Compuware 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____.

Commission file number 000-20900

COMPUWARE CORPORATION

(Exact name of registrant as specified in its charter)

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

One Campus Martius, Detroit, MI 48226-5099

(Address of principal executive offices including zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes T 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).      YesT 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 T      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 NoT

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

As of February 4, 2013, there were outstanding 212,214,825 shares of Common Stock, par value $.01, of the registrant.

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012	3
	Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended December 31, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	26
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 5.	Other Information	57
Item 6.	Exhibits	58
SIGNATURES		59

2

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

	December 31,			March 31,
ASSETS	2012			2012
CURRENT ASSETS:
Cash and cash equivalents	$	64,884		$	99,180
Accounts receivable, net		449,964			455,427
Deferred tax asset, net		38,669			37,665
Income taxes refundable		3,693			14,807
Prepaid expenses and other current assets		32,377			34,279
Total current assets		589,587			641,358
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		314,404			321,991
CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET		119,041			118,973
ACCOUNTS RECEIVABLE		190,613			205,869
DEFERRED TAX ASSET, NET		36,254			40,672
GOODWILL		799,823			801,889
OTHER ASSETS		35,202			36,786
TOTAL ASSETS	$	2,084,924		$	2,167,538
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	13,509		$	16,169
Accrued expenses		98,171			119,834
Income taxes payable		14,883			3,919
Deferred revenue		413,446			447,050
Total current liabilities		540,009			586,972
LONG TERM DEBT		70,000			45,000
DEFERRED REVENUE		311,036			373,359
ACCRUED EXPENSES		29,139			30,109
DEFERRED TAX LIABILITY, NET		84,648			82,161
Total liabilities		1,034,832			1,117,601
SHAREHOLDERS' EQUITY:
Common stock		2,121			2,175
Additional paid-in capital		692,133			685,904
Retained earnings		368,445			372,408
Accumulated other comprehensive loss		(12,607	)		(10,550	)
Total shareholders' equity		1,050,092			1,049,937
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,084,924		$	2,167,538

See notes to condensed consolidated financial statements.

3

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
REVENUES:
Software license fees	$	64,831		$	57,121		$	130,499		$	152,958
Maintenance fees		102,341			106,843			307,487			322,908
Subscription fees		20,793			19,931			61,503			58,156
Professional services fees		46,049			50,575			140,155			157,403
Application services fees		23,852			18,587			64,981			52,302
Total revenues		257,866			253,057			704,625			743,727
OPERATING EXPENSES:
Cost of software license fees		5,388			4,844			15,117			13,150
Cost of maintenance fees		8,639			9,603			26,653			28,907
Cost of subscription fees		7,603			7,291			22,823			22,192
Cost of professional services		39,694			45,277			122,080			136,496
Cost of application services		20,758			17,265			57,468			53,934
Technology development and support		25,629			27,265			79,675			78,706
Sales and marketing		65,773			69,683			184,604			197,255
Administrative and general		44,733			39,236			122,819			122,717
Total operating expenses		218,217			220,464			631,239			653,357
INCOME FROM OPERATIONS		39,649			32,593			73,386			90,370
OTHER INCOME (EXPENSE), NET		(55	)		231			(90	)		1,221
INCOME BEFORE INCOME TAX PROVISION		39,594			32,824			73,296			91,591
INCOME TAX PROVISION		14,254			11,236			26,894			30,339
NET INCOME	$	25,340		$	21,588		$	46,402		$	61,252
Basic earnings per share	$	0.12		$	0.10		$	0.22		$	0.28
Diluted earnings per share	$	0.12		$	0.10		$	0.21		$	0.28
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Foreign currency translation adjustments	$	4,690		$	(7,485	)	$	(3,322	)	$	(25,703	)
TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments		831			(8,682	)		(1,265	)		(7,747	)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		3,859			1,197			(2,057	)		(17,956	)
COMPREHENSIVE INCOME	$	29,199		$	22,785		$	44,345		$	43,296

See notes to condensed consolidated financial statements.

4

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Nine Months Ended
	December 31,
	2012			2011
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	46,402			61,252
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		49,358			44,706
Stock award compensation		20,663			17,555
Deferred income taxes		6,172			7,460
Other		552			221
Net change in assets and liabilities, net of effects from currency fluctuations and acquisitions:
Accounts receivable		17,140			(14,201	)
Prepaid expenses and other current assets		(2,024	)		1,940
Other assets		6,632			(3,451	)
Accounts payable and accrued expenses		(24,868	)		783
Deferred revenue		(91,181	)		(53,184	)
Income taxes		20,122			10,604
Net cash provided by operating activities		48,968			73,685
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Business, net of cash acquired		-			(249,337	)
Property and equipment		(18,241	)		(15,879	)
Capitalized software		(24,817	)		(18,346	)
Other		(1,400	)		(575	)
Net cash used in investing activities		(44,458	)		(284,137	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings		142,800			180,200
Payments on borrowings		(117,800	)		(70,200	)
Net proceeds from exercise of stock awards including excess tax benefits		11,965			8,503
Employee contribution to stock purchase plans		2,046			2,101
Repurchase of common stock		(76,366	)		(4,259	)
Net cash provided by (used in) financing activities		(37,355	)		116,345
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(1,451	)		(3,936	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(34,296	)		(98,043	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		99,180			180,244
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	64,884		$	82,201

See notes to condensed consolidated financial statements.

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Note 1 - Basis of Presentation

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

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2012, final amounts may differ from these estimates.

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

Basis for Revenue Recognition

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

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services or software related professional services) and non-software deliverables (web performance services, professional services unrelated to our software products or application services). Our web performance services and application services do not qualify as software deliverables because our license grant does not allow the customer the right or capability to take possession of the software. For arrangements that contain both software and non-software deliverables, in accordance with ASC 605 “Revenue Recognition,” we allocate the arrangement consideration to the non-software deliverables as a group, and to the software deliverables as a group (the “Deliverable Groups”). We determine the selling price to allocate the arrangement consideration to the Deliverable Groups based on the following hierarchy of evidence: vendor specific objective evidence of selling price (“VSOE,” meaning price when sold separately) if available; third-party evidence of selling price if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. We currently are unable to establish VSOE or third-party evidence of selling price for either our software related deliverables or our non-software deliverables. 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 we have allocated the arrangement consideration between the Deliverable Groups, we recognize revenue as described in the respective software license fees, maintenance fees, subscription fees, professional services fees and application services fees sections below.

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

Software license fees

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

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

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

The Company offers flexibility to customers purchasing licenses for its products and related maintenance. Terms of these transactions range from standard perpetual license sales that include one year of maintenance to large multi-year (generally two to five years), multi-product contracts. The Company allows deferred payment terms with installments 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.

7

Maintenance fees

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

Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our web performance services and are delivered on a software-as-a-service (“SaaS”) basis. Subscription fees are deferred upon contract execution and are recognized ratably over the term of the subscription.

Professional services fees

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

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

Application services fees

Our application services fees consist of fees related to our Covisint on-demand software including associated services. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. Many of our application services fee contracts include a services project fee and a subscription 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. Therefore, the services 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 the customer will receive benefit (generally five years). The recurring fees are recognized over the applicable service period.

8

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 comprehensive income over the revenue recognition period of the related customer contracts.

Research and development

Research and development (“R&D”) costs primarily include the cost of programming personnel and amounted to $26.2 million and $22.6 million for the three months ended December 31, 2012 and 2011, respectively, and $77.7 million and $62.2 million for the nine months ended December 31, 2012 and 2011, respectively. R&D costs related to our software products and web performance services in the condensed consolidated statements of comprehensive income are reported as “technology development and support” and for our application services network, the costs are reported as “cost of application services”.

Income Taxes

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

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

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

The Company’s effective tax rate for the nine months ended December 31, 2012 was 36.7% compared to 33.1% for the nine months ended December 31, 2011. The effective tax rate was higher primarily due to a reversal of the valuation allowance associated with the Brownfield Redevelopment (“Brownfield”) tax credit resulting in a $5.0 million reduction to the Company’s income tax provision for the nine months ended December 31, 2011. The reversal was recorded as a result of legislation enacted in May 2011 that amended Michigan’s Income Tax Act to implement a comprehensive set of tax changes effective January 2012. One part of the legislation contains provisions that replaced the Michigan Business Tax (“MBT”) with a new corporate income tax. Certain credits allowed under the MBT, including the Brownfield tax credit, will continue to be effective under the revised Income Tax Act. This will allow the Company to reduce its future tax liability for the duration of the credit carryforward period.

9

Cash paid for income taxes was $3.7 million and $11.6 million for the nine months ended December 31, 2012 and 2011, respectively.

The American Taxpayer Relief Act (“ATRA”) was signed into law on January 2, 2013. The ATRA extended the research and experimentation credit retroactively to January 1, 2012; under the prior law the credit expired on December 31, 2011. The new legislation extends the credit only through December 2013. The cumulative benefit of this reinstatement from January 2012 through March 2013 will be recognized entirely during the fourth quarter of fiscal 2013, and is not expected to be material.

