UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED MARCH 31, 2014

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)
 
(I.R.S. 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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
 
Nasdaq Global Select Market
Preferred Stock Purchase Rights
 
Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes o  No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes o No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  x  Accelerated filer o  Non-accelerated filer o   (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was $2,407,256,009 based upon the closing sales price of the common stock on that date of $11.19 as reported on The NASDAQ Global Select Market. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are assumed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.

There were 219,677,822 shares of $.01 par value common stock outstanding as of May 27, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's 2014 Annual Meeting of Shareholders (the “Proxy Statement”) filed pursuant to Regulation 14A are incorporated by reference in Part III.
 


COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
Table of Contents

Item
 
Number
Page
PART I
1
Business
3
 
 
 
1A.
Risk Factors
14
 
 
 
1B.
Unresolved Staff Comments
23
 
 
 
2
Properties
23
 
 
 
3
Legal Proceedings
23
 
 
 
4
Mine Safety Disclosures
23
 
 
 
PART II
 
 
 
5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
23
 
 
 
6
Selected Financial Data
26
 
 
 
7
Management's Discussion and Analysis of Financial Condition and Results of Operations
27
 
 
 
7A.
Quantitative and Qualitative Disclosure about Market Risk
52
 
 
 
8
Financial Statements and Supplementary Data
54
 
 
 
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
94
 
 
 
9A.
Controls and Procedures
94
 
 
 
9B.
Other Information
97
PART III
 
 
 
10
Directors, Executive Officers and Corporate Governance
98
 
 
 
11
Executive Compensation
98
 
 
 
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
98
 
 
 
13
Certain Relationships and Related Transactions, and Director Independence
99
 
 
14
Principal Accountant Fees and Services
99
 
 
 
PART IV
 
 
 
15
Exhibits and Financial Statement Schedules
100
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ITEM 1. BUSINESS

We are a leading provider of software and supporting services in three business segments: (1) Application Performance Management (“APM”); (2) Mainframe Productivity and Performance (“Mainframe” or “MF”); and (3) Application Services (“Covisint” or “AS”). These segments are described in detail in “Software Solutions” and “Application Services”.  Our APM solutions help customers optimize the user experience, performance, availability and quality of enterprise, web, mobile and cloud-based applications. Our MF solutions improve the productivity and performance of the mainframe platform while helping reduce associated costs.  Covisint enables customers to securely share and integrate vital information and processes across users, business partners, customers, vendors and suppliers.

We deliver these solutions primarily as “on-premises” software that is installed and operates on our customers’ owned hardware and applications and through a Software-as-a-Service (“SaaS”) model in which our software solutions are accessed through our hosted networks (see Technology and Network Operations section for additional information).

Compuware was founded in 1973 as an information technology (“IT”) professional services company. In the late 1970s, we entered the software market by offering mainframe productivity tools for fault diagnosis, file and data management and application debugging. As IT platforms shifted to distributed, web-based and, more recently, to hosted Internet services (“cloud computing”), we adapted our solution strategy in response, developing and maintaining a portfolio of solutions across a wide range of enterprise computing platforms and market categories.

We are currently executing a strategic transformation plan to improve the company’s topline growth rate and profitability. The primary objectives of this plan include:
· Become best in the world for the businesses in which we choose to compete (“core businesses”).
· Simplify the portfolio, allowing us to focus on improving growth and profitability.
· Align the organization with the products we sell through the creation of independent business segments.
 
During fiscal 2014, we accelerated our transformation by executing strategic initiatives for those businesses deemed strategically non-core:
· On October 1, 2013, we completed the initial public offering of approximately 20 percent of our Covisint business (we continue to work toward a successful distribution of the remaining 80 percent of our shares of Covisint to Compuware shareholders).
· During the fourth quarter of fiscal 2014, we substantially completed the divestiture of our Changepoint, Professional Services and Uniface business segments to Marlin Equity Partners (“Marlin”).
 
These actions are intended to allow us to:
· Drive revenue growth by extending our strong position in the APM market through solution innovation and increased value.
· Maintain and enhance our MF solutions to protect and grow our market-leadership position.
· Prepare Covisint for a complete spin-off within 12 months of the IPO.
 
As part of this effort, we were also able to accelerate our cost-rationalization efforts, eliminating $56 million of corporate and shared services expenses in fiscal 2014.

For additional discussion of developments in our business during fiscal 2014, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We were incorporated in Michigan in 1973. Our executive offices are located at One Campus Martius, Detroit, Michigan 48226-5099, and our telephone number is 313.227.7300. Our Internet address is www.compuware.com. Our Codes of Conduct and our Board committee charters, as well as copies of reports we file with the Securities and Exchange Commission are available in the investor relations section of our external web site as soon as reasonably practicable after we electronically file such reports. The information contained on our web site should not be considered part of this report.
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This report 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, including, without limitation, those discussed in Item 1A Risk Factors and elsewhere in this report, 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. 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.

OUR BUSINESS STRATEGY

Our business strategy is to enable our customers’ most important technologies to perform at their peak by delivering best-in-class on-premises software, SaaS and associated professional technical services. Our solutions empower customers to drive revenue, brand equity and customer satisfaction by harnessing disruptive technologies like cloud computing, virtualization and mobile computing.

Our APM solutions offer a complete view of the performance of applications – as well as deep-dive problem resolution – across the enterprise and through the Internet for every end user, all from a single dashboard. Our APM solutions also provide visibility into the performance of every transaction, enabling optimal management of key applications throughout the application lifecycle.

Our Mainframe solutions optimize developer productivity, reduce costs and improve service quality throughout the application lifecycle of mainframe applications. Specifically, we provide solutions for cross-platform file and data management, application failure management, interactive debugging and code coverage and application performance analysis.  To maximize productivity and better enable the next generation of mainframe developers, our solutions work in both a traditional “green screen” environment as well as a graphical integrated development environment known as the Compuware Workbench.  During November 2012, we released a new Mainframe solution, APM for Mainframe.  The combination of dynaTrace’s patented PurePath Technology ® with Strobe enabled customers' distributed and mainframe teams to improve mean time to resolution (MTTR), reduce MIPS costs, postpone hardware upgrades and accelerate time-to-market for new applications.  The APM for Mainframe solution will be transitioned to the APM business segment for fiscal 2015.

Our secure cloud platform, Covisint application services, enables enterprises to easily and securely connect with and share key information, data and applications with their extended network of customers and business partners. Covisint is operating with a targeted focus on industries including automotive, healthcare, manufacturing and energy that require the secure access to and sharing of complex and distributed information, data and applications.

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BUSINESS SEGMENTS

The following table sets forth, for the periods indicated, a breakdown of total revenue by business segment and the percentage of total revenues for each segment (dollars in thousands):
 
Year Ended March 31, (1)
   
Percentage of Total Revenues
 
Business Segment Revenue
 
2014
   
2013
   
2012
   
2014
   
2013
   
2012
 
                       
APM
 
$
327,367
   
$
300,533
   
$
270,443
     
45.4
%
   
41.5
%
   
35.4
%
Mainframe
   
296,254
     
332,677
     
419,317
     
41.1
     
46.0
     
54.9
 
Total software revenue
   
623,621
     
633,210
     
689,760
     
86.5
     
87.5
     
90.3
 
Application services
   
97,135
     
90,694
     
73,731
     
13.5
     
12.5
     
9.7
 
Total revenue
 
$
720,756
   
$
723,904
   
$
763,491
     
100.0
%
   
100.0
%
   
100.0
%
 
(1) As discussed in Note 2, we have treated the operations of certain business segments as discontinued operations. The results for all periods have been restated to reflect such treatment.
 
SOFTWARE SOLUTIONS

Our Application Performance Management and Mainframe segments comprise our software solutions. Software revenue includes software license fees, maintenance fees, subscription fees and software related services fees. Users of our products include executive management, line of business leadership, IT leadership and staff and IT service providers. Our solutions support these users in achieving key business and technology goals across all major platforms.

Application Performance Management

Compuware Application Performance Management (“Compuware APM”) consists of our solutions built to manage the complexity of today’s most challenging modern applications including mobile, cloud, Big Data and service-oriented architecture. Compuware APM helps optimize application performance by monitoring tens of thousands of applications for customers, large and small, around the globe. Through the lens of end-user experience, our customers enjoy faster performance, proactive problem resolution, accelerated time-to-market and reduced application management costs through smarter analytics, advanced APM automation and a unique performance lifecycle foundation.

Compuware APM is a best of breed system incorporating the three dimensions of modern APM — User Experience Management, Application Monitoring and Application-Aware Network Monitoring.
 
