Covisint continued to prepare for their separation from us, additional administrative and general costs directly attributable to the Covisint business have been incurred and are included here.

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Cost of application services	$	27,870		$	35,080			(20.6	)%	$	59,562		$	61,291			(2.8	)%

Capitalized internal software costs		(639	)		(1,391	)		(54.1	)		(1,429	)		(3,341	)		(57.2	)

Cost of application services expensed	$	27,231		$	33,689			(19.2	)%	$	58,133		$	57,950			0.3	%

Percentage of application services fees		125.3	%		137.4	%					134.2	%		119.2	%

See “Application Services” for a discussion of the associated costs.

Capitalization of internally developed software costs decreased $752,000 and $1.9 million during the three months and six months ended September 30, 2014, respectively, due to the timing and stage of our software development initiatives. During the first two quarters of 2015, there was an increase of projects in the planning stage which were not capitalized.

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,						% Change			Six Months Ended September 30,						%Change
	2014			2013			% Change			2014			2013			%Change
Technology development and support costs incurred	$	26,635		$	25,867			3.0	%	$	52,785		$	53,309			(1.0	)%

Capitalized software costs		(7,020	)		(4,488	)		56.4			(13,218	)		(8,239	)		60.4

Technology development and support costs expensed	$	19,615		$	21,379			(8.3	)%	$	39,567		$	45,070			(12.2	)%

Technology development and support costs expensed as a percentage of software revenue		13.2	%		14.4	%					13.5	%		15.3	%

Technology development and support as a percentage of software solutions revenues decreased in the three and six months ended September 30, 2014 primarily due to the increase in capitalized software costs which reduced the net amount expensed.

The increase in capitalized internal software costs from the prior year relates primarily to the increase in projects that are in the capitalization phase of development. During the six months ended September 30, 2014, several additional Dynatrace products were in the capitalization phase of development as compared to the six months ended September 30, 2013, resulting in the increase in capitalization.

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,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Sales and marketing costs	$	50,976		$	47,356			7.6	%	$	104,079		$	99,623			4.5	%

Percentage of software revenue		34.2	%		32.0	%					35.6	%		33.8	%

Sales and marketing costs increased $3.6 million and $4.5 million during the three months and six months ended September 30, 2014, respectively. The increases were primarily due to an increase in salaries and benefits expense resulting from headcount increases in the Dynatrace segment, additional management personnel in the Mainframe segment as we further pursue a possible separation of the Mainframe and Dynatrace businesses and additional marketing costs.

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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):

	September 30,				% Change			September 30,				% Change
	2014		2013		% Change			2014		2013		% Change
Administrative and general expenses	$	30,580	$	32,838		(6.9	)%	$	64,593	$	68,886		(6.2	)%

Administrative and general costs decreased $2.3 million and $4.3 million during the three months and six months ended September 30, 2014, respectively, due primarily to a decrease in salaries and benefits expense related to headcount reductions associated with our restructuring initiatives.

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 $110 million to $120 million of administrative and general and non-core operational costs over two years. In February 2013, the Company approved the initial phase of the restructuring plan designed to achieve cost savings. In January 2014, the Company announced the final phase of this cost reduction plan which includes additional reductions in the global workforce across all general, administrative and shared services divisions of the Company, along with the early termination of certain operating leases and the closing or reductions in size of office facilities worldwide. These cost reduction efforts, which are expected to be substantially completed by the end of fiscal 2015, are expected to result in cumulative restructuring charges of $50 million to $60 million. Substantially all of the remaining estimated charges will result in future cash expenditures.

As part of the final phase of these efforts, the Company recorded a restructuring charge in continuing operations of approximately $2.3 million and $5.2 million during the three and six months ended September 30, 2014, respectively, for costs associated with these reductions.

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.

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

	Three Months Ended September 30,						% Change			Six Months Ended September 30,						% Change
	2014			2013			% Change			2014			2013			% Change
Income tax provision	$	5,275		$	3,008			75.4	%	$	3,568		$	1,937			84.2	%

Effective tax rate		38.6	%		27.4	%					33.7	%		13.7	%

Our effective tax rate for the six months ended September 30, 2014 was 33.7% compared to 13.7% for the six months ended September 30, 2013. The effective rate was lower during fiscal 2014 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.

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 assumptions that affect the reported amounts of assets, liabilities and shareholders’ equity and the disclosure of contingencies 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, 2014. 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, 2014 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 condensed consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of 2014.