Recently Issued Accounting Pronouncements

In July 2012, the FASB issued Accounting Standard Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other (Topic 350).” The amendments in this ASU allow an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The requirements of this ASU were adopted during our quarter ended September 30, 2012 and did not have a significant impact on our disclosures.

In December 2011, the FASB issued Accounting Standard Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210)”. The amendments in this ASU require improved disclosure information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. This ASU should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We plan to adopt this ASU in fiscal 2014 and do not expect this to have a significant impact on our disclosures.

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

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Note 2 – Financing Receivables

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

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

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

	As of December 31, 2012
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	8,380	$	739	$	-	$	43,018	$	52,137
Loans								4,205		4,205
Total		8,380		739		-		47,223		56,342
Watch rating
Software products								179		179
Total financing receivables	$	8,380	$	739	$	-	$	47,402	$	56,521

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	As of March 31, 2012
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	4,997	$	1,165	$	68	$	36,202	$	42,432
Loans								5,467		5,467
Total		4,997		1,165		68		41,669		47,899
Watch rating
Software products								179		179
Total financing receivables	$	4,997	$	1,165	$	68	$	41,848	$	48,078

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

Note 3 - Foreign Currency Transactions and Derivatives

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

The foreign currency net gains or (losses) for the three months ended December 31, 2012 and 2011 were ($323,000) and $138,000, respectively, and for the nine months ended December 31, 2012 and 2011 were ($1.4 million) and $707,000, respectively. The hedging transaction net gains or (losses) from foreign exchange derivative contracts for the three months ended December 31, 2012 and 2011 were $54,000 and $98,000, respectively, and for the nine months ended December 31, 2012 and 2011 were $525,000 and ($490,000), respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of comprehensive income.

The Company has derivative contracts maturing through January 2013 to sell $2.1 million and purchase $8.9 million in foreign currencies at December 31, 2012 and had derivative contracts maturing through April 2012 to sell $5.5 million and purchase $9.6 million in foreign currencies at March 31, 2012.

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Note 4 - Fair Value of Assets and Liabilities

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

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

	As of December 31, 2012
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Estimated		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents - money market funds	$	5,078	$	5,078		-		-
Liabilities:
Foreign exchange derivatives	$	8		-	$	8		-

	As of March 31, 2012
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Estimated		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents - money market funds	$	25,391	$	25,391		-		-
Liabilities:
Foreign exchange derivatives	$	27		-	$	27		-

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				Nine Months Ended
	December 31,				December 31,
Basic earnings per share:	2012		2011		2012		2011
Numerator:
Net income	$	25,340	$	21,588	$	46,402	$	61,252
Denominator:
Weighted-average common shares outstanding		212,836		218,534		215,318		218,427
Basic earnings per share	$	0.12	$	0.10	$	0.22	$	0.28
Diluted earnings per share:
Numerator:
Net income	$	25,340	$	21,588	$	46,402	$	61,252
Denominator:
Weighted-average common shares outstanding		212,836		218,534		215,318		218,427
Dilutive effect of stock awards		4,036		3,349		4,153		4,134
Total shares		216,872		221,883		219,471		222,561
Diluted earnings per share	$	0.12	$	0.10	$	0.21	$	0.28

During the three months ended December 31, 2012 and 2011, stock awards to purchase 7.8 million and 13.9 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 5.3 million and 1.4 million shares, respectively, were excluded from the calculation because the performance conditions for vesting had not yet been met. During the nine months ended December 31, 2012 and 2011, stock awards to purchase 11.8 million and 9.4 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 2.8 million and 1.5 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.

14

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

ESOP/401(k)

Effective April 1, 2012, the Company implemented a matching program for the 401(k) component of the ESOP/401(k). The Company matches 33% of employees’ 401(k) contributions up to 2% of eligible earnings. Matching contributions by the Company vest 100% when an employee attains three years of service with the Company. During the three months and nine months ended December 31, 2012, the Company expensed $900,000 and $3.3 million, respectively, related to this program.

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 December 31, 2012, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended
	December 31, 2012
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Term in Years		Value
Options outstanding as of March 31, 2012		21,620		$	8.06
Granted		1,536			9.92
Exercised		(1,929	)		6.38			$	5,405
Forfeited		(494	)		10.06
Cancelled/expired		(195	)		10.09
Options outstanding as of December 31, 2012		20,538		$	8.30		6.59	$	50,013
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2012		19,582		$	8.26		6.49	$	48,428
Options exercisable as of December 31, 2012		12,021		$	8.05		5.41	$	32,320

The average fair value of stock options vested during the nine months ending December 31, 2012 and 2011 was $4.14 and $4.72 per share, respectively.

15

Options that Vest Based on both Performance and Service Conditions

During the first nine months of 2013, stock options that vest based on both service and performance conditions were granted to certain employees of the Company. The performance conditions are based on company-wide revenue and earnings targets and it is not deemed probable that these targets will be achieved as of December 31, 2012.

A summary of activity for options that vest based on the achievement of both service and performance conditions under the Company’s stock-based compensation plans as of December 31, 2012, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended
	December 31, 2012
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Term in Years		Value
Options outstanding as of March 31, 2012		-		$	-
Granted		3,838			9.79
Forfeited		(40	)		9.73
Options outstanding as of December 31, 2012		3,798		$	9.79		9.73	$	3,470
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2012		-		$	-		-	$	-
Options exercisable as of December 31, 2012		-		$	-		-	$	-

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:

	Nine Months Ended
	December 31,
	2012			2011
Expected volatility		40.83	%		39.87	%
Risk-free interest rate		0.95	%		1.72	%
Expected lives at date of grant (in years)		6.3			5.8
Weighted-average fair value of the options granted	$	4.02		$	4.04

16

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 2007 LTIP as of December 31, 2012 and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended
	December 31, 2012
				Weighted
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair Value		Value
Non-vested RSU outstanding as of March 31, 2012		4,553
Granted		916		$	9.59
Released		(815	)			$	7,409
Forfeited		(52	)
Non-vested RSU outstanding as of December 31, 2012		4,602

Approximately 42,000 PSAs were granted during the first nine months of 2013. The performance vesting conditions for these awards are based on company-wide revenue and earnings targets and it is not deemed probable that these targets will be achieved as of December 31, 2012.

Covisint Corporation 2009 Long-Term Incentive Plan

As of December 31, 2012, there were 119,000 stock options outstanding from the 2009 Covisint LTIP. These options will vest only if, prior to August 26, 2015, Covisint completes an initial public offering (“IPO”) or if there is a change of control of Covisint. The Company has determined that these options may not satisfy certain requirements of Section 409A of the Internal Revenue Code (“Code”), and therefore offered recipients of these options an amendment which provides for fixed exercise dates for options that are so amended. The Company intends that such amendment will cure any failure of the options to comply with Section 409A of the Code without incurring penalties thereunder. In December 2012, 110,100 of the outstanding options were amended. The compensation cost will be based on the fair value of the modified award. In connection with the modification of the options, the Company has also agreed to reimburse the option holders who have accepted the amendment for certain negative personal tax implications incurred as a result of any violation of Section 409A of the Code that may later be found to have occurred. Any such reimbursement would also include a tax gross-up, resulting in the net reimbursement equaling any penalties incurred based on Section 409A of the Code.

The individuals who received stock options from the 2009 Covisint LTIP were also awarded PSAs from the Company’s 2007 LTIP. There were 1.4 million PSAs outstanding as of December 31, 2012. These PSAs will vest only if Covisint does not complete an IPO or a change of control transaction by August 25, 2015, and the Covisint business meets a pre-defined revenue target for any four consecutive calendar quarters ending prior to August 26, 2015.

As of December 31, 2012, unrecognized compensation cost related to Covisint Corporation options totaled approximately $21.6 million. This expense will be recognized over the requisite service period including a cumulative catch-up related to service provided through the date an IPO or change of control of Covisint occurs. If an IPO or change of control occurs prior to August 26, 2015, the PSAs granted to employees with Covisint stock options will be cancelled.  As a result, expense will be recognized for the Covisint stock options, but all prior expense taken for the PSAs for employees with Covisint stock options will be reversed.

17

Stock Awards Compensation

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

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2012			2011			2012		2011
Stock-based compensation classified as:
Cost of maintenance fees	$	164		$	202		$	616	$	604
Cost of subscription fees		(47	)		(68	)		6		(8	)
Cost of professional services		65			54			225		287
Cost of application services		396			254			1,105		1,196
Technology development and support		468			575			1,842		1,655
Sales and marketing		1,328			1,493			4,515		4,546
Administrative and general		3,110			3,062			12,354		9,275
Total stock-based compensation expense before income tax provision	$	5,484		$	5,572		$	20,663	$	17,555

As of December 31, 2012, it is expected that total unrecognized compensation cost of $31.9 million, net of estimated forfeitures, related to nonvested equity awards that are expected to vest will be recognized over a weighted-average period of approximately 2.06 years.