Compuware APM User Experience Management

Compuware APM User Experience Management (“UEM”) provides IT teams and application owners with a complete view of application performance and its business impact for all users, geographies, browsers and devices. Compuware’s APM UEM combines real user, synthetic and third-party cloud services and business analytics in a single powerful platform for managing performance, availability and service level agreements across web, mobile, cloud and enterprise applications.  UEM is supported by APMaaS Synthetic, dynaTrace and Data Center Real-User Monitoring solutions.
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Compuware APM Application Monitoring

Compuware APM Application Monitoring combines deep transaction management and smart analytics with an end-user perspective to help clients deliver faster applications, rapidly find and fix problems and accelerate time to market. Our application monitoring solution provides smart application monitoring for today’s modern web, mobile, cloud and Big Data environments.  Application Monitoring is supported by dynaTrace solutions.
 
Compuware APM Application-Aware Network Monitoring

Compuware APM Application-Aware Network Monitoring enables network and infrastructure operators to quickly isolate faults that impact application performance and end-user experience across web, middleware, database and network tiers. Our solution passively collects network traffic and delivers application-layer insight across business critical application environments including SAP, Oracle, Citrix, HTTP, and VoIP, among others.  Application-Aware Network Monitoring is supported by Data Center Real-User Monitoring solutions.

Software related services

We offer a full range of services designed to accelerate the results of customers’ mobile, web, cloud and enterprise application initiatives which include implementation services, lifecycle and technology APM best practices services, APM enterprise adoption services and managed services. We combine product knowledge with extensive hands-on experience to help clients improve application performance and business results. Compuware APM services provide the education, advice and hands-on support needed to maximize the benefits of the Compuware APM platform.
 
Mainframe Software Products and Solutions

Our strategy for Mainframe products is to remain focused on developing, marketing and supporting high-quality software products, both to support traditional uses of the mainframe and to enable IT organizations to rationalize, modernize and extend their legacy application portfolios. In addition, we have enhanced product integration and built new graphical user interfaces to increase the value that customers obtain from the use of our products to enhance the synergy among the functional groups working on key business applications and to make IT processes more streamlined, automated and repeatable.

Our Mainframe software products improve the productivity of development, maintenance and support teams in application analysis, testing, defect detection and remediation, fault management, file and data management, data compliance and application performance management in the IBM z/OS environment. We believe these products are and will continue to be among the industry’s leading solutions for this platform.

Our Mainframe products are functionally rich, focused on customer needs, easy to install and require minimal user training. We strive to ensure a common look and feel across our products and emphasize ease of use in all aspects of product design and functionality. Most products can be used immediately without modification of customer development practices and standards. These products can be quickly integrated into day-to-day operational, development, testing, debugging and maintenance activities.

Our Mainframe products consist of the following:

File-AID products provide a consistent, familiar and secure method for IT professionals to access, analyze, edit, compare, move and transform data across all strategic environments. File-AID products are used to quickly resolve production data problems and manage ongoing changes to data and databases at any stage of the application lifecycle, including building test data environments to provide the right data in the shortest time. The File-AID product family can also be used to address data privacy compliance requirements in pre-production test environments.
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Abend-AID products enable IT professionals to quickly diagnose and resolve application and system failures. The products automatically collect program and environmental information, analyze the information and present diagnostic and supporting data in a way that can be easily understood by all levels of IT staff. Abend-AID’s automated failure notification speeds problem resolution and reduces downtime.

Xpediter interactive debugging products help developers integrate enterprise applications, build new applications and modernize and extend their legacy applications, satisfying corporate scalability, reliability and security requirements. Xpediter products deliver powerful analysis and testing capabilities across multiple environments, helping developers test more accurately and reliably, in less time.

Hiperstation products deliver complete pre-production testing functionality for automating test creation and execution, test results analysis and documentation. Hiperstation also provides application auditing capabilities to address regulatory compliance, security breach analysis and other business requirements. The products simulate the online systems environment, allowing programmers to test applications under production conditions without requiring actual users at terminals. The products’ powerful functions and features enhance unit, concurrency, integration, migration, capacity, regression and stress testing.

Strobe products help customers locate and eliminate sources of performance issues and excessive resource demands during every phase of an application’s lifecycle. Strobe products measure the activity of z/OS-based online and batch applications, providing reports on where and how time is spent during execution. They support an extensive array of subsystems, databases and languages. These products can be applied via a systematic program to reduce the consumption of mainframe resources and reduce associated costs and/or make resources available for additional business workloads.

The Compuware Workbench is an open source, interactive developer environment that leverages Eclipse. It provides a common framework and single launch-point from which to initiate our Mainframe products, as well as the capability to launch other products from one platform. The graphical user interface is familiar to users who are accustomed to developing in a modern development environment, making common mainframe tasks faster and simpler to perform for both experienced developers and those who are new to the mainframe.

Compuware APM for Mainframe allows customers to combine dynaTrace PurePath for z/OS and Strobe enabling 24/7 transaction management across distributed and mainframe applications. Users can proactively monitor interconnected system applications, including mobile transactions that interact with mainframe CICS or Java applications, providing visibility into how distributed applications are impacting mainframe workloads. When a poorly performing transaction is identified, users can easily drill down into source code for root cause analysis as well as determine ways to increase the performance of DB2 SQL statements, reduce wait states and eliminate resource overuse. We are transitioning this product to the APM business segment in fiscal year 2015.

Software Related Services

Historically, we offered a range of services to help organizations ensure high-quality, high-performing Mainframe applications, including implementation, consulting, training and managed services. These offerings were designed for maximum value realization. In 2014, we transitioned most Mainframe software related services to our professional services segment which was divested during 2014.  We do not anticipate providing significant services associated with our Mainframe business going forward.
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APPLICATION SERVICES

Covisint provides a leading cloud engagement platform, delivered as a service (“PaaS”), that allows global organizations with distributed communities of customers, business partners and suppliers to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information and applications from multiple sources. Our platform is utilized by our customers in three models:

· business-to-partner – to enable communication, collaboration and transactions with business partners (suppliers, dealers, agents, distributors) to deliver products and services to the right place at the right time;
· business-to-customer – to provide a group of commercial customers and consumers (B2B customers, “connected owner”, franchises) the ability to access information and applications around a common initiative; and
· between enterprises – to enable information sharing and access to integrated and relevant information and applications at the right time between enterprises.

Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new business models and revenue opportunities, increase customer retention and lower operating costs.

Our platform is comprised of four layers - our robust cloud-based identity management tools, data integration capabilities, presentation portal, and application development.  Our identity management tool enables (a) our customers, their suppliers and business partners to authorize secure and limited access to their own business applications, and (b) an authorized user to sign onto multiple different customer’s applications through a single sign on.  Our platform provides the ability to integrate and exchange data with our customers’ on-premise and hosted enterprise systems, as well as other cloud-based data sources. These capabilities are integrated with a presentation portal that provides our customers with the ability to create and manage content, link to data for information and transaction purposes, and develop applications to create business process innovations.
 
SEASONALITY

We generally experience a higher volume of software transactions and associated license revenue in the quarter ended December 31, which is our third fiscal quarter, and the quarter ended March 31, which is our fourth fiscal quarter, as a result of customer spending patterns.

SOFTWARE LICENSING, PRODUCT MAINTENANCE AND CUSTOMER SUPPORT

We license software to customers using two types of software licenses, perpetual and time-based. Generally, perpetual software licenses allow customers a perpetual right to run our software up to a licensed capacity, including aggregate MIPS (Millions of Instructions Per Second), users, servers, operating system instances (“OSIs”) or monitoring activities. Time-based licenses allow customers a right to run our software for a limited period of time up to their licensed capacity. We also offer perpetual or time-based licenses that allow our customers a right to run our Mainframe software with an unlimited MIPS capacity.
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Our customers purchase maintenance and support services that provide technical support and advice, including problem resolution services, error corrections and any product enhancements released during the maintenance period. Maintenance and support services are provided online, through our FrontLine technical support web site, by telephone access to technical personnel located in our development labs and by support personnel in the offices of our foreign subsidiaries and distributors.

Licensees have the option of renewing their maintenance agreements on an annual or multi-year basis for an annual fee based on the price of the licensed product. We also enter into agreements with our customers that allow them to license software and purchase multiple years of maintenance in a single transaction (“multi-year transactions”). In support of these multi-year transactions, we allow extended payment terms to qualifying customers.

We believe that effective support of our customers and products for the maintenance term is a substantial factor in product satisfaction and incremental product sales. We believe our installed base is a significant asset and intend to continue to provide customer support and product enhancements to ensure a continuing high level of customer satisfaction. Throughout our history, we have experienced high customer maintenance renewal rates.