Long-lived assets

We follow the guidance of ASC 360-10, “Property, Plant and Equipment” to assess potential impairment losses on long-lived assets used in operations. A long-lived asset, or group of assets, to be held and used in the business are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. A long-lived asset group that is not held for sale is considered to be impaired when the asset group is not recoverable, that is when the undiscounted net cash flows expected to be generated by the asset group is less than its carrying amount and the carrying amount of the asset group exceeds its fair value. We review long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. Certain long-lived assets do not have identifiable cash flows that are largely independent, and in those circumstances, the asset group for that long-lived asset includes all assets and liabilities of the company.

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As part of our announced transformation plan, during the fourth quarter of 2014, we began to consider various strategic alternatives for certain long-lived assets, including the potential disposition of real estate assets, which indicated the carrying amount of the real estate may not be recoverable. We, therefore, performed a recoverability test for the long-lived asset group which was held and used as of March 31, 2014. As our real estate assets do not have identifiable cash flows that are largely independent of the cash flows of assets and liabilities of other asset groups, our evaluation included all assets and liabilities of the Company. The recoverability test indicated that the associated long-lived asset group was not impaired. While we believe our judgments and assumptions are reasonable, a change in facts or assumptions underlying certain estimates and judgments made as part of our recoverability test, including the decision to divest real estate within the asset group, could result in a substantial impairment and would have a negative effect on our results of operations. Since March 31, 2014 management has continued to consider a disposition of this real estate, which if undertaken would require approval by the Company’s Board of Directors and would be expected to result in a non-cash impairment charge of $100-120 million before income taxes. As of September 30 2014, management had not committed to a plan, therefore, no impairment loss has been recognized.

Goodwill Impairment Evaluation

The goodwill balance by reporting unit as of September 30, 2014 is presented as follows (in thousands):

	Dynatrace			MF		AS		Total
Goodwill as of March 31, 2014	$	482,857		$	140,304	$	25,385	$	648,546

Effect of foreign currency translation		(16,440	)		-		-		(16,440	)

Goodwill as of September 30, 2014	$	466,417		$	140,304	$	25,385	$	632,106

We are required to assess the impairment of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value.

The performance test involves a two-step process. Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We measure the fair value of our Dynatrace and Mainframe reporting units and other intangible assets using an estimate of the related discounted cash flow and market comparable valuations, where appropriate. We measure the fair value of our Covisint reporting unit based on the market value for the Covisint shares as of March 31, 2014. The discounted cash flow model uses significant assumptions, including projected future cash flows, the discount rate reflecting the risk inherent in future cash flows, and a terminal growth rate. The key assumptions in the market comparable value analysis are peer group and comparable transaction selection and application of this information to the respective reporting unit. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform Step 2 of the goodwill impairment test to determine the amount of impairment loss by comparing the implied fair value of the respective reporting unit’s goodwill with the carrying amount of that goodwill. Under such evaluation, if the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the impairment loss is recognized as an operating expense in an amount equal to that excess. There is a high degree of judgment regarding management’s forecast for the reporting units as market developments for both customers and competitors can affect actual results. There can also be uncertainty regarding management’s selection of peer companies and comparable transactions as an exact match is unlikely to exist.

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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 group information.

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

The events and circumstances that could affect our key assumptions in the analysis of fair value in the future include the following:

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

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

Future negative changes in the global economy.

Increased competition and pricing pressures.

We evaluated our goodwill for impairment on a reporting unit basis at March 31, 2014, and the fair value of our Dynatrace, Mainframe and Covisint reporting units were substantially in excess of each unit’s respective carrying value as of March 31, 2014. Since March 31, 2014, there have been no events or changes in circumstances that would require the completion of an interim impairment analysis.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2014, cash and cash equivalents totaled $255.3 million, compared to $300.1 million at March 31, 2014.

Net cash provided by operating activities

Net cash provided by operating activities during the first six months of 2015 was $11.8 million, which represents a $15.3 million decrease from the first six months of 2014.

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.

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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 decrease in accounts receivable as compared to the prior year was $29.8 million and was primarily related to the cyclical nature of our Mainframe business which has higher sales and maintenance renewals during the third and fourth quarters of our fiscal year. The impact of the net decrease in deferred revenue was $13.9 million and was primarily related to our normal cycle of maintenance renewals which is cyclically higher in our third and fourth quarters. Operating cash flows for the first half of fiscal 2015 were negatively impacted by cash paid for income taxes. This cash payment related to the fiscal 2014 gain on divestiture of our Changepoint, Professional Services and Uniface business segments.