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Note 7 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

The Company has the following reporting units: Application Performance Management (“APM”), Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”). The changes in the carrying amount of goodwill by reporting unit during the nine months ended December 31, 2012 are summarized as follows (in thousands):

	APM			MF			CP		UF		PS		AS		Total
Goodwill as of March 31, 2012	$	477,632		$	140,591		$	22,084	$	21,285	$	114,912	$	25,385	$	801,889
Effect of foreign currency translation		(2,132	)		(1	)		-		-		67		-		(2,066	)
Goodwill as of December 31, 2012	$	475,500		$	140,590		$	22,084	$	21,285	$	114,979	$	25,385	$	799,823

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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 December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,447				$	4,447
Amortized intangible assets:
Capitalized software
Internally developed		242,867	$	(186,246	)		56,621
Purchased		165,866		(140,317	)		25,549
Customer relationship		52,165		(24,294	)		27,871
Other		20,140		(15,587	)		4,553
Total amortized intangible assets	$	481,038	$	(366,444	)	$	114,594

	As of March 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,443				$	4,443
Amortized intangible assets:
Capitalized software
Internally developed		218,049	$	(175,018	)		43,031
Purchased		167,041		(133,925	)		33,116
Customer relationship		52,196		(21,153	)		31,043
Other		20,247		(12,907	)		7,340
Total amortized intangible assets	$	457,533	$	(343,003	)	$	114,530

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

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

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

20

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

Amortization of intangible assets

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
Amortized intangible assets:
Capitalized software
Internally developed	$	3,965	$	3,323	$	11,228	$	9,483
Purchased		2,420		2,711		7,199		6,438
Customer relationship		1,045		1,164		3,130		3,427
Other		826		1,092		2,643		2,867
Total amortization expense	$	8,256	$	8,290	$	24,200	$	22,215

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

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

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

Based on the capitalized software, customer relationship and other intangible assets recorded through December 31, 2012, the annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (in thousands):

	Fiscal Year Ended March 31,
	2013		2014		2015		2016		2017		Thereafter
Amortized intangible assets:
Capitalized software	$	25,287	$	25,930	$	20,697	$	17,095	$	8,758	$	2,830
Customer relationship		4,168		4,127		4,127		4,127		3,963		10,489
Other		3,414		3,034		748		-		-		-
Total amortization expense	$	32,869	$	33,091	$	25,572	$	21,222	$	12,721	$	13,319

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Note 8 – Segment Information

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

	Three Months Ended
	December 31, 2012
														Unallocated
	APM		MF		CP			UF		PS		AS		Expenses			Total
Software license fees	$	33,938	$	24,743	$	2,684		$	3,466	$	-	$	-	$	-		$	64,831
Maintenance fees		23,369		67,048		4,139			7,785		-		-		-			102,341
Subscription fees		20,130		-		663			-		-		-		-			20,793
Professional services fees		7,624		673		3,137			1,413		33,202		-		-			46,049
Application services fees		-		-		-			-		-		23,852		-			23,852
Total revenues		85,061		92,464		10,623			12,664		33,202		23,852		-			257,866
Operating expenses		76,773		24,727		10,951			5,254		28,264		21,664		50,584			218,217
Contribution / operating margin	$	8,288	$	67,737	$	(328	)	$	7,410	$	4,938	$	2,188	$	(50,584	)	$	39,649

	Three Months Ended
	December 31, 2011
														Unallocated
	APM			MF		CP		UF		PS		AS		Expenses			Total
Software license fees	$	24,360		$	26,720	$	3,513	$	2,528	$	-	$	-	$	-		$	57,121
Maintenance fees		19,441			75,782		3,895		7,725		-		-		-			106,843
Subscription fees		19,379			-		552		-		-		-		-			19,931
Professional services fees		8,893			558		4,517		981		35,626		-		-			50,575
Application services fees		-			-		-		-		-		18,587		-			18,587
Total revenues		72,073			103,060		12,477		11,234		35,626		18,587		-			253,057
Operating expenses		82,118			24,721		11,683		5,044		31,794		17,265		47,839			220,464
Contribution / operating margin	$	(10,045	)	$	78,339	$	794	$	6,190	$	3,832	$	1,322	$	(47,839	)	$	32,593

22

	Nine Months Ended
	December 31, 2012
															Unallocated
	APM			MF		CP			UF		PS		AS		Expenses			Total
Software license fees	$	74,237		$	43,566	$	5,545		$	7,151	$	-	$	-	$	-		$	130,499
Maintenance fees		66,544			205,972		12,321			22,650		-		-		-			307,487
Subscription fees		59,526			-		1,977			-		-		-		-			61,503
Professional services fees		23,003			1,640		9,898			3,684		101,930		-		-			140,155
Application services fees		-			-		-			-		-		64,981		-			64,981
Total revenues		223,310			251,178		29,741			33,485		101,930		64,981		-			704,625
Operating expenses		226,928			67,856		31,392			15,279		85,322		59,731		144,731			631,239
Contribution / operating margin	$	(3,618	)	$	183,322	$	(1,651	)	$	18,206	$	16,608	$	5,250	$	(144,731	)	$	73,386

	Nine Months Ended
	December 31, 2011
																Unallocated
	APM			MF		CP			UF		PS		AS			Expenses			Total
Software license fees	$	54,142		$	83,874	$	7,643		$	7,299	$	-	$	-		$	-		$	152,958
Maintenance fees		57,003			230,776		11,647			23,482		-		-			-			322,908
Subscription fees		56,639			-		1,517			-		-		-			-			58,156
Professional services fees		22,646			3,960		12,487			3,259		115,051		-			-			157,403
Application services fees		-			-		-			-		-		52,302			-			52,302
Total revenues		190,430			318,610		33,294			34,040		115,051		52,302			-			743,727
Operating expenses		231,489			72,926		33,989			15,595		95,045		53,934			150,379			653,357
Contribution / operating margin	$	(41,059	)	$	245,684	$	(695	)	$	18,445	$	20,006	$	(1,632	)	$	(150,379	)	$	90,370

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

23

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011 (1)		2012		2011 (1)
Revenues:
United States	$	159,622	$	151,100	$	442,498	$	457,823
Europe and Africa		59,315		65,938		155,216		177,756
Other international operations		38,929		36,019		106,911		108,148
Total revenues	$	257,866	$	253,057	$	704,625	$	743,727

(1) December 31, 2011 amounts between the United States, Europe and Africa and other international operations have been reclassified to conform to the current year presentation.

	As of		As of
	December 31,		March 31,
	2012		2012
Long-lived assets
United States	$	962,753	$	961,202
Austria		208,314		214,615
Other		25,330		24,210
Total long-lived assets	$	1,196,397	$	1,200,027

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

24

Note 9 - Debt

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

As of December 31, 2012 and March 31, 2012, the Company’s debt balance under its credit facility was $70.0 million and $45.0 million, respectively, and was classified as long term.

The credit facility contains various covenant requirements, including limitations on liens; indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans and advances from the Company; transactions with affiliates; and limits additional borrowing outside of the facility to $250 million. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. Additionally, the Company is required to maintain at least a 0.25 to 1.0 cushion below its consolidated total leverage ratio maximum of 2.5 to 1.0 on a pro forma basis in the case of any stock repurchases, acquisitions or dividends in excess of $50 million in any fiscal year. The Company was in compliance with the covenants under the credit facility at December 31, 2012.

Borrowings under the credit facility bear interest at the base rate (the greatest of the prime rate, the federal funds effective rate plus one percent, or the daily LIBOR rate plus one percent) or the Eurodollar rate, at the Company’s option, plus the applicable margin (which is based on the level of maximum total debt to EBITDA ratio). For the nine months ended December 31, 2012, interest rates on outstanding borrowings were at a weighted average rate of 1.9%. The Company pays a quarterly fee on the credit facility based on the applicable margin grid. Interest and fees related to the credit facility were $487,000 and $651,000 during the three months ended December 31, 2012 and 2011, respectively, and were $1.4 million and $1.4 million during the nine months ended December 31, 2012 and 2011, respectively.

Cash paid for interest during the third quarter of 2013 and 2012 was $471,000 and $983,000, respectively. Cash paid for interest during the first nine months of 2013 and 2012 was $1.4 million and $2.4 million, respectively.

Note 10 – Contingencies

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

25

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 December 31, 2012, and the related condensed consolidated statements of comprehensive income and cash flows for the three-month and nine-month periods ended December 31, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

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

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

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

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan

February 6, 2013

26

COMPUWARE CORPORATION AND SUBSIDIARIES

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

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

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

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

Forward-Looking Statements

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

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

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

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Summary of Risk Factors

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

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

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

· Maintenance revenue could decline.

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

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

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

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

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

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

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

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

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

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

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

· Our software technology may infringe the proprietary rights of others.

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

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

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

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

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

· Current laws may not adequately protect our proprietary rights.