For fiscal 2014, 2013 and 2012, software license fees represented approximately 22.1%, 22.0% and 25.6%, respectively, and maintenance fees represented approximately 49.0%, 50.0% and 49.9%, respectively, of our total revenues.

BACKLOG

We consider backlog orders for our APM and Mainframe segments to be contractually committed arrangements with a customer for which the associated revenue has not been recognized.  For these segments, we record the unrecognized amount of each contractually committed arrangement as deferred revenue in our consolidated balance sheet; therefore the deferred revenue balances are equal to the segment’s backlog balance. We tend to experience a higher volume of product transactions including maintenance renewals in our third and fourth fiscal quarters. For our APM and Mainframe segments, the deferred revenue or backlog balance was $657.3 million and $693.1 million as of March 31, 2014 and 2013, respectively. The amount of the March 31, 2014 backlog not expected to be recognized in fiscal 2015 is $291.3 million which is recorded as non-current deferred revenue in our consolidated balance sheet.

For our Covisint application services segment, we consider the backlog balance to be future years of contractually committed arrangements, of which only the billed amounts are included in deferred revenue. As of March 31, 2014 and 2013, the backlog balance associated with our Covisint application services segment was $94.2 million and $116.6 million, respectively, of which $27.8 million and $35.2 million, respectively, was billed and included in deferred revenue. The amount of the March 31, 2014 backlog not expected to be recognized in fiscal 2015 is $50.9 million.

CUSTOMERS

Our products and services are used by the IT departments and lines of business of a wide variety of commercial and government organizations.
 
We did not have a single customer that accounted for greater than 10% of total revenue during fiscal 2014, 2013 or 2012, or greater than 10% of accounts receivable at March 31, 2014 and 2013.
 
For the year ended March 31, 2014, the two customers providing over 10% of our Application Services revenue were General Motors Company and AT&T. Covisint’s relationship with General Motors consists of multiple, separate business initiatives for different business segments within General Motors, including supply chain, marketing and OnStar. AT&T is a reseller of our Covisint platform to its customers in the healthcare industry. We have been informed by AT&T that it has ceased selling our platform to new customers and new projects to existing customers. Losing all or a significant portion of our business with General Motors or AT&T could have a material impact on our Application Services business.
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RESEARCH AND DEVELOPMENT

We have been successful in developing acquired products and technologies into marketable software. Our research and development organization is primarily focused on enhancing and strengthening the capabilities of our current software solutions, hosted software network and application services network along with designing and developing new application services.
 
We believe that our future growth lies in part in continuing to identify promising technologies from all potential sources, including independent software developers, customers, other companies and internal research and development.

As of March 31, 2014, development and support activities associated with our software solutions and application services are performed primarily at our headquarters in Detroit, Michigan (Mainframe, APM and Covisint) and at our APM development labs in Gdansk, Poland; Linz, Austria; Waltham, Massachusetts; and Beijing, China.

Total research and development (“R&D”) cost from continuing operations was $82.2 million, $88.4 million and $72.5 million, respectively, during fiscal 2014, 2013 and 2012, of which $23.3 million, $30.0 million and $22.0 million, respectively, was capitalized for internally developed software technology. The R&D costs relating to our software solutions are reported as “technology development and support” in the consolidated statements of operations, and the portion related to our application services is reported as “cost of application services”.

TECHNOLOGY AND NETWORK OPERATIONS

APM as a Service (APMaaS)
Our APMaaS offering is designed to provide a complete APM solution in a service-based model. The offering manages the performance of our customers’ business-critical applications through real-user and synthetic monitoring, and application monitoring.

Our APMaaS Synthetic offering enables a customer to test and measure the mobile and web experience from across the globe using the Compuware Performance Network, a hosted software network. The Compuware Performance Network encompasses global measurement points of backbone nodes located in third-party data centers and peer software on personal computers.
 
Our APMaaS Real-User and Application Monitoring offering enables a customer to measure the performance of real-user transactions and the supporting application infrastructure, including Java, .NET, PHP, Big Data applications and others. The APMaaS Real-User and Application Monitoring offering leverages public cloud service providers for infrastructure across multiple geographies.

We operate both multi-instance and multi-tenant platforms and deliver services entirely through an on-demand, hosted model. As such, we provide customer provisioning, application installation, application configuration, maintenance, short-term data backup, data security and other services. The Compuware APMaaS offering delivers enterprise-grade, continuously available and high performing services across the globe.

Covisint Application Services Network

Our Covisint platform is highly-scalable and designed to process millions of transactions, manage terabytes of data and provide access for millions of users every day. The platform is enterprise-grade, continuously available across the globe and addresses our customers’ most demanding uptime requirements. We secure customer data in physical, virtual and cloud computing environments with our industry leading role-based identity management, data encryption and database management services.
 
The core platform is written in Java and is optimized for usability and performance. We also leverage Web 2.0 technologies like AJAX, HTML and HTML5, and security standards like OAuth and SAML. To expand the value of our platform, our software development kit includes a broad set of application programming interfaces that enable our channel partners and customers to develop custom applications and integrations. Our solutions often combine proprietary and open source technologies. Open source technology reduces the overall cost to our customers and allows us to bring innovations and enhancements to market in a more expedient and efficient manner.
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We operate both multi-instance and multi-tenant architectures depending on our customers’ need for dedicated applications and databases. Most Covisint solutions are hosted on a shared infrastructure although some organizations request dedicated servers. Our platform is provided as a public cloud, private cloud or a hybrid approach. Customers and third parties can customize the platform to meet their specific branding and user experience requirements through our proprietary or integrated technologies.

Century Link, Inc. hosts our enterprise-class hardware. We currently utilize facilities located in Chicago, Detroit, Tokyo, Frankfurt and Shanghai. This allows us to ensure reliability, redundancy and performance for all our customer solutions. In addition to our Century Link relationship and international facilities, we maintain and operate a disaster recovery facility in our Detroit, Michigan headquarters.

SALES AND MARKETING

We market our software products including APMaaS and software related services primarily through a direct sales force in the United States, Canada, Europe, Japan, Asia-Pacific, Brazil and Mexico; an inside sales force in Waltham, Massachusetts and Maidenhead, England for our hosted software; and through independent distributors and partners, giving us a presence in approximately 60 countries. We market our application services primarily through account managers located in North America. This marketing structure enables us to keep abreast of, and respond quickly to, the changing needs of our customers and to call on the actual users of our products and services on a regular basis.

COMPETITION

APM - The markets for our APM software solutions are highly competitive and characterized by continual change and improvement in technology, and shifting customer needs. We believe that the key competitive factors in our APM market include:

· Breadth across modern and traditional application workloads;
· Depth and smart analytics to resolve problems and optimize performance;
· Lifecycle purpose-built capabilities to enable faster time to market;
· Enterprise-class features for companies of all sizes;
· Expertise to ensure effective adoption and best-practice use cases; and
· Total economic value.

The overall market for APM is continually evolving. Our competition is comprised of legacy vendors, such as CA Technologies, HP, and IBM; and niche vendors such as AppDynamics, Riverbed and Keynote. Some of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. We believe we have continued to invest in our APM offerings to a greater extent than the legacy vendors and that our offerings address a broader customer need than the niche vendors which only address a subset of an organization’s APM requirements.
 
Compuware APM incorporates the three dimensions of modern APM — User Experience Management, Application Monitoring and Application-Aware Network Monitoring. Incorporated into all three dimensions are three additional foundational elements that give the Compuware APM solutions unique, industry leading value. First, smart analytics have been applied across the platform to make implementation, operation and management extremely easy yet powerful. Second, purpose built performance lifecycle collaboration capabilities, sometimes called DevOps capabilities, have been embedded to dramatically reduce problem resolution time and speed new application functionality to market. Third, Compuware’s patented PurePath Technology has been extended across all dimensions of the system to provide the industry’s deepest and most accurate visibility into application performance and behavior.
 