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 and business transformation.

Net cash used in investing activities

Net cash used in investing activities during the first six months of 2015 was $28.6 million, which represented a $10.7 million increase in cash used as compared to the first six months of 2014 due primarily to the payment of a purchase price adjustment to Marlin of $8.0 million. The adjustment relates to accounts receivable which we retained in excess of a contractually specified amount.

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 likely 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 2015 was $24.6 million compared to $48.1 million during the first six months of 2014.

Cash flows from financing activities consist primarily of cash dividends paid. Additionally, during the first quarter of 2015, we purchased approximately 1.4 million Covisint shares in the market and in private transactions for $5.6 million. These purchases were made to maintain our 80% or greater ownership of Covisint common stock, a condition to a tax-free spin-off, in anticipation of the expiration of lock-up agreements applicable to holders of non-qualified stock options to acquire Covisint common stock and the subsequent exercise of those options.

The decrease in net cash used in financing activities was primarily due to a decrease in dividends paid during the first six months of 2015 as a result of the suspension of the Compuware quarterly dividend required by the Merger Agreement with Thoma Bravo.

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”). As of September 30, 2014, approximately $139.5 million remains authorized for future purchases under the Discretionary Plan. The Merger Agreement with Thoma Bravo prohibits repurchases of common stock prior to completion of the merger without its written consent. Our credit facility also limits stock repurchases without approval of the lenders.

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The Company has an unsecured $300 million revolving credit facility (the “credit facility”) with Comerica Bank and other lenders to provide leverage for the Company if needed. As of September 30, 2014, there were no outstanding borrowings under the credit facility and we were in compliance with all covenants in the agreement. We have received consent from the participants in our credit facility to allow the spin-off of Covisint without negatively impacting our credit facility.

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, 2014. 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 2014.

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, 2014. Therefore, the market risks remain substantially unchanged since we filed the annual report on Form 10-K for the year ending March 31, 2014.

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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II OTHER INFORMATION

Item 1.

Legal Proceedings

On September 5, 2014, John Urbonas, a purported shareholder of Compuware, submitted a demand letter to the Compuware Board of Directors. In his letter, Mr. Urbonas alleges that the Board members breached their fiduciary duties in negotiating and approving the proposed transaction. The letter asks that the Board commence an action on behalf of Compuware and against the Directors for restitution/damages and injunctive or other equitable relief. Thereafter, on September 8, 2014, Sharon Klein, a purported shareholder of Compuware, submitted a similar demand letter, making the same general allegations and asking the Board to take action to rectify alleged breaches of fiduciary duty arising out of the proposed transaction.

Also on September 5, 2014, the first of ten putative class action complaints was filed in Michigan state court. The complaints are as follows: (1) Adelman v. Compuware Corp., et al., No. 14-011437-CB (Wayne County, filed September 5, 2014); (2) Bushman v. Bedi, et al., No. 14-011585-CB (Wayne County, filed September 9, 2014); (3) Saggar v. Bedi, et al., No. 14-011597-CB (Wayne County, filed September 9, 2014); (4) Essig v. Compuware Corp., et al., No. 14-142842-CB (Oakland County, filed September 10, 2014); (5) Stein v. Bedi, et al., No. 14-011688-CB (Wayne County, filed September 11, 2014); (6) Klein v. Compuware Corp., et al., No. 14-011721-CB (Wayne County, filed September 12, 2014); (7) Urbonas v. Compuware Corp., et al, No. 14-011770-CB (Wayne County, filed September 12, 2014); (8) Feinstein v. Compuware, et al., No. 14-143110-CB (Oakland County, filed September 24, 2014); (9) Lim v. Compuware, et al., No. 14-143160-CB (Oakland County, filed September 26, 2014); and (10) City of Sunrise Police Officers’ Ret. Plan v. Compuware Corp., et al., No. 14-013610-CB (Wayne County, filed October 21, 2014). On September 29, 2014, the first six Wayne County actions were consolidated under the caption In re Compuware Corp. Shareholder Litigation, No. 14-011437-CB (the “Consolidated Action”). Compuware filed motions to transfer the three Oakland County actions to Wayne County.

Prior to the hearing date for the motions, counsel for plaintiffs in the Feinstein and Essig actions agreed to transfer those actions to Wayne County. The transfers were effectuated on October 10, 2014 and October 13, 2014, respectively. The plaintiff in the Lim action agreed to voluntarily dismiss that action and the Oakland County Court entered a voluntary dismissal order on October 20, 2014. Accordingly, all matters are currently pending in Wayne County.