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

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

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

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

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

OVERVIEW

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

Our primary source of profitability and cash flow is the sale of our mainframe productivity tools (“mainframe”) that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have experienced lower volumes of software license transactions for our mainframe solutions in recent years and during the first nine months of 2013 causing an overall downward trend in our mainframe product revenues which we expect to continue. Changes in our current customer IT computing environments and spending habits have impacted their need for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. Customers utilize our products to reduce operating costs, increase programmer productivity and create a smooth transition to the next generation of mainframe environment programmers. We will continue to make strategic enhancements to our mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a maintenance renewal rate of approximately 90%. The cash flow generated from our mainframe business supports our growth segments.

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

We have also identified the secure collaboration services market, served by our Covisint application services, as a key source of revenue growth. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Our Covisint services, which are provided on a platform-as-a-service basis to customers primarily in the automotive and U.S. healthcare industries, create an environment that simplifies and secures this collaboration atmosphere. The need for these services is growing across all business segments. Our focus in the manufacturing industry is on enabling automakers to connect, engage and collaborate on mission critical business processes with their suppliers, customers and business partners. Our focus in the healthcare industry is on enabling hospitals, physicians and government entities to share electronic patient health and medical records.

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

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

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

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

Quarterly Update

The following occurred during the third quarter of 2013:

· Achieved an increase in total revenue of $4.8 million during the third quarter of 2013 as compared to the third quarter of 2012 due to a $7.7 million increase in software license fees, a $5.3 million increase in application services fees and an $862,000 increase in subscription fees partially offset by a $4.5 million decline in maintenance fees and a $4.5 million decline in professional services fees.

· Acheived an increase in operating margin to 15.4% during the third quarter of 2013 as compared to 12.9% during the third quarter of 2012 due primarily to the increase in APM contribution margin (see “Business Segment Analysis” for additional information).

· Software solutions revenue increased $2.0 million or 1.0% for the third quarter of 2013 as compared to the third quarter of 2012 due primarily to an increase in APM revenue partially offset by a decline in mainframe revenue. Software solutions contribution margin improved to 41.4% during the third quarter of 2013 from 37.9% during the third quarter of 2012 due primarily to the increase in APM contribution margin.

· Professional services segment revenue declined $2.4 million or 6.8% during the third quarter of 2013 as compared to the third quarter of 2012 due to a decline in application development services for customers within the financial services industry. Contribution margin increased to 14.9% in the third quarter of 2013 from 10.8% during the third quarter of 2012 due primarily to a $2.5 million revenue reserve related to a government project during the third quarter of 2012 (see “Professional Services” for additional information).

· Covisint revenue increased $5.3 million or 28.3% from the third quarter of 2012. Contribution margin improved to 9.2% in the third quarter of 2013 from 7.1% during the third quarter of 2012 due to the increase in revenue.

· Released PurePath for zOS, which combines Strobe and dynaTrace technology on the mainframe, during November 2012. It is showing strong potential with some deals already completed. We expect PurePath for zOS to meaningfully contribute to our mainframe earnings in 2014.

· Instituted a stock repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934 pursuant to which we repurchase shares pursuant to a predetermined formula during our quarterly trading black-out periods.

· Repurchased 3.3 million shares of our common stock at an average price of $9.24 per share.

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In December 2012, Covisint Corporation, currently a wholly owned subsidiary of Compuware, submitted a registration statement on a confidential basis to the U.S. Securities and Exchange Commission for a possible initial public offering of approximately 20% of its common stock ("Proposed IPO"). The Proposed IPO is intended, among other things, to give Covisint greater flexibility to pursue strategic opportunities and to increase its visibility in the marketplace. The Proposed IPO is expected to commence within three to six months as market conditions permit and is also subject to completion of the SEC's review process. Our current plan is to distribute any remaining Covisint shares owned by Compuware directly to Compuware shareholders within 12 months of completing the IPO, subject to approval by our Board of Directors, receipt of consent from the lenders under our revolving credit agreement and applicable regulatory approvals.

Subsequent to the close of the quarter, our Board of Directors approved an action plan to increase shareholder value. In addition to the planned spin-off of the Covisint business, we are considering alternatives to eliminate approximately $60 million of administrative and general and non-core operational costs over the next three years with approximately $20 million in cost savings anticipated in fiscal 2014, and we announced plans for a $0.50 per share annual dividend to be paid quarterly starting in fiscal 2014. In approving the action plan, the Board rejected an unsolicited conditional offer from Elliott Management Corporation to acquire all of the outstanding shares of the Company for $11.00 per share (the “Elliott proposal”). The Board concluded that the Elliott proposal undervalues the Company and is not in the best interest of shareholders. While we are focused on executing and delivering on our plan, the Board will carefully review and evaluate any credible offer it receives that delivers full value to our shareholders.

The payment of future dividends is subject to the availability of funds after taking into account our operational funding requirements, the terms of any indebtedness and applicable state law. The revolving credit agreement to which we are a party contains financial covenants that could limit our ability to pay dividends, as well as a covenant that would prohibit us from paying dividends if we are in default or if payment of the dividend would result in a default. We anticipate being able to pay the planned dividend in fiscal 2014.

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

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BUSINESS SEGMENT ANALYSIS

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

	Software Solutions																					Unallocated
Three Months Ended:	APM			MF			CP			UF			Total			PS			AS			Expenses			Total
December 31, 2012
Total revenues	$	85,061		$	92,464		$	10,623		$	12,664		$	200,812		$	33,202		$	23,852		$	-		$	257,866
Operating expenses		76,773			24,727			10,951			5,254			117,705			28,264			21,664			50,584			218,217
Contribution / operating margin	$	8,288		$	67,737		$	(328	)	$	7,410		$	83,107		$	4,938		$	2,188		$	(50,584	)	$	39,649
Margin %		9.7	%		73.3	%		(3.1	%)		58.5	%		41.4	%		14.9	%		9.2	%		N/A			15.4	%
December 31, 2011
Total revenues	$	72,073		$	103,060		$	12,477		$	11,234		$	198,844		$	35,626		$	18,587		$	-		$	253,057
Operating expenses		82,118			24,721			11,683			5,044			123,566			31,794			17,265			47,839			220,464
Contribution / operating margin	$	(10,045	)	$	78,339		$	794		$	6,190		$	75,278		$	3,832		$	1,322		$	(47,839	)	$	32,593
Margin %		(13.9	%)		76.0	%		6.4	%		55.1	%		37.9	%		10.8	%		7.1	%		N/A			12.9	%

	Software Solutions																					Unallocated
Nine Months Ended:	APM			MF			CP			UF			Total			PS			AS			Expenses			Total
December 31, 2012
Total revenues	$	223,310		$	251,178		$	29,741		$	33,485		$	537,714		$	101,930		$	64,981		$	-		$	704,625
Operating expenses		226,928			67,856			31,392			15,279			341,455			85,322			59,731			144,731			631,239
Contribution / operating margin	$	(3,618	)	$	183,322		$	(1,651	)	$	18,206		$	196,259		$	16,608		$	5,250		$	(144,731	)	$	73,386
Margin %		(1.6	%)		73.0	%		(5.6	%)		54.4	%		36.5	%		16.3	%		8.1	%		N/A			10.4	%
December 31, 2011
Total revenues	$	190,430		$	318,610		$	33,294		$	34,040		$	576,374		$	115,051		$	52,302		$	-		$	743,727
Operating expenses		231,489			72,926			33,989			15,595			353,999			95,045			53,934			150,379			653,357
Contribution / operating margin	$	(41,059	)	$	245,684		$	(695	)	$	18,445		$	222,375		$	20,006		$	(1,632	)	$	(150,379	)	$	90,370
Margin %		(21.6	%)		77.1	%		(2.1	%)		54.2	%		38.6	%		17.4	%		(3.1	%)		N/A			12.2	%

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Software Solutions as a Group

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

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

	Three Months Ended							Nine Months Ended
	December 31,							December 31,
	2012		2011		% Change			2012		2011		% Change
Software license fees	$	64,831	$	57,121		13.5	%	$	130,499	$	152,958		(14.7	)%
Maintenance fees		102,341		106,843		(4.2	)		307,487		322,908		(4.8	)
Subscription fees		20,793		19,931		4.3			61,503		58,156		5.8
Professional services fees		12,847		14,949		(14.1	)		38,225		42,352		(9.7	)
Total software solutions revenue	$	200,812	$	198,844		1.0	%	$	537,714	$	576,374		(6.7	)%

Software license fees (“license fees”) increased $7.7 million during the third quarter of 2013 and declined $22.5 million during the first nine months of 2013, which included a negative impact from foreign currency fluctuations of $491,000 and $3.3 million for the third quarter and the first nine months of 2013, respectively. Excluding the impact from foreign currency fluctuations, license fees increased $8.2 million and declined $19.2 million for the third quarter and first nine months of 2013, respectively. The increase for the third quarter of 2013 can primarily be attributed to the increase in APM license revenue from the third quarter of 2012. For the first nine months of 2013, the increase in APM license revenue was more than offset by the decline in mainframe license revenue, resulting in the decline in license fees from the prior year (see the discussion within “Software Solutions by Business Segment” for more details).