Mainframe - Our Mainframe Solutions compete in a very mature mainframe market defined by IBM’s System z/OS environment.  While this market is mature, it is highly competitive and characterized by continual change and improvement in technology.  The competition is very well known and we seldom encounter a new or emerging competitor.  Our primary competitors are IBM and CA Technologies.  These competitors have greater financial, marketing, recruiting and training resources than we do. Several other secondary competitors exist that compete on an individual point product basis.  Certain competitors bundle their competing products with other software that we do not offer. Consequently they can provide an offering including competing products at a lower price. The principal competitive factors affecting the market for our software include: responsiveness to customer needs; functionality, performance and reliability of our software products in a customer’s environment; ease of use; quality of customer support; our ability to bring products to market that meet ever-changing customer requirements; vendor reputation; distribution channels; and price. The features and capabilities of our Mainframe Solutions are recognized as leaders in the mainframe developer productivity and performance analysis segments.  Customers that evaluate the overall value propositions of our solutions acknowledge the advantages our products provide over the competition.
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Application Services - The market for application services PaaS is highly competitive and characterized by rapid technological change, shifting customer needs and frequent introductions of new solutions and services and we expect to face additional competition in the future. The principal competitive factors affecting the market for our application services include: security; scalability; speed of implementation; ability to enable users to maintain regulatory compliance; ease of implementation into various data sources; strength and stability of infrastructure; comprehensiveness of platform features and functionality; ability to meet customer service level requirements; and price. Our principal competitors include system integrators, such as IBM, Hewlett-Packard and Dell; cloud-based platform vendors, such as Salesforce.com and Microsoft Azure; business-to-business integration and data exchange vendors, such as GXS and Sterling Commerce; and our customers’ internal IT groups.
 
Our platform is pre-built with vertical-specific data types, identity frameworks and workflows that minimize the need for customization, speed time to market and generate comparable competitive advantage. In addition, we continuously update our platform as innovation and new regulations increase or alter data types, technology standards or role-based identity requirements. While we are able to leverage these investments across our customer base, internal IT groups and system integrators that develop custom platforms may be challenged with building cost-effective solutions that compete favorably over time.
 
General - A variety of external and internal events and circumstances could adversely affect our competitive capacity. Our ability to remain competitive will depend, to a great extent, upon our performance in product development and customer support, effective sales execution and our ability to acquire and integrate new technologies. To be successful in the future, we must respond promptly and effectively to the challenges of technological change and our competitors' innovations by continually enhancing our own software solutions and application services.

PROPRIETARY RIGHTS

We regard our intellectual property and technology as proprietary trade secrets and confidential information. We rely largely upon a combination of trade secret, copyright and trademark laws together with our license and service agreements with customers and our internal security systems, confidentiality procedures and employee agreements to maintain the trade secrecy of our intellectual property and technology. We typically provide our products to users under nonexclusive, nontransferable, perpetual licenses. We protect our proprietary rights under license agreements which define how our customers use our products. Under certain limited circumstances, we may be required to make source code for our products available to our customers under an escrow agreement, which restricts access to and use of the source code. Although we take steps to protect our trade secrets, there can be no assurance that misappropriation will not occur. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States.

In addition to trade secret protection, we seek to protect our software technology, documentation and other written materials under copyright law, which affords only limited protection. We also assert registered trademark rights in our product names. As of March 31, 2014, we have been granted 61 patents issued primarily in the United States and have 23 patent applications pending primarily with the United States Patent and Trademark Office for certain product technology and have plans to seek additional patents in the future. Once granted, we expect the duration of each patent will be up to 20 years from the effective date of filing of an application. In addition, we are a party to a patent cross license agreement with IBM under which each party is granted a perpetual, irrevocable, nonexclusive license to certain of each other's patents issued or pending prior to March 21, 2009.
 
Because the industry is characterized by rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new technology developments, frequent software enhancements, name recognition and reliable product maintenance are more important to establishing and maintaining a technology leadership position than legal protection of our technology.
 
There can be no assurance that third parties will not assert infringement claims against us with respect to current and future products and technology or that any such assertion will not require us to enter into royalty arrangements that could require a payment to the third party upon sale of the product, or result in costly litigation.
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EMPLOYEES

As of March 31, 2014, we employed 3,066 people worldwide, with 871 in software sales, sales support and marketing; 1,020 in technology development and support, maintenance and network operations; 174 dedicated to software related services, 631 in Covisint application services and 370 in other general and administrative functions. Only a small number of our international employees are represented by labor unions. We have experienced no work stoppages and believe that our relations with our employees are good. Our success will depend in part on our continued ability to attract and retain highly qualified, experienced and talented personnel.

Executive Officers of the Registrant

Our current executive officers, who serve at the discretion of our Board of Directors, are listed below:

Name
 
Age
 
Position
 
 
 
 
 
Robert C. Paul
 
51
 
President, Chief Executive Officer and member of the Board of Directors
 
 
 
 
 
Joseph R. Angileri
 
56
 
Chief Financial Officer
 
 
 
 
 
Daniel S. Follis, Jr.
 
48
 
Senior Vice President, General Counsel and Secretary
 
 
 
 
 
Kris Manery
 
59
 
Senior Vice President, General Manager Mainframe
 
 
 
 
 
John Van Siclen
 
58
 
Senior Vice President, General Manager APM

Robert C. Paul was reappointed as President in June 2013 and appointed as Chief Executive Officer in June 2011. Mr. Paul served as President and Chief Operating Officer of Compuware from April 2008 until June 2011 and was appointed a member of the Board of Directors in March 2010. Prior to that time, Mr. Paul was President and Chief Operating Officer of Covisint since its acquisition by Compuware in March 2004.

Joseph R. Angileri was appointed as Chief Financial Officer in June 2013.  Mr. Angileri served as President and Chief Operating Officer from June 2011 until June 2013. Prior to joining Compuware, Mr. Angileri had more than 26 years of professional experience with Deloitte LLP, including more than 20 years as a partner there, most recently as Managing Partner of the Michigan region.

Daniel S. Follis, Jr. has served as Senior Vice President, General Counsel and Secretary since March 2008. From January 2006 through February 2008, he served as Vice President, Associate General Counsel. Mr. Follis joined Compuware in March 1998 as Senior Counsel.

Kris Manery has served as Senior Vice President, General Manager Mainframe since June 2011.  Mr. Manery joined Compuware in October 1985 as a Product Sales Representative. From April 1998 to December 2000, he served as a Sales Manager for North American Sales and from January 2001 through May 2011, he served as a Vice President in various roles, including Product Line Sales Management, Sales Development, Customer Relationship Management, Enterprise Products Management, Products Regional Management and Business Unit Management.
 
John Van Siclen has served as Senior Vice President, General Manager APM since November 2011.  From August 2008 through October 2011, Mr. Van Siclen served as the Chief Executive Officer and President of dynaTrace Software, Inc. He joined Compuware in July 2011 with our acquisition of dynaTrace.
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SEGMENT INFORMATION, PAYMENT TERMS AND FOREIGN REVENUES

For a description of revenues and operating profit by segment and for a description of extended payment terms offered to some customers, see note 1 of the consolidated financial statements included in this report. For financial information regarding geographic operations for each of the last three fiscal years, see note 15 to the consolidated financial statements included in this report. Customer revenue is allocated to geographic operations based on the country in which the products were sold or the services were performed. The Company’s foreign operations are subject to risks related to foreign exchange rates and other risks. For a discussion of risks associated with our foreign operations, see Item 1A Risk Factors and Item 7A Quantitative and Qualitative Disclosure about Market Risk.

ITEM 1A. RISK FACTORS

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that we believe may affect us are described below. The risks and uncertainties described below are not the only ones we face. Additional 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. 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.

If we are not able to grow our APM revenue at anticipated levels, we may fail to achieve our forecasted financial results and we may fail to meet the expectations of analysts or investors which could cause our stock price to decline.
The success of our APM business segment is dependent on continued revenue growth of our on-premise hosted software solutions.  The APM market is currently growing as companies continue to invest in applications to take advantage of the proliferation of mobile devices, cloud computing and the large amounts of data being collected by applications referred to as Big Data.  Our APM revenue has grown as a result of this spending.  If customer investment in applications and supporting application performance management solutions does not continue to grow or declines, or we are unable to deliver solutions desired by customers, the demand for our APM solutions may decline, and we may not be able to grow revenue or revenue may decline as a result.  If this occurs it could have a material impact on our results of operations.

Additionally, we continue to invest in new derivative offerings of our on-premise and SaaS offerings. It is difficult to estimate customer acceptance of these new offerings and how these new offerings will affect sales of our existing offerings.   If these new offerings are not in demand by our customers or cause a reduction in the demand for our existing offerings, our results of operations could be negatively impacted.  Also, we have competitors with substantially greater financial and marketing resources than we have.  As a result, these competitors may be more effective in developing offerings that customers purchase.  If we are less successful than our competitors in creating and maturing offerings that customers purchase, our results of operations could be negatively affected.
 