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On October 14, 2014, Interim Lead Counsel for plaintiffs in the Consolidated Action filed a Consolidated Amended Complaint for Breach of Fiduciary Duty (the “Consolidated Complaint”), naming as defendants Compuware, the Compuware Board of Directors, Elliott Associates, Thoma Bravo, Parent and Acquisition Sub. That same day, plaintiff David D. Essig filed Plaintiff’s First Amended Complaint in Intervention (the “Amended Intervenor Complaint”), naming the same defendants. Both Complaints generally allege that Compuware’s Board of Directors breached their fiduciary duties in negotiating and approving the proposed transaction, and were aided and abetted in the alleged breaches by the other named defendants. Both Complaints further allege that the preliminary proxy statement fails to provide shareholders with material information relating to the proposed transaction. The Consolidated Complaint additionally asserts a claim for unjust enrichment against the individual defendants.

The Consolidated Complaint purports to assert direct claims against the defendants and derivative claims on behalf of Compuware, while the Amended Intervenor Complaint only purports to assert direct claims. Both Complaints seek legal and equitable relief, including an injunction to prevent defendants from taking steps to consummate the proposed transaction.

We have been named as a co-defendant in a consolidated putative class action complaint filed in federal court in New York against Covisint, its directors and certain officers at the time of Covisint's initial public offering ("IPO") alleging violation of securities laws in connection with Covisint's IPO and seeking unspecified damages. The complaint is: Desrocher v. Covisint Corp., et al., No. 1:14-cv-03878-AKH (U.S. District Court for the Southern District of New York, filed October 14, 2014). We believe this lawsuit is without merit, and we intend to vigorously defend against it.

Item 1A.

Risk Factors

In September 2014, we entered into an agreement and plan of merger with affiliates of Thoma Bravo pursuant to which the Company will become, upon completion of the merger contemplated thereby, a wholly owned subsidiary of Thoma Bravo. Accordingly, we have added a risk factor entitled “Our intended acquisition by Thoma Bravo may not be consummated and our stock price may decline.” as set forth below:

Our intended acquisition by Thoma Bravo may not be consummated and our stock price may decline.

On September 2, 2014, we, entered into an Agreement and Plan of Merger which we refer to as the Merger Agreement with affiliates of Thoma Bravo, LLC. We refer to these entities collectively as Thoma Bravo. Upon completion of the merger contemplated by the Merger Agreement, we will become a wholly owned subsidiary of Thoma Bravo and will cease to be publicly owned and traded. There are, however, many contingencies which may cause the merger not to occur.

Completion of the merger is subject to various conditions, such as (i) the approval of the merger by our shareholders, (ii) the expiration of the waiting period applicable to the consummation of the merger under the Hart-Scott-Rodino Act, (iii) the absence of any law or order restraining, enjoining, rendering illegal or otherwise prohibiting the merger, and (iv) the absence of a material adverse effect on Compuware.

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In addition, the parties may terminate the Merger Agreement under various circumstances, such as: (i) if the merger is not consummated on or before the later of January 30, 2015, or, the second business day after the end of the marketing period provided in the Merger Agreement, (ii) in certain circumstances, if a law or order restrains, enjoins, renders illegal or otherwise prohibits the merger and (iii) if our shareholders have voted not to approve the merger. It is also possible that Thoma Bravo will be unable to obtain the necessary financing to complete the merger. Further, as described in our Quarterly Report on Form 10-Q for the period ended September 30, 2014, the merger is the subject of shareholder litigation seeking, among other things, an injunction to prevent defendants from taking steps to consummate the proposed transaction.

There can be no assurance that the merger will occur. If the merger is not consummated, our stock price may decline, particularly if our stock price increased in anticipation of the completion of the merger.

On October 31, 2014, we completed the previously announced spin-off of the remaining shares of Covisint Corporation we owned on that date to our shareholders and restricted stock unit holders of record as of October 20, 2014 so that Covisint is no longer our subsidiary. In connection with the Covisint spin-off, the risk factors entitled "Our planned distribution of all or a substantial part of our remaining shares of common stock in Covisint Corporation, which we refer to as the Tax-Free Distribution, could subject us and our shareholders to significant tax liability and could affect our ability to enter into certain transactions in the future." and the risk factor entitled “Our stock repurchase plan and future dividend payments may be suspended or terminated at any time, or our plans to distribute our Covisint shares to shareholders or to undertake a return of capital transaction may change, any of which may result in a decrease in our stock price.” have been retitled and modified as set forth below:

In anticipation of the completion of the merger with Thoma Bravo, we have treated the distribution of our Covisint shares to our shareholders as a taxable dividend for U.S. federal income tax purposes.