During the third quarters of 2013 and 2012, for software license transactions that were required to be recognized ratably, we deferred $11.2 million and $6.4 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $7.9 million and $12.0 million of previously deferred license revenue during the third quarters of 2013 and 2012, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

During the first nine months of 2013 and 2012, for software license transactions that were required to be recognized ratably, we deferred $20.1 million and $11.8 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $23.1 million and $37.9 million of previously deferred license revenue during the first nine months of 2013 and 2012, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees decreased $4.5 million during the third quarter of 2013 and $15.4 million during the first nine months of 2013, which included a negative impact from foreign currency fluctuations of $882,000 and $9.9 million for the third quarter and first nine months of 2013, respectively. Excluding the impact from foreign currency fluctuations, maintenance fees declined $3.6 million and $5.5 million for the third quarter and first nine months of 2013, respectively. Although we continue to experience a high maintenance renewal rate with our current mainframe customers, the decline in mainframe license transactions throughout the past several years is impacting mainframe maintenance revenue as new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements. The declines in mainframe maintenance fees in both periods were partially offset by an increase in APM and Changepoint maintenance fees.

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Subscription fees increased $862,000 during the third quarter of 2013 and $3.3 million during the first nine months of 2013. Foreign currency fluctuations did not have a substantial impact on subscription fees for the third quarter of 2013. For the first nine months of 2013, subscription fees included a negative impact from foreign currency fluctuations of $755,000. Excluding the impact from foreign currency, subscription fees increased $4.1 million for the first nine months of 2013. The improvements in subscription fees over the prior year periods were primarily a result of new SaaS solution sales exceeding customer cancellations during the previous year.

Professional services fees within our software solutions business segments decreased $2.1 million and $4.1 million during the third quarter and first nine months of 2013, respectively. The decline in professional services fees from the third quarter of 2012 occurred due to a reduced need for implementation services for our APM products and the decline in revenue for our Changepoint software products. The decline from the first nine months of 2012 occurred within our mainframe and Changepoint segments due to declines in new software license sales.

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011 (1)		2012		2011 (1)
United States	$	106,193	$	99,679	$	284,941	$	298,674
Europe and Africa		58,238		64,853		152,150		173,897
Other international operations		36,381		34,312		100,623		103,803
Total software solutions revenue	$	200,812	$	198,844	$	537,714	$	576,374

(1) December 31, 2011 amounts between the United States, Europe and Africa and other international operations have been reclassified to conform to the current year presentation.

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Software Solutions by Business Segment

Application Performance Management

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Revenue
Software license fees	$	33,938		$	24,360			39.3	%	$	74,237		$	54,142			37.1	%
Maintenance fees		23,369			19,441			20.2			66,544			57,003			16.7
Subscription fees		20,130			19,379			3.9			59,526			56,639			5.1
Professional services fees		7,624			8,893			(14.3	)		23,003			22,646			1.6
Total revenue		85,061			72,073			18.0			223,310			190,430			17.3
Operating expenses		76,773			82,118			(6.5	)		226,928			231,489			(2.0	)
Contribution margin	$	8,288		$	(10,045	)		182.5	%	$	(3,618	)	$	(41,059	)		91.2	%
Contribution margin %		9.7	%		(13.9	%)					(1.6	%)		(21.6	%)

APM segment revenue increased $13.0 million during the third quarter of 2013 due primarily to increased software license and maintenance fees. License fees increased $6.9 million in the U.S. and Canada due to a higher volume of software license transactions including one significant software license transaction that resulted in the recognition of $2.5 million in revenue during the third quarter of 2013. License fees in Europe increased $2.0 million with the changes in our European APM team. The increase in maintenance fees is primarily the result of new sales exceeding customer cancellations during the previous year.

Operating expenses declined during the third quarter of 2013 due to reductions in headcount and marketing expenses related to a continuing focus on cost containment during 2013 as well as the capitalization of additional software development costs due to projects which were in the capitalization phase of development during the third quarter of 2013.

APM segment revenue increased $32.9 million during the first nine months of 2013 due primarily to increased license and maintenance fees related to the acquisition of dynaTrace during the second quarter of 2012. Additionally, subscription fees increased $2.9 million due to new SaaS solution sales exceeding customer cancellations during the previous year.

Operating expenses for the first nine months of 2013 declined $4.6 million from the prior year due to reductions in headcount and marketing expenses for the second and third quarters of 2013 as compared to the second and third quarters of 2012. Revenue growth and cost reductions for the first nine months of 2013 had a positive impact on our contribution margin for the first nine months of 2013 as compared to the same period of the prior year.

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States	$	45,249	$	37,865	$	121,649	$	99,125
Europe and Africa		26,545		23,033		62,954		59,522
Other international operations		13,267		11,175		38,707		31,783
Total APM segment revenue	$	85,061	$	72,073	$	223,310	$	190,430

Mainframe

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Revenue
Software license fees	$	24,743		$	26,720			(7.4	)%	$	43,566		$	83,874			(48.1	)%
Maintenance fees		67,048			75,782			(11.5	)		205,972			230,776			(10.7	)
Professional services fees		673			558			20.6			1,640			3,960			(58.6	)
Total revenue		92,464			103,060			(10.3	)		251,178			318,610			(21.2	)
Operating expenses		24,727			24,721			0.0			67,856			72,926			(7.0	)
Contribution margin	$	67,737		$	78,339			(13.5	)%	$	183,322		$	245,684			(25.4	)%
Contribution margin %		73.3	%		76.0	%					73.0	%		77.1	%

Mainframe segment revenue declined $10.6 million for the third quarter of 2013 and $67.4 million for the first nine months of 2013. A significant software license transaction resulting in $9.8 million in revenue was recognized during the third quarter of 2013. However, this was more than offset by the reduction in sales volume of mainframe transactions overall recognized during the third quarter. The decline in revenue for the first nine months of 2013 is primarily related to five large software license transactions that resulted in the recognition of $26.4 million in revenue during the first nine months of 2012.

Furthermore, the reduction in revenue is consistent with the overall downward trend in our mainframe product revenues we have experienced throughout the past several years. Changes in our current customers’ IT computing environments and spending habits have reduced their demand for additional mainframe computing capacity. In addition, increased 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, including the PurePath for zOS product we released during the third quarter of 2013 which combines dynaTrace and Strobe technology to provide application performance management for the mainframe. We expect PurePath for zOS to meaningfully contribute to our mainframe earnings in 2014.

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

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States	$	54,064	$	55,539	$	144,462	$	181,167
Europe and Africa		21,737		29,836		61,083		80,641
Other international operations		16,663		17,685		45,633		56,802
Total Mainframe segment revenue	$	92,464	$	103,060	$	251,178	$	318,610

Changepoint

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Revenue
Software license fees	$	2,684		$	3,513			(23.6	)%	$	5,545		$	7,643			(27.4	)%
Maintenance fees		4,139			3,895			6.3			12,321			11,647			5.8
Subscription fees		663			552			20.1			1,977			1,517			30.3
Professional services fees		3,137			4,517			(30.6	)		9,898			12,487			(20.7	)
Total revenue		10,623			12,477			(14.9	)		29,741			33,294			(10.7	)
Operating expenses		10,951			11,683			(6.3	)		31,392			33,989			(7.6	)
Contribution margin	$	(328	)	$	794			(141.3	)%	$	(1,651	)	$	(695	)		(137.6	)%
Contribution margin %		(3.1	%)		6.4	%					(5.6	%)		(2.1	%)

Changepoint segment revenue declined $1.9 million for the third quarter of 2013 and $3.6 million for the first nine months of 2013 due to a decline in software license fees and professional services fees, partially offset by an increase in maintenance fees and subscription fees.

Operating expenses decreased from the prior year due to the decline in revenue. However, the proportionately higher decrease in revenue caused the contribution margin to decline for the third quarter and first nine months of 2013.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States	$	4,857	$	5,275	$	14,064	$	14,761
Europe and Africa		2,107		3,647		5,717		9,013
Other international operations		3,659		3,555		9,960		9,520
Total Changepoint segment revenue	$	10,623	$	12,477	$	29,741	$	33,294

Uniface

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Revenue
Software license fees	$	3,466		$	2,528			37.1	%	$	7,151		$	7,299			(2.0	)%
Maintenance fees		7,785			7,725			0.8			22,650			23,482			(3.5	)
Professional services fees		1,413			981			44.0			3,684			3,259			13.0
Total revenue		12,664			11,234			12.7			33,485			34,040			(1.6	)
Operating expenses		5,254			5,044			4.2			15,279			15,595			(2.0	)
Contribution margin	$	7,410		$	6,190			19.7	%	$	18,206		$	18,445			(1.3	)%
Contribution margin %		58.5	%		55.1	%					54.4	%		54.2	%

Uniface segment revenue increased $1.4 million for the third quarter of 2013 due to an increase in software license and professional services fees. For the first nine months of 2013, Uniface revenue declined $555,000 primarily due to the negative impact of foreign currency on software license and maintenance fees.