A substantial portion of our Mainframe segment revenue is dependent on our customers’ continued use of IBM and IBM-compatible products.
A substantial portion of our revenue from software solutions is generated from products designed for use with IBM and IBM-compatible mainframe operating systems. As a result, much of our revenue from software solutions is dependent on our customers’ continued use of these systems. In addition, because our products operate in conjunction with IBM operating systems software, changes to IBM’s mainframe operating systems may require us to adapt our products to these changes. IBM also provides competing products designed for use with their mainframe operating systems. A decline in our customers’ use of IBM and IBM-compatible mainframe operating systems, our inability to keep our products current with changes to IBM’s mainframe operating systems on a timely basis, or the loss of market share to IBM’s competing products could have a material adverse effect on our license and maintenance revenue in this segment, negatively impacting our results of operations and cash flow.
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Our product revenue is dependent on the acceptance of our pricing structure for our software solutions.
The pricing of our software licenses, maintenance services and hosted software is under constant pressure from customers and competitive vendors that can negatively impact our product revenue. These competitive pressures could have a material adverse effect on our results of operations and cash flow.

Maintenance revenue could continue to decline.
Our maintenance revenue has been negatively affected by cancellations and reduced pricing for Mainframe maintenance renewals and the decline in new Mainframe maintenance arrangements. If we are unable to increase new product sales and maintenance contract renewals to outpace the combined impact of maintenance cancellations, reduced pricing for maintenance renewals and currency fluctuations, our maintenance revenues will decline, which could have a material adverse effect on our results of operations and cash flow.

Our primary source of profitability is from our Mainframe segment. As revenues in this segment decline, our profitability will decline unless we are able to significantly increase margins in our APM segment.
Our Mainframe segment generates significantly higher contribution margins than our APM and applications services segments.  We expect our future revenue growth to come primarily from APM as we intend to have a tax free distribution of our application services segment. Declines in Mainframe revenue and contribution margin prior to the APM segment generating additional significant improvements in its contribution margin will have a further negative impact on our results of operations and cash flow.

Changes in the financial services industry could have a negative impact on our revenue and margins.
Approximately 20% of our Mainframe revenue is generated from customers in the financial services industry.  Future changes in the financial services industry, including mergers, restructurings or failures, could have a material adverse effect on our Mainframe license and maintenance revenue, negatively impacting our results of operations and cash flow.

We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other unpredictable factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.
Our revenues, particularly our software license revenues, are difficult to forecast. Software license revenues in any quarter are dependent on orders booked in the quarter. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate the sales forecast. Our sales forecast estimates could prove to be unreliable both in a particular quarter and over a longer period of time as a significant amount of our transactions are completed during the final weeks and days of the quarter. Therefore, we generally do not know whether revenues or earnings will have met expectations until after the end of the quarter. Also, the manner in which our customers license our products can cause revenues to be deferred or recognized ratably over time.  Changes in the mix of customer agreements could adversely affect our revenues. As a result, our actual financial results can vary substantially from our forecasted results.
 
In addition, investors should not rely on the results of prior periods or on historical seasonality in license revenue as an indication of our future performance. Our operating expense levels are relatively fixed in the short-term and are based, in part, on our expectations of future revenue. If we have unanticipated lower sales in any given quarter, we will not be able to reduce our operating expenses for that quarter proportionately in response. Therefore, net income may be disproportionately affected by a fluctuation in revenue.
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Any significant shortfall in revenues or earnings, or lowered expectations could cause our common stock price to decline.

Our business could be negatively affected as a result of actions of shareholders or others.
There can be no assurance that a shareholder 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 such proposals is likely 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 based on various factors, including uncertainty associated with potential offers to acquire Compuware.
 
Our planned distribution of all or a substantial part of our remaining shares of common stock in Covisint Corporation, which we refer to as the Tax-Free Distribution, could subject us and our shareholders to significant tax liability and could affect our ability to enter into certain transactions in the future.
 
We have announced plans to distribute our shares of Covisint common stock within one year of the October 2013 offering of Covisint’s common stock to the public. We sought and have received a private letter ruling from the IRS substantially to the effect that, among other things, the Tax-Free Distribution will qualify as a tax-free transaction for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code or the Code.
 
One requirement for the Tax-Free Distribution to be a tax-free distribution is that we maintain at least 80% ownership in Covisint until the distribution.  We currently own approximately 80.03% of Covisint’s outstanding shares.  Certain holders of options to purchase Covisint common stock from Covisint have agreed not to exercise their options for a specified period of time after the IPO.  These agreements restrict exercise of such options only through June 23, 2014. We have agreed with Covisint to allow us to purchase additional shares of Covisint prior to any Covisint equity transaction (including, without limitation, the exercise of stock options to purchase Covisint common stock from Covisint) to ensure that we maintain at least 80% ownership in Covisint up to the Tax-Free Distribution. In addition, Covisint has granted the holders of options exercisable in calendar 2014 tandem stock appreciation rights that permit such holders to effectively elect cash settlement of those options.  These tandem stock appreciation rights are first exercisable after the agreements restricting exercises of options expire in June 2014.  The related options will expire upon exercise of the tandem stock appreciation rights. We have agreed with Covisint to purchase additional Covisint shares during fiscal 2015 to fund the cash settlement of the tandem stock appreciation rights. Any such purchases of Covisint common stock may result in significant cash outlays from us to Covisint, which could have a negative impact on our available cash and equity before or subsequent to a Tax-Free Distribution.
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In May 2014, we submitted to the IRS a request for a supplemental private letter ruling confirming the tax-free status of the Tax-Free Distribution, taking into account (i) the award and potential exercise of SARs and our expected acquisition of additional shares of Covisint’s common stock under our agreements with Covisint or in open-market purchases, and (ii) our possible retention of a minor portion of Covisint’s common stock for sale following the Tax-Free Distribution.  There can be no assurance that we will receive the requested ruling. If we do not receive the supplemental ruling in the form requested, we may determine not to proceed with the distribution of the Covisint shares.
 
In addition, the private letter rulings and the tax opinion that we expect to receive from counsel will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of Covisint’s business, and neither the private letter rulings nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter rulings will not address all the issues that are relevant to determining whether the distribution will qualify as a tax-free transaction. Notwithstanding the private letter rulings and opinion, the IRS could subsequently determine that the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines that any of the representations, assumptions or undertakings that were included in the request for the private letter rulings or the private letter rulings or in the request for the private letter rulings were false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter rulings. If the Tax-Free Distribution fails to qualify as a tax-free transaction, in general, we would be subject to tax as if we had sold our shares of Covisint common stock in a taxable sale for its fair market value, and our shareholders who receive shares of Covisint common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. Any additional tax we are required to pay in such event could have a material adverse effect on our results of operations and cash flow.

Even if the Tax-Free Distribution would otherwise qualify as a tax-free transaction for U.S. federal income tax purposes, such distribution may be taxable to us if Section 355(d) of the Code or Section 355(e) of the Code applies to the distribution. Section 355(d) of the Code may apply to the distribution if any person purchases 50% or more of our stock, by vote or value, during the five-year period ending on the date of any distribution of our shares of Covisint to our shareholders. Section 355(e) of the Code will apply to the distribution if 50% or more of our stock or Covisint’s stock, by vote or value, is acquired by one or more persons, other than the holders of our stock who received Covisint stock in the distribution, acting pursuant to a plan or a series of related transactions that includes the distribution. Any shares of our stock or Covisint stock acquired directly or indirectly within two years before or after the Tax-Free Distribution generally are presumed to be part of such a plan unless that presumption can be rebutted.  In the event Section 355(d) or (e) of the Code is implicated by a proposed acquisition of our stock or Covisint’s stock, such an acquisition in connection with the Tax-Free Distribution could cause such distribution to be fully taxable to us and require us to pay a material amount of income taxes without any related cash received with which to pay the resulting tax liability.  This substantial potential liability may discourage offers to acquire Compuware and/or Covisint from being made or may result in any such offer being discounted to take into account the risk of such tax liability.  In addition, during this timeframe, the potential tax liability on account of these Code provisions could affect our ability to issue stock to complete acquisitions, expand our product offerings, develop new technology or obtain additional debt financing and put us at a competitive disadvantage.

Substantial uncertainty exists on the scope of Section 355(e) of the Code, and we or Covisint may have undertaken, may contemplate undertaking or may otherwise undertake in the future transactions that may cause Section 355(e) of the Code to apply to the distribution notwithstanding our desire or intent to avoid application of Section 355(e) of the Code. Accordingly, we cannot provide you any assurance that we will not have tax-related obligations related to the application of Section 355(e) of the Code to the Tax-Free Distribution.
 