The Merger Agreement reduces the amount of cash to be exchanged for each of our shares of common stock in the merger by a proportionate amount of the taxes we will have to pay as a result of the distribution. As a result, our shareholders are expected to receive an estimated $10.38 per share rather than $10.43 in the merger.

If the merger is not consummated, and even if the distribution would otherwise qualify as a tax-free transaction for U.S. federal income tax purposes, such distribution may be taxable to us in the future if Section 355(e) of the Internal Revenue Code applies to the distribution. Section 355(e) of the Code will apply to the distribution if 50% or more of our stock or Covisint’s 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 our stock or Covisint stock acquired directly or indirectly within two years before or after the distribution generally are presumed to be part of such a plan unless that presumption can be rebutted. In the event Section 355(e) of the Code is implicated by a proposed acquisition of our stock or Covisint’s stock, such an acquisition could cause the distribution to be fully taxable to us and require us to pay a material amount of income taxes without any related cash received with which to pay the resulting tax liability. This substantial potential liability may discourage offers to acquire Compuware from being made or may result in any such offer being discounted to take into account the risk of such tax liability. In addition, during this timeframe, the potential tax liability on account of these Code provisions could affect our ability to issue stock to complete acquisitions, expand our product offerings, develop new technology or obtain additional debt financing and put us at a competitive disadvantage.

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 distribution.

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If the Merger Agreement with Thoma Bravo is terminated under specified circumstances, we may be required to pay Thoma Bravo a termination fee of $82.4 million.

Prior to our execution of the Merger Agreement with Thoma Bravo, we have repurchased shares of our common stock from time to time under an arrangement pursuant to which management is permitted to determine the amount and timing of repurchases in its discretion subject to an overall limit, as well as under a time-limited arrangement pursuant to which repurchases occur according to a formula without further discretion that is also subject to the overall limit and can be terminated at any time. Our ability and willingness to repurchase shares is subject to, among other things, the availability of cash resources and credit at rates and upon terms we believe are prudent. Stock market conditions, the market value of our common stock and other factors may also make it imprudent for us from time to time to engage in repurchase activity. There can be no assurance that we will resume our repurchase activities at historic levels or at all.

In addition, until our execution of the Merger Agreement with Thoma Bravo, we paid quarterly cash dividends on our common stock. We had also announced our intention to undertake a return of capital transaction for the benefit of shareholders, the form, size and timing of which were yet to be determined. There can be no assurance that, if the merger with Thoma Bravo is not completed, we will resume paying cash dividends or, if we do, the amount or frequency of such dividends. Any such dividends will be subject to the discretion of our Board of Directors and will depend on our current and expected results of operations, financial condition and available cash resources, the terms of the documentation relating to any indebtedness we have at the time, applicable state law and other factors our Board of Directors deems relevant. Similarly, whether any return of capital transaction will occur and the form, size and timing of any such transaction will be subject to the discretion of our Board of Directors and will depend on many factors, such as our current and expected results of operations and financial condition, the terms of the documentation relating to any indebtedness we have at the time, applicable state law, applicable tax ramifications, our ability to improve and optimize our balance sheet, the availability of any necessary funding and other factors our Board of Directors deems relevant. As a result, there can be no assurance that we will engage in a return of capital transaction as we intend. If we do not resume payment of cash dividends or determine not to engage in a return of capital transaction, our stock price may be negatively affected.

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In connection with the spin-off of our shares of Covisint common stock, the following risk factors have been deleted.

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.

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.

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

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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

	2.14	Agreement and Plan of Merger, dated as of September 2, 2014, by and among Project Copper Holdings, LLC, Project Copper Merger Corp. and Compuware Corporation (Company’s Form 8-K filed September 3, 2014)

	10.171	Executive Severance Agreement with Christopher O’Malley dated as of July 21, 2014 (Company's Form 10-Q filed August 7, 2014)

	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 6, 2014		By:	/s/ Robert C. Paul
			Robert C. Paul
			President and Chief Executive Officer

Date:	November 6, 2014		By:	/s/ Joseph R. Angileri

			Joseph R. Angileri
			Chief Financial Officer
			(Principal Financial Officer and
			Principal Accounting Officer)

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