For the third quarter of 2013, operating expenses increased due to the increase in revenue. The proportionately higher increase in revenue compared to expenses resulted in the improvement in contribution margin. For the first nine months of 2013, operating expenses declined due primarily to the impact of foreign currency and the contribution margin remained consistent with the prior year.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States	$	2,023	$	1,000	$	4,766	$	3,621
Europe and Africa		7,849		8,337		22,396		24,721
Other international operations		2,792		1,897		6,323		5,698
Total Uniface segment revenue	$	12,664	$	11,234	$	33,485	$	34,040

Professional Services

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Professional services fees	$	33,202		$	35,626			(6.8	)%	$	101,930		$	115,051			(11.4	)%
Operating expenses		28,264			31,794			(11.1	)		85,322			95,045			(10.2	)
Contribution margin	$	4,938		$	3,832			28.9	%	$	16,608		$	20,006			(17.0	)%
Contribution margin %		14.9	%		10.8	%					16.3	%		17.4	%

Professional services segment fees decreased $2.4 million for the third quarter of 2013 and $13.1 million for the first nine months of 2013 primarily due to a decline in application development services for customers within the financial services industry. Several large projects for these customers were completed during 2012 and have not yet been replaced, resulting in the decline in revenue for the third quarter and the first nine months of 2013.

Operating expenses decreased $3.5 million for the third quarter of 2013 and $9.7 million for the first nine months of 2013 primarily due to a decline in subcontractor costs associated with the large financial services projects noted above as well as headcount reductions and a decline in bonus expense due to lower company-wide bonus attainment.

The improvement in contribution margin for the third quarter of 2013 is primarily due to a $2.5 million revenue reserve related to a government contract during the third quarter of 2012 resulting from collectability concerns, which had a negative impact on contribution margin in 2012. The reduction in contribution margin for the first nine months of 2013 was due to a decline in our utilization rate associated with the decline in revenue.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011 (1)		2012		2011 (1)
United States	$	32,984	$	35,055	$	101,538	$	113,626
Europe and Africa		-		301		22		1,061
Other international operations		218		270		370		364
Total professional services segment revenue	$	33,202	$	35,626	$	101,930	$	115,051

(1)           December 31, 2011 amounts between the United States, Europe and Africa and other international operations have been reclassified to conform to the current year presentation.

Application Services

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

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2012			2011			% Change			2012			2011			% Change
Application services fees	$	23,852		$	18,587			28.3	%	$	64,981		$	52,302			24.2	%
Operating expenses		21,664			17,265			25.5			59,731			53,934			10.7
Contribution margin	$	2,188		$	1,322			65.5	%	$	5,250		$	(1,632	)		421.7	%
Contribution margin %		9.2	%		7.1	%					8.1	%		(3.1	%)

Covisint services are provided to customers primarily in the automotive and healthcare industries. Application services segment fees increased $5.3 million for the third quarter and $12.7 million for the first nine months of 2013 due to growth from both recurring and services fees across automotive and healthcare customers as well as customers in other industries. Services fees increased, in part, due to the establishment of stand alone value for certain professional services during 2012, which allowed us to recognize the related revenue as the services were delivered rather than over the expected period during which the customer would receive benefit.

As of December 31, 2012 and December 31, 2011, backlog for the application services segment was approximately $108.7 million and $101.8 million, respectively. Backlog represents contractually committed arrangements that have yet to be recognized.

In anticipation of capitalizing on the growth of the secure collaboration services market, we hired additional developers, customer support and sales personnel, and we increased the capacity of our global application services network during 2012. Operating expenses increased $4.4 million during the third quarter of 2013 and $5.8 million during the first nine months of 2013 due to these investments partially offset by an increase in capitalized research and development costs. During the third quarter and first nine months of 2013, our revenue growth exceeded the ongoing additional costs from these investments, resulting in the increase in contribution margin over the prior year.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011 (1)		2012		2011 (1)
United States	$	20,445	$	16,366	$	56,019	$	45,523
Europe and Africa		1,077		784		3,044		2,798
Other international operations		2,330		1,437		5,918		3,981
Total application services segment revenue	$	23,852	$	18,587	$	64,981	$	52,302

(1) December 31, 2011 amounts between the United States, Europe and Africa and other international operations have been reclassified to conform to the current year presentation.

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

Cost of Software License Fees

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

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Cost of software license fees	$	5,388		$	4,844			11.2	%	$	15,117		$	13,150			15.0	%
Percentage of software license fees		8.3	%		8.5	%					11.6	%		8.6	%

During the third quarter of 2013, cost of software license fees as a percentage of software license fees remained consistent with the prior year. Although cost of software license fees increased, software license revenue increased proportionately. During the first nine months of 2013, cost of software license fees increased $2.0 million due primarily to amortization expense on intangible assets acquired as part of the dynaTrace acquisition during the second quarter of 2012, resulting in the increase in cost as a percentage of software license fees.

Cost of Maintenance Fees

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

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Cost of maintenance fees	$	8,639		$	9,603			(10.0	)%	$	26,653		$	28,907			(7.8	) %
Percentage of maintenance fees		8.4	%		9.0	%					8.7	%		9.0	%

Cost of maintenance fees decreased $1.0 million and $2.3 million during the third quarter and first nine months of 2013, respectively, primarily resulting from a reduction in maintenance costs related to our APM products.

Cost of Subscription Fees

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

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Cost of subscription fees	$	7,603		$	7,291			4.3	%	$	22,823		$	22,192			2.8	%
Percentage of subscription fees		36.6	%		36.6	%					37.1	%		38.2	%

Cost of subscription fees increased $312,000 during the third quarter of 2013 and $631,000 during the first nine months of 2013 primarily due to increased amortization of capitalized research and development costs. We continued to invest in research and development throughout 2012 and the first nine months of 2013 which increased the amortizable base.

Cost of subscription fees as a percentage of subscription revenue for the third quarter of 2013 remained consistent with the prior year. The decrease in the cost as a percentage of subscription fees for the first nine months of 2013 was due to the increase in subscription fees proportionately exceeding the increase in cost of subscription fees.

Cost of Professional Services

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

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Cost of professional services	$	39,694		$	45,277			(12.3	)%	$	122,080		$	136,496			(10.6	) %
Percentage of professional services fees		86.2	%		89.5	%					87.1	%		86.7	%

Cost of professional services decreased $5.6 million during the third quarter of 2013 and $14.4 million during the first nine months of 2013. The decrease was primarily due to a decline in subcontractor costs to support the activity in our professional services segment and a decline in salaries and benefits expense due to headcount reduction (see “Professional Services” discussion above for additional information).

The decline in cost as a percentage of professional services fees for the third quarter of 2013 is primarily due to the $2.5 million revenue reserve that had a negative impact on revenue for the third quarter of 2012 discussed in the “Professional Services” section of this report. The increase in cost of professional services as a percentage of professional services fees for the first nine months of 2013 was primarily due to the decline in professional services fees associated with the decline in our utilization rate. Many of the costs associated with our professional services fees, specifically salary and benefits expenses, do not fluctuate with changes in revenue. The increase was partially offset by the effect of the $2.5 million reduction in revenue for the third quarter of 2012 discussed above.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Cost of Application Services

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

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Cost of application services	$	20,758		$	17,265			20.2	%	$	57,468		$	53,934			6.6	%
Percentage of application services fees		87.0	%		92.9	%					88.4	%		103.1	%

Cost of application services increased $3.5 million during the third quarter and the first nine months of 2013 primarily due to increased salary and benefits expense from hiring additional developers, customer support and sales personnel to support the growth of the application services business segment.

The decrease in cost of application services as a percentage of application services fees for both the third quarter of 2013 and the first nine months of 2013 was due to the proportionately larger increase in application services fees.

Technology Development and Support

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

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Technology development and support costs incurred	$	31,105		$	30,471			2.1	%	$	93,768		$	87,996			6.6	%
Capitalized internal software costs		(5,476	)		(3,206	)		70.8			(14,093	)		(9,290	)		51.7
Technology development and support costs expensed	$	25,629		$	27,265			(6.0	)%	$	79,675		$	78,706			1.2	%
Technology development and support costs expensed as a percentage of software solutions revenue		12.8	%		13.7	%					14.8	%		13.7	%

Technology development and support before capitalized internal software costs increased $634,000 for the third quarter of 2013 and $5.8 million during the first nine months of 2013. The increase for the third quarter of 2013 primarily relates to increased software development activity as there were additional projects that were in the capitalization phase of development. The increase for the first nine months of 2013 primarily relates to higher compensation and benefits costs due to the hiring of developers and customer support personnel to support the growth of the APM segment, including those hired through the dynaTrace acquisition in the second quarter of 2012. The increase in costs for the first nine months of 2013 was partially offset by a reduction in bonus expense resulting from lower company-wide bonus attainment.