Another requirement for the Tax-Free Distribution to qualify as a tax-free transaction is that Compuware either distribute (i) all of its Covisint common stock held immediately before the Tax-Free Distribution or (ii) an amount constituting at least 80% of Covisint’s outstanding shares of common stock and establish to the satisfaction of the IRS that the retention of Covisint common stock is not in pursuance of a plan having as one of its principal purposes the avoidance of federal income tax.  In the event that Compuware’s ownership percentage of Covisint’s common stock exceeds 80%, Compuware may determine to retain some or all of the excess shares, which would later be sold to raise cash for use in Compuware’s business operations.  As noted above, Compuware is requesting a ruling from the IRS with respect to its possible retention of Covisint shares in the supplemental private letter ruling.  If Compuware receives a positive ruling from the IRS and determines to retain shares of Covisint common stock for future sale, then Compuware shareholders would receive fewer Covisint shares in the Tax-Free Distribution than they would have received if Compuware had distributed all of its Covisint shares.
 
Our announced evaluation of a strategic separation of our APM and Mainframe businesses may take multiple forms, may not produce the intended benefits to shareholders or may not result in a separation of the businesses.
 
In May 2014, we announced that we are exploring the strategic separation of our APM and Mainframe businesses. We are early in the process of determining the feasibility of such a separation, the expected effects on these businesses, alternative structures and whether such separation would create shareholder value. As a result, there can be no assurance that the review will result in a strategic separation or as to the form such a separation would take, and there is no specific timetable for completing this review or the separation itself. If it does not occur or is significantly delayed, our stock price may be negatively affected.
 
If we proceed with a separation, the separation is subject to a number of risks, including, among others, the risk that any spin-off or other disposition by the Company of its interest in one of these businesses is not able to be implemented as intended, the risk that the separation does not achieve the expected benefits for the Company and its shareholders, the risk that the separation results in an adverse impact on the Company’s remaining business, the risk of adverse tax consequences for the Company and its shareholders, the risk that the costs and disruptions arising out of any such separation will outweigh the benefits, and the risk of potential unanticipated adverse customer impact.  The occurrence of any of these contingencies may have a material adverse impact on the Company’s results of operations and stock price.
 
Substantial changes in our operations, including business segregations and divestitures, may disrupt our business, divert the attention of our management or cause us to incur additional costs and may result in financial results that are worse than expected.
During fiscal 2014, we divested our professional services business and a portion of our software portfolio, completed the initial public offering of approximately 20% of our Covisint business and reaffirmed our intention to divest all or a substantial part of our remaining interest in Covisint stock through a Tax-Free Distribution.  As a part of the 2014 divestiture, we continue to provide certain support for the divested businesses under a transition services agreement.  Additionally, in May 2014, we announced that we would begin exploring a separation of the APM and Mainframe business segments.  These activities, or similar activities in the future, could disrupt our business, divert the attention of management or cause us to incur additional costs to maintain appropriate levels of service for our remaining business segments, any of which  could have a negative impact on our results of operations and cash flows.
 
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.
Our success depends in part upon the continued service of our key senior management and technical personnel. Such personnel are employed at-will and may leave Compuware at any time. Our success also depends on our continuing ability to attract and retain highly qualified technical, managerial and sales personnel. The market for technical personnel has historically been, and we expect that it will continue to be, intensely competitive. These market factors and changes to our business portfolio may cause additional uncertainties among existing personnel or candidates for certain positions.  Therefore, there can be no assurance that we will continue to be successful in attracting or retaining such personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could have a material adverse effect on our business.
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We may not achieve the results we expect from our expense reduction program, the timing could be delayed, or the restructuring charges necessary to achieve the targeted expense reductions could be higher than expected, any of which could materially and adversely affect our results of operations and financial condition.
In fiscal 2013, we announced and began to implement plans to reduce expenses, which included a reduction in our workforce, the elimination or reduction in size of certain office facilities and the early termination of certain operating leases. Some of the changes being implemented will require additional investments in systems and personnel to implement new systems and may result in unanticipated costs. Moreover, the timing and actual cost savings achieved from our cost rationalization initiative may vary from our announced expectations due to delays, unanticipated needs to retain a greater number of employees than expected or higher than expected costs to achieve the savings targets. Until fully implemented, there can be no assurance that our restructuring plan to reduce expenses will produce the cost savings we anticipate or in the time frame we expect. Any negative variance in the amount or timing of the cost savings or in the cost to achieve our savings targets could cause our results of operations to be worse than anticipated or require additional restructuring charges.

Defects or disruptions in our hosted software or application services networks or interruptions or delays in service would impair the delivery of our on-demand service and could diminish demand for our services and subject us to substantial liability.
Defects in our hosted software network or our application services network could result in service disruptions for our customers. Our network performance and service levels could be disrupted by numerous events, including natural disasters and power losses. We might inadvertently operate or misuse the system in ways that could cause a service disruption for some or all of our customers. We might have insufficient redundancy or server capacity to address any such disruption, which could result in interruptions in our services or degradations of our service levels. Our customers might use our hosted software in ways that cause a service disruption for other customers. These defects or disruptions could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones, either of which could have a material adverse effect on our results of operations and cash flow.
 
The market for application services is highly competitive with emerging competitors. As the market matures, competition may increase and could have a material negative impact on our results of operations.
Several of our competitors in the application services market have substantially greater financial, marketing, recruiting and training resources than we do. As a result, our competitors may be more efficient and effective at achieving the following principal competitive factors affecting the market for application services:  security; scalability; speed of implementation; ability to enable users to maintain regulatory compliance; features and functionality; ability to meet customer service level requirements; and price. If we are less successful at achieving one or more of these factors than our competitors, we may lose market share which could have a material adverse effect on our business, financial condition and operating results.

Economic uncertainties or slowdowns may reduce demand for our offerings, which may have a material adverse effect on our revenues and operating results.
Our revenues and profitability depend on the overall demand for our software products, hosted software and application services. Economic uncertainties over the last few years have resulted in companies reassessing their spending for technology projects. If the economies within the geographic regions in which we operate experience a slowdown or recession, it could have a material adverse effect on our results of operations and cash flow.
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Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our Covisint application services, which may have a material negative effect on our revenues and operating results.
A substantial portion of our Covisint application services revenue has been generated from customers in the automotive industry, with General Motors Company currently Covisint’s largest customer. General Motors announced in July 2012 that it intends to significantly reduce its use of outsourced information technology services over the next three to five years. If General Motors were to terminate or significantly curtail its relationship with Covisint, it could experience a rapid decline in application services revenue and contribution margin over a relatively short period of time.

In addition, negative developments in the automotive manufacturing industry generally, including restructuring, cost reduction efforts and bankruptcies, could increase the collection risk of accounts receivable from these customers, which could have a material adverse effect on our application services results of operations and margins.

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.
We evaluate our long-lived assets, including property and equipment, goodwill, acquired product rights and other intangible assets, whenever events or circumstances occur that may indicate these assets are impaired or, periodically, as required by generally accepted accounting principles. This evaluation utilizes expectations of future revenues and profitability to estimate fair value of our reporting units.  In the continuing process of evaluating the recoverability of the carrying amount of our long-lived assets including goodwill, we could identify substantial impairments which could have a material adverse effect on our results of operations.

Our software technology may infringe the proprietary rights of others.
Our software technology is developed or enhanced internally or acquired from unrelated parties.

All employees sign an agreement that states the employee was hired for his or her talent and skill rather than for any trade secrets or proprietary information of others of which he or she may have knowledge. Further, our employees execute an agreement stating that work developed for us or our clients belongs to us or our clients, respectively.

During the due diligence stage of any software technology acquisition, we research and investigate the title to the software technology we would be acquiring from the seller. This investigation generally includes without limitation, litigation searches, copyright and trademark searches, review of development documents and interviews with key employees of the seller regarding development, title and ownership of the software technology being acquired. The acquisition agreement itself generally contains representations, warranties and covenants concerning the title and ownership of the software technology as well as indemnification and remedy provisions in the event the representations, warranties and covenants are breached by the seller.
 
Although we use all reasonable efforts to ensure we do not infringe on third party intellectual property rights, there can be no assurance that third parties will not assert infringement claims against us with respect to our current and future software technology or that any such assertion will not require us to enter into royalty arrangements or result in costly litigation.

Our results could be adversely affected by increased competition, pricing pressures and technological changes within the software products market.
The markets for our software products are highly competitive. Several of our competitors have greater financial and marketing resources than we do.  The principal competitive factors affecting the market for our software products include: responsiveness to customer needs; functionality, performance and reliability of our software products in a customer’s environment; ease of use; quality of customer support; our ability to bring products to market that meet ever-changing customer requirements; vendor reputation; distribution channels; and price. A variety of external and internal events and circumstances could adversely affect our competitive capacity. Our ability to remain competitive will depend, to a great extent, upon our performance in sales, product development and customer support. To be successful in the future, we must respond promptly and effectively to our customers’ purchasing methodologies, challenges of technological change and our competitors' innovations by continually enhancing our product offerings.
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We operate in an industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. If we fail to keep pace with technological change in our industry, such failure would have an adverse effect on our revenues. During the past several years, many new technological advancements and competing products entered the marketplace. To the extent that our current product portfolio does not meet such changing requirements, our revenues will suffer. Delays in new product introductions or less-than-anticipated market acceptance of these new products are possible and could have a material adverse effect on our revenues.

Developers of third party products, including operating systems, databases, systems software, applications, networks, servers and computer hardware, frequently introduce new or modified products. These new or modified third party products could incorporate features which perform functions currently performed by our products or could require substantial modification of our products to maintain compatibility with these companies’ hardware or software. While we have generally been able to adapt our products and our business to changes introduced by new or modified third party product offerings, there can be no assurance that we will be able to do so in the future. Failure to adapt our products in a timely manner to such changes or customer decisions to forego the use of our products in favor of those with comparable functionality contained either in the hardware or other software could have a material adverse effect on our results of operations and cash flow.

We must develop or acquire product enhancements and new products to succeed.
Our success depends in part on our ability to develop product enhancements and new products that keep pace with continuing changes in technology and customer preferences. The majority of our products have been developed from acquired technology and products. We believe that our future growth lies, in part, in continuing to identify, acquire and then develop promising technologies and products. While we are continually searching for acquisition opportunities, there can be no assurance that we will continue to be successful in identifying, acquiring and developing products and technology. If any potential acquisition opportunities are identified, there can be no assurance that we will consummate and successfully integrate any such acquisitions and there can be no assurance as to the timing or effect on our business of any such acquisitions. Our failure to develop technological improvements or to adapt our products to technological change may, over time, have a material adverse effect on our business.
 
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.
As part of our overall strategy, we have acquired or invested in, and plan to continue to acquire or invest in, complementary companies, products, and technologies and may enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that we may not be able to integrate the acquired technologies or products with our current products and technologies; the potential disruption of our ongoing business; the inability to retain key technical, sales and managerial personnel; the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses; the risk that revenues from acquired companies, products and technologies do not meet our expectations; and decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets.
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For us to maximize the return on our investments in acquired companies, the products from these entities must be integrated with our existing solutions. These integrations can be difficult and unpredictable, especially given the complexity of software and that acquired technology is typically developed independently and designed with no regard to integration. The difficulties are compounded when the products involved are well-established because compatibility with the existing base of installed products must be preserved. Successful integration also requires coordination of different development and engineering teams. This too can be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and product roadmaps. There can be no assurance that we will be successful in our product integration efforts or that we will realize the expected benefits.

With each of our acquisitions, we have initiated efforts to integrate the disparate cultures, employees, systems and products of these companies. Retention of key employees is critical to ensure the continued development, support, sales and marketing efforts pertaining to the acquired products. We have implemented retention programs to keep many of the key technical and sales employees of acquired companies. Nonetheless, we have lost some key employees and may lose others in the future.

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.
Approximately 40 percent of our total revenues from continuing operations are derived from foreign operations and we expect that foreign operations will continue to generate a significant percentage of our total revenues. Products and services are generally priced in the currency of the country in which they are sold. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect our results of operations. The international business environment is also subject to other risks, including the need to comply with foreign and U.S. laws and the greater difficulty of managing business operations overseas. In addition, our foreign operations are affected by general economic conditions in the international markets in which we do business. A worsening of economic conditions in these markets could cause customers to delay or forego decisions to license new products or to reduce their requirements for application services.

Current laws may not adequately protect our proprietary rights.
We regard our software as proprietary and attempt to protect it with copyrights, trademarks, trade secret laws and/or restrictions on disclosure, copying and transferring title. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to obtain and use information that we regard as proprietary. We have many patents and many patent applications pending. However, existing patent and copyright laws afford only limited practical protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Any claims against those who infringe on our proprietary rights can be time consuming and expensive to prosecute, and there can be no assurance that we would be successful in protecting our rights despite significant expenditures.
 
Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. One item that needs to be evaluated is the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. Changes in estimates of projected future operating results or in assumptions regarding our ability to generate future taxable income could result in significant increases to our total valuation allowance and tax expense that would reduce net income.

In addition, we recognize reserves for uncertain tax positions through tax expense for estimated exposures related to our current and historical tax positions. We evaluate the need for reserves for uncertain tax positions on a quarterly basis and any change in the amount will be recorded in our results of operations, as appropriate. It could take several years to resolve certain of these issues.
 
We are also subject to routine corporate income tax audits in the jurisdictions in which we operate. Our provision for income taxes includes amounts intended to satisfy income tax assessments that are likely to result from the examination of our corporate tax returns that have been filed in these jurisdictions. The amounts ultimately paid upon resolution of these examinations could be materially different from the amounts included in the provision for income taxes and result in increases to tax expense.
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Our stock repurchase plan and future dividend payments may be suspended or terminated at any time, or our plans to distribute our Covisint shares to shareholders or to undertake a return of capital transaction may change, any of which may result in a decrease in our stock price.
We have repurchased shares of our common stock from time to time under an arrangement pursuant to which management is permitted to determine the amount and timing of repurchases in its discretion subject to an overall limit, as well as under a time-limited arrangement pursuant to which repurchases occur according to a formula without further discretion that is also subject to the overall limit and can be terminated at any time. Our ability and willingness to repurchase shares is subject to, among other things, the availability of cash resources and credit at rates and upon terms we believe are prudent. Stock market conditions, the market value of our common stock and other factors may also make it imprudent for us from time to time to engage in repurchase activity. There can be no assurance that we will continue to repurchase shares at historic levels or at all. If our repurchase program is curtailed, our stock price may be negatively affected.

In June 2013, we began paying quarterly cash dividends on our common stock.  We have also announced our intention to distribute our shares of our Covisint subsidiary to our shareholders within 12 months after completion of Covisint’s initial public offering and to subsequently undertake a return of capital transaction for the benefit of shareholders, the form, size and timing of which are yet to be determined. 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, the timing of any such distribution, whether the intended return of capital transaction will occur and, if so, the form, size and timing of such transaction will be subject to the discretion of our Board of Directors and will depend on many factors, such as our current and expected results of operations and financial condition, the terms of the documentation relating to any indebtedness we have at the time, applicable state law, applicable tax ramifications, our ability to improve and optimize our balance sheet, the availability of any necessary funding and other factors our Board of Directors deems relevant. As a result, there can be no assurance that we will continue to pay cash dividends, distribute our Covisint shares or engage in the return of capital transaction as we intend. If we do not continue to pay cash dividends, or determine not to distribute Covisint shares or engage in the return of capital transaction, our stock price may be negatively affected.
 
Acts of terrorism, acts of war, cyber-attacks and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.
Natural disasters, acts of war, cyber-attacks, terrorist attacks and the escalation of military activity in response to such attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist or cyber-attacks and the national and international responses to such threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.
Provisions of our articles of incorporation and bylaws, Michigan law and the Rights Agreement, dated October 25, 2000, as amended, between Compuware Corporation and Computershare Trust Company, N.A., as rights agent, could make it more difficult for a third party to acquire Compuware, even if doing so would be perceived to be beneficial to shareholders. The combination of these provisions inhibits a non-negotiated acquisition, merger or other business combination involving Compuware, which, in turn, could adversely affect the market price of our common stock.
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ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Our executive offices, our Mainframe and one of our APM research and development labs, principal marketing department, primary application services office, customer service and  support teams for Mainframe and APM are located in our corporate headquarters building in Detroit, Michigan. We own the facility, which is approximately 1.1 million square feet, including approximately 316,000 square feet designated for lease to third parties for office, retail and related amenities. In addition, we lease approximately 217,000 square feet of land on which the facility resides.

We lease approximately 57 sales offices in 29 countries, including four remote product research and development facilities.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that the outcome of any of these legal matters will have a material effect on our consolidated financial position, results of operations or cash flows. See note 17 of the consolidated financial statements included within item 8 of this report for more details regarding our contingent liabilities.
 
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The NASDAQ Global Select Market (“NASDAQ”) under the symbol CPWR. As of May 27, 2014, there were 3,331 shareholders of record of our common stock. In fiscal 2014, we paid quarterly cash dividends of $0.125 per share. 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 any indebtedness we have at the time, applicable state law and other factors our Board of Directors deems relevant. The following table sets forth the range of high and low sale prices for our common stock for the periods indicated, all as reported by NASDAQ.
 