Technology development and support as a percentage of software solutions revenues declined from the prior year for the third quarter of 2013 primarily due to the increase in revenue and an increase in the capitalization of software costs. Technology development and support as a percentage of software solutions revenues increased for the first nine months of 2013 due to the decline in revenue and increased costs.

The change in capitalized internal software costs from the prior year relates primarily to the timing of projects that are in the capitalization phase of development. During the third quarter of 2013, several additional product releases within our APM segment were in the capitalization phase of development as compared to the third quarter of 2012, resulting in $2.3 million in additional capitalization. During the first nine months of 2013, a new product release for Changepoint was also in the capitalization phase of development as well as the APM product releases, resulting in the increase in capitalized research and development costs from the prior year.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Sales and marketing costs	$	65,773		$	69,683			(5.6	)%	$	184,604		$	197,255			(6.4	)%
Percentage of software solutions revenue		32.8	%		35.0	%					34.3	%		34.2	%

Sales and marketing costs declined $3.9 million for the third quarter of 2013 and $12.7 million for the first nine months of 2013 due primarily to decreased compensation and travel expense associated with headcount reduction, primarily in Europe. Additionally, advertising expense declined from the prior year due to a credit related to a significant marketing agreement.

Administrative and General

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

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

	Three Months Ended							Nine Months Ended
	December 31,				%			December 31,				%
	2012		2011		Change			2012		2011		Change
Administrative and general expenses	$	44,733	$	39,236		14.0	%	$	122,819	$	122,717		0.1	%

Administrative and general costs increased $5.5 million during the third quarter of 2013 and $102,000 during the first nine months of 2013. The increase for the third quarter of 2013 is due primarily to expenses related to a post-retirement consulting agreement executed during the quarter and to an asset impairment. For the first nine months of 2013, the increase in expense was offset by a decline in bonus expense resulting from lower company-wide bonus attainment.

We may incur significant professional fees during the coming quarters related to the Elliott proposal. The amount and timing of the related expenses will depend upon additional actions taken by the shareholder. Aside from the costs associated with the Elliott proposal, we anticipate our cost reduction initiatives to begin impacting our overall administrative and general costs in fiscal 2014.

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COMPUWARE CORPORATION AND SUBSIDIARIES

OTHER INCOME (EXPENSE)

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

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Interest income	$	520		$	808			(35.6	)%	$	1,487		$	2,767			(46.3	)%
Interest expense		(495	)		(890	)		44.4			(1,481	)		(2,443	)		39.4
Other		(80	)		313			(125.6	)		(96	)		897			(110.7	)
Other income, net	$	(55	)	$	231			(123.8	)%	$	(90	)	$	1,221			(107.4	)%

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

The decrease in interest expense is related to interest on borrowings under the line of credit. Borrowings were incurred primarily to fund a portion of the dynaTrace acquisition during the second quarter of 2012 and to continue the share repurchase program. The average outstanding debt balances during the second and third quarters of 2012 were approximately $128 million and $122 million, respectively, as compared to approximately $32 million, $49 million and $69 million during the first, second and third quarters of 2013, respectively.

INCOME TAXES

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

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

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2012			2011			Change			2012			2011			Change
Income tax provision	$	14,254		$	11,236			26.9	%	$	26,894		$	30,339			(11.4	)%
Effective tax rate		36.0	%		34.2	%					36.7	%		33.1	%

The Company’s effective tax rate for the nine months ended December 31, 2012 was 36.7% compared to 33.1% for the nine months ended December 31, 2011. The effective tax rate was higher primarily due to a reversal of the valuation allowance associated with the Brownfield Redevelopment (“Brownfield”) tax credit resulting in a $5.0 million reduction to the Company’s income tax provision for the nine months ended December 31, 2011. The reversal was recorded as a result of legislation enacted in May 2011 that amended Michigan’s Income Tax Act to implement a comprehensive set of tax changes effective January 2012. One part of the legislation contains provisions that replaced the Michigan Business Tax (“MBT”) with a new corporate income tax. Certain credits allowed under the MBT, including the Brownfield tax credit, will continue to be effective under the revised Income Tax Act. This will allow the Company to reduce its future tax liability for the duration of the credit carryforward period.

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COMPUWARE CORPORATION AND SUBSIDIARIES

The American Taxpayer Relief Act (“ATRA”) was signed into law on January 2, 2013. The ATRA extended the research and experimentation credit retroactively to January 1, 2012; under the prior law the credit expired on December 31, 2011. The new legislation extends the credit only through December 2013. The cumulative benefit of this reinstatement from January 2012 through March 2013 will be recognized entirely during the fourth quarter of fiscal 2013, and is not expected to be material.

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Goodwill Impairment Evaluation

The goodwill balance by reporting unit as of December 31, 2012 is presented as follows (in thousands):

	APM			MF			CP		UF		PS		AS		Total
Goodwill as of March 31, 2012	$	477,632		$	140,591		$	22,084	$	21,285	$	114,912	$	25,385	$	801,889
Effect of foreign currency translation		(2,132	)		(1	)		-		-		67		-		(2,066	)
Goodwill as of December 31, 2012	$	475,500		$	140,590		$	22,084	$	21,285	$	114,979	$	25,385	$	799,823

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

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COMPUWARE CORPORATION AND SUBSIDIARIES

We continue to monitor the risk of future goodwill impairment for the professional services reporting unit, which has a goodwill balance of $115.0 million at December 31, 2012. We believe the decline in revenue and margin for the first nine months of 2013 compared to the first nine months of 2012 is temporary due to the expiration of certain projects as discussed in “Professional Services” above. However, if we are unable to increase both revenues and margins, we may have a triggering event and we could be required to reduce the value of goodwill associated with the professional services reporting unit. The contribution margin percentage for the first nine months of 2013 was 16.3% as compared to 17.4%, 16.1%, 16.7% and 10.0% for the first nine months of 2012, fiscal years 2012, 2011 and 2010, respectively. There has been no triggering event since March 31, 2012.

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

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

The fair value of the professional services reporting unit was estimated at March 31, 2012, primarily using a discounted cash flow model. Assumptions used in the model that have the most significant effect are our estimated growth rates and estimated weighted average cost of capital.

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

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

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

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

· Future negative changes in the U.S. economy.

· Increased competition and pricing pressures within the professional services market.

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COMPUWARE CORPORATION AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2012, cash and cash equivalents totaled $64.9 million, compared to $99.2 million at March 31, 2012.

Net cash provided by operating activities

Net cash provided by operating activities during the first nine months of 2013 was $49.0 million, which represents a $24.7 million decline from the first nine months of 2012. The decrease was primarily due to a $46.9 million reduction in cash received from customers resulting from the decrease in revenue as compared to the prior year. The decrease in operating cash was partially offset by a $9.6 million reduction in cash paid to suppliers primarily related to fewer subcontractors, a $7.7 million reduction in cash paid for income taxes and a $6.8 million reduction in cash paid to employees resulting from headcount reduction.

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

Changes in accounts receivable and deferred revenue have typically represented the most significant adjustments to net income to arrive at operating cash flow as we allow for deferred payment terms on multi-year products contracts. The impact of the net decrease in accounts receivable as compared to the prior year was $31.3 million and primarily related to the reduction in revenue from large software license deals and the timing of billings from multi-year product arrangements for the first nine months of 2013 as compared to the first nine months of 2012. The impact of the net decrease in deferred revenue was $38.0 million and primarily related to the decline in deferred multi-year mainframe maintenance as well as a decline in mainframe maintenance renewals during the first nine months of 2013 compared to the first nine months of 2012.

Additionally, the impact of the net decrease in accounts payable and accrued expenses as compared to the prior year was $25.7 million and primarily related to the reduction in the bonus accrual due to lower revenue and earnings attainment for the first nine months of 2013 as compared to the first nine months of 2012.

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 quarterly dividends.

Net cash used in investing activities

Net cash used in investing activities during the first nine months of 2013 was $44.5 million, which represents a $239.7 million decrease in cash used as compared to the first nine months of 2012 due primarily to the $249.3 million in cash used to acquire dynaTrace during the second quarter of 2012 partially offset by increases in purchases of property and equipment and capitalized software of $8.8 million.

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

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Net cash provided by (used in) financing activities

Net cash used in financing activities during the first nine months of 2013 was $37.4 million. Net cash provided by financing activities during the first nine months of 2012 was $116.3 million, resulting in a net decrease to cash of $153.7 million for the first nine months of 2013 as compared to the same period of the prior year.

The decrease was primarily due to a $37.4 million reduction in proceeds from borrowings, a $72.1 million increase in purchases of common stock and a $47.6 million increase in payments on borrowings. The proceeds from borrowings during the first nine months of 2012 were used to fund the dynaTrace acquisition. The proceeds from borrowings during the first nine months of 2013 were used to fund our repurchases of common stock.

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

As of December 31, 2012, approximately $147.7 million remains authorized for future purchases under the Discretionary Plan. The authorization will remain in effect until exhausted absent further action of the Board.

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

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

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

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.

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CONTRACTUAL OBLIGATIONS

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The value of the Euro during fiscal 2013 has been adversely affected by developments in Europe and has had a negative effect on our revenues compared to rates in effect during the comparable periods of the prior year. Our foreign currency denominated expenses supply a natural offset to the majority of revenues denominated in foreign currencies resulting in a much less significant impact from currency fluctuations on income from operations. Annually, we perform a sensitivity analysis to assess the potential loss that a 10% positive or negative change in foreign currency exchange rates would have on our income from operations. Based on that analysis, we believe such a change would not materially affect our consolidated financial position, results of operations or cash flows.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

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Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II OTHER INFORMATION

Item 1A. Risk Factors

In December 2012, Elliott Management Corporation sent a letter to our Board of Directors conditionally offering to acquire all of the outstanding shares of the Company for $11.00 per share. Subsequent to the close of the quarter, our Board of Directors approved an action plan to increase shareholder value, which includes a planned spin-off of Covisint, consideration of alternatives to eliminate approximately $60 million of administrative and general and non-core operational costs over the next three years, and a planned $0.50 per share annual dividend, to be paid quarterly starting in fiscal 2014. In addition to approving the action plan, the Board rejected the proposal from Elliott Management Corporation. As a result of these developments, the risk factor included within Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 entitled “Our stock repurchase plan may be suspended or terminated at any time, which may result in a decrease in our stock price.” is amended and restated and a new risk factor entitled “Our business could be negatively affected as a result of actions of shareholders or others.” is added, in each case as set forth below:

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

We have repurchased shares of our common stock in the market during the past several years and currently repurchase shares 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 continue to repurchase shares at historic levels or at all. If our repurchase program is curtailed, our stock price may be negatively affected.

In January 2013, we announced our intention to begin paying cash dividends on our common stock in fiscal 2014 and to distribute our shares of our Covisint subsidiary to our shareholders within 12 months after completion of Covisint’s initial public offering. The amount and size of any future cash dividend payments 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, any distribution of some or all of our shares of Covisint will be subject to the discretion of our Board of Directors and will depend on 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 regulatory approval and other factors our Board of Directors deems relevant. Completion of the Covisint stock distribution is also subject to the consent of the lenders under our current revolving credit agreement, which may be withheld at the discretion of the lenders. As a result, there can be no assurance that we will declare and pay any cash dividends or that we will distribute our Covisint shares as we intend. If we do not pay cash dividends, discontinue paying cash dividends or determine not to distribute Covisint shares, our stock price may be negatively affected.

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

In January 2013, we announced that our Board of Directors had rejected an unsolicited proposal by Elliott Management Corporation to acquire all of our outstanding shares of common stock. Elliott Management Corporation is being given an opportunity to perform due diligence on Compuware subject to a non-disclosure agreement and the Board has indicated its willingness to carefully review and evaluate any credible offer it receives that delivers full value to Compuware shareholders. There can be no assurance that Elliott Management Corporation or another third party will not make an unsolicited takeover proposal in the future or take other action to acquire control of Compuware. Considering and responding to the Elliott Management Corporation proposal is expected to result in significant additional costs to Compuware, and future acquisition proposals, other shareholder actions to acquire control and the litigation that often accompanies them, if any, are likely to be costly and time-consuming and may disrupt our operations and divert the attention of management and our employees from executing our strategic plan. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or potential changes to the composition of the Board of Directors may lead to the perception of a change in the direction of the business or other instability which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us because of any such issues, then our revenue, earnings and operating cash flows could be materially and adversely affected. Moreover, we believe that the future trading price of our common stock may be volatile and subject to wide price fluctuations based on various factors, including uncertainty associated with potential offers to acquire Compuware.

Except as set forth above and in our Form 10-Q for the quarter ended September 30, 2012, there have been no material changes to the risk factors set forth in “Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

The following table sets forth the repurchases of common stock for the quarter ended December 31, 2012:

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans		Approximate dollar value of shares that may yet be purchased under the plans or programs (1)
For the month ended October 31, 2012		1,595,800	$	9.38		1,595,800	$	162,797,000
For the month ended November 30, 2012		1,265,760		8.72		1,265,760		151,758,000
For the month ended December 31, 2012		391,300		10.35		391,300		147,708,000
Total		3,252,860	$	9.24		3,252,860

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

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

In May 2012, the Board of Directors adopted a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 (“10b5-1 Plan”) to repurchase our common stock. A broker selected by us had the authority under the terms and limitations specified in the plan to repurchase shares on our behalf in accordance with the terms of the plan without further direction from us. This repurchase program allowed us to repurchase shares pursuant to a predetermined formula without regard to the quarterly black-out periods. This plan utilized funds under the previous authorization described above and expired in October 2012. In December 2012, the Board of Directors adopted a similar 10b5-1 Plan which expires in May 2013.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Item 5. Other Information

As of December 31, 2012, there were stock options outstanding from the 2009 Covisint LTIP, some of which are held by Robert Paul, Compuware’s Chief Executive Officer and a “Named Executive Officer” in our most recent annual meeting proxy statement. These options will vest only if, prior to August 26, 2015, Covisint completes an initial public offering (“IPO”) or if there is a change in control of Covisint (a “Change in Control”). The Company determined that these options may not satisfy certain requirements of Section 409A of the Internal Revenue Code (“Code”), and therefore offered all recipients of these options, including Mr. Paul, an amendment which provides for fixed exercise dates for options that are so amended. The Company intends that such amendment will cure any failure of the options to comply with Section 409A of the Code without incurring penalties thereunder. In connection with the modification of the options, the Company has also agreed to reimburse the option holders who have accepted the modification for certain negative personal tax implications incurred as a result of any violation of Section 409A of the Code that may later be found to have occurred. Any such reimbursement would also include a tax gross-up, resulting in the net reimbursement equaling any penalties incurred based on Section 409A of the Code. The following is a summary of the revised vesting provisions:

· Following the closing of an IPO, the amended options will generally be exercisable only during specified periods: (a) 40% in the first calendar year following the year in which the IPO occurs; (b) 30% in the second calendar year following the year in which the IPO occurs; and (c) 30% in the third calendar year following the year in which the IPO occurs ((a), (b) and (c) are each a “Specified Period”). Each Specified Period and the portion of the amended options exercisable during such Specified Period will expire at the end of the calendar year in which it is exercisable, to the extent it remains unexercised.

· If, after an IPO, employment is terminated due to death, disability or without “cause,” 100% of the amended options (to the extent not previously forfeited or expired) will be exercisable until the later of (i) 85 days after termination or (ii) December 27th of the calendar year in which employment terminates; provided that notwithstanding such exercise period, the exercisability of the amended options will terminate on their expiration date. Any portion of the amended options that remains unexercised following the periods described in the previous sentences will be forfeited.

· Following a Change in Control, the amended options (to the extent not previously forfeited or expired) will be 100% exercisable until the later of (i) 85 days after the Change in Control date or (ii) December 27th of the calendar year in which such Change in Control occurs; provided that notwithstanding such exercise period, the exercisability of the amended options will terminate on their expiration date. Any portion of the amended options that remains unexercised following the periods described in the previous sentence will be forfeited.

· If the option holder voluntarily terminates employment following the IPO, the holder may exercise only that portion of the amended options (to the extent not previously forfeited or expired) that is exercisable during the Specified Period in which employment is terminated until the later of (i) 85 days after the option holder’s termination date or (ii) December 27th of the calendar year in which such termination occurs; provided that the amended options will no longer be exercisable after their expiration date. Any portion of the amended options that was exercisable but remains unexercised following the periods described in the previous sentence will be forfeited. The remainder of the amended options that was not exercisable during the Specified Period in which voluntary termination occurs will expire upon termination.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Item 6. Exhibits

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

Exhibit

Number Description of Document

10.143 Amendment No. 2 to Amended and Restated 2007 Long Term Incentive Plan (Company’s Form 8-K filed January 30, 2013)

10.144 Amendment No. 3 to 2007 Long Term Incentive Plan (Company’s Form 8-K filed January 30, 2013)

10.145 Amendment No. 1 to Covisint Option Agreement (as of December 2012)

10.146 Amendment No. 1 to Amended and Restated 2007 Long Term Incentive Plan (as of July 2011)

10.147 Amendment No. 2 to 2007 Long Term Incentive Plan (as of July 2011)

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:	February 6, 2013	By:	/s/ Robert C. Paul
			Robert C. Paul
			Chief Executive Officer
			(principal executive officer)
Date:	February 6, 2013	By:	/s/ Laura L. Fournier
			Laura L. Fournier
			Executive Vice President,
			Chief Financial Officer and
			Treasurer
			(principal financial officer and
			principal accounting officer)

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