Fiscal Year Ended March 31, 2014
 
High
   
Low
 
Fourth quarter
 
$
11.38
   
$
9.66
 
Third quarter
   
11.39
     
10.30
 
Second quarter
   
11.72
     
10.31
 
First quarter
   
12.30
     
10.19
 

Fiscal Year Ended March 31, 2013
 
High
   
Low
 
Fourth quarter
 
$
12.74
   
$
10.69
 
Third quarter
   
11.16
     
7.97
 
Second quarter
   
10.25
     
8.32
 
First quarter
   
9.38
     
8.08
 
 
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Our credit facility contains various covenants, including limitations on stock repurchases; dividends; and a minimum net worth requirement. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. Additionally, our stock repurchases are limited to $50 million from August 8, 2013 through the end of the agreement. The Company was in compliance with the covenants under the credit facility at March 31, 2014. See note 10 of the consolidated financial statements included in this report for more details regarding our credit agreement.
 
Common Share Repurchases

There were no repurchases of common stock during the quarter ended March 31, 2014.
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Comparison of Cumulative Five Year Total Return

The following line graph compares the yearly percentage change in the cumulative total shareholder return on our common shares with the cumulative total return of each of the following indices: the S&P 500 Index, the NASDAQ Market Index and the NASDAQ Computer and Data Processing Index for the period from April 1, 2009 through March 31, 2014. The graph includes a comparison to the S&P 500 Index in accordance with SEC rules, as the Company's common stock is part of such index. The graph assumes the investment of $100 in our common shares, the S&P 500 Index and each of the two NASDAQ indices on March 31, 2009 and the reinvestment of all dividends.

The comparisons in the graph are required by applicable SEC rules. You should be careful about drawing any conclusions from the data contained in the graph, because past results do not necessarily indicate future performance. The information contained in this graph shall not be deemed to be "soliciting material" or "filed" with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
 
 
Total Return To Shareholders
(Includes reinvestment of dividends)
 
 
Base
   
Indexed Returns
 
 
Period
   
Fiscal Years Ending
 
 
March 31,
   
March 31,
 
Company / Index
 
2009
   
2010
   
2011
   
2012
   
2013
   
2014
 
Compuware Corporation
 
$
100
     
127.47
     
175.27
     
139.45
     
189.53
     
166.84
 
S&P 500 Index
   
100
     
149.77
     
173.20
     
187.99
     
214.24
     
261.07
 
NASDAQ Market Index
   
100
     
158.32
     
185.32
     
208.14
     
223.01
     
290.32
 
NASDAQ Computer & Data Processing Index
   
100
     
158.57
     
176.14
     
199.59
     
205.39
     
288.37
 

The additional information required in this section is contained in Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this report and is incorporated herein by reference.
25

ITEM 6. SELECTED FINANCIAL DATA

The selected statement of operations and balance sheet data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.
 
 
Year Ended March 31, (1)
 
 
2014
   
2013
   
2012
   
2011
   
2010
 
 
(In thousands, except per share data)
 
Statement of Operations Data:
           
Revenues:
                   
Software license fees
 
$
159,197
   
$
159,093
   
$
195,751
   
$
173,643
   
$
177,606
 
Maintenance fees
   
353,374
     
361,359
     
380,968
     
375,248
     
394,468
 
Subscription fees
   
80,857
     
79,862
     
76,246
     
67,718
     
16,852
 
Services fees
   
30,193
     
32,896
     
36,795
     
28,722
     
25,685
 
Application services fees
   
97,135
     
90,694
     
73,731
     
55,025
     
40,467
 
Total revenues
   
720,756
     
723,904
     
763,491
     
700,356
     
655,078
 
Operating expenses:
                                       
Cost of software license fees
   
20,310
     
18,986
     
16,391
     
13,056
     
14,181
 
Cost of maintenance fees
   
28,387
     
31,621
     
34,715
     
29,259
     
28,948
 
Cost of subscription fees
   
32,406
     
30,264
     
29,102
     
24,974
     
9,289
 
Cost of services
   
25,662
     
31,777
     
36,276
     
28,917
     
23,790
 
Cost of application services
   
117,155
     
83,298
     
72,384
     
51,011
     
37,923
 
Technology development and support
   
86,181
     
95,356
     
94,233
     
80,152
     
79,404
 
Sales and marketing
   
216,115
     
220,714
     
242,211
     
209,124
     
187,372
 
Administrative and general
   
134,695
     
153,733
     
154,366
     
145,371
     
153,676
 
Restructuring costs (2)
   
11,990
     
15,751
                     
3,355
 
Gain on divestiture of product lines (3)
                                   
(52,351
)
Total operating expenses
   
672,901
     
681,500
     
679,678
     
581,864
     
485,587
 
Income from continuing operations
   
47,855
     
42,404
     
83,813
     
118,492
     
169,491
 
Other income (expense), net
   
3,288
     
(1,170
)
   
1,633
     
4,462
     
25,721
 
Income from continuing operations before income tax provision
   
51,143
     
41,234
     
85,446
     
122,954
     
195,212
 
Income tax provision
   
12,944
     
15,917
     
22,005
     
33,303
     
60,615
 
Income (loss) from continuing operations including non-controlling interest
   
38,199
     
25,317
     
63,441
     
89,651
     
134,597
 
Income (loss) from discontinued operations, net of tax (1)
   
29,926
     
(42,568
)
   
24,930
     
17,790
     
6,209
 
Net income (loss) including non-controlling interest
   
68,125
     
(17,251
)
   
88,371
     
107,441
     
140,806
 
Less: Net loss attributable to the non-controlling interest in Covisint Corporation
   
(3,458
)
   
-
     
-
     
-
     
-
 
Net income attributable to Compuware Corporation
 
$
71,583
   
$
(17,251
)
 
$
88,371
   
$
107,441
   
$
140,806
 
 
                                       
Basic earnings (loss) per share (4)
                                       
Continuing operations
   
0.19
     
0.12
     
0.29
     
0.35
     
0.58
 
Discontinued operations
   
0.14
     
(0.20
)
   
0.11
     
0.14
     
0.03
 
Net income (loss) attributable to Compuware Corporation common shareholders
 
$
0.33
   
$
(0.08
)
 
$
0.40
   
$
0.49
   
$
0.61
 
 
                                       
Diluted earnings (loss) per share (4)
                                       
Continuing operations
   
0.19
     
0.12
     
0.29
     
0.34
     
0.57
 
Discontinued operations
   
0.13
     
(0.20
)
   
0.11
     
0.14
     
0.03
 
Net income (loss) attributable to Compuware Corporation common shareholders
 
$
0.32
   
$
(0.08
)
 
$
0.40
   
$
0.48
   
$
0.60
 
 
                                       
Shares used in computing net income (loss) per share:
                                       
Basic earnings computation
   
215,952
     
214,627
     
218,344
     
220,616
     
232,634
 
Diluted earnings computation
   
221,180
     
214,627
     
222,378
     
226,095
     
234,565
 
 
                                       
Balance Sheet Data (at period end):
                                       
Working capital
 
$
215,200
   
$
38,159
   
$
54,386
   
$
143,905
   
$
92,688
 
Total assets
   
1,997,109
     
1,973,282
     
2,167,538
     
2,038,377
     
2,013,325
 
Long term debt (5)
           
18,000
     
45,000
                 
Total shareholders' equity
   
1,101,034
     
998,226
     
1,049,937
     
952,612
     
913,813
 
Cash dividends per share
   
0.50
                                 
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(1) During fiscal 2014 the Company divested our Changepoint, Uniface, and Professional Services business segments.  See note 2 of the consolidated financial statements included in this report for additional information regarding the divestiture.
 
(2) During fiscal 2014 and 2013, the Company undertook various restructuring activities to reduce administrative and general and non-core operational costs. The activities associated with this plan resulted in a restructuring charge from continuing operations of $12.0 million for fiscal 2014 and $15.8 million for fiscal 2013, respectively. See note 9 of the consolidated financial statements included in this report for additional information regarding our restructuring plan.
 
During fiscal 2010, the Company undertook various restructuring activities to improve the effectiveness and efficiency of a number of the Company’s critical business processes.
 
(3) In May 2009, we exited the Quality and Testing business by selling our Quality and DevPartner distributed product lines to Micro Focus International PLC, resulting in a gain on divestiture of product lines of $52.4 million.
 
(4) See note 13 of the consolidated financial statements included in this report for the basis of computing earnings (loss) per share.
 
(5) See note 10 of the consolidated financial statements included in this report for additional information on debt.
 
See note 3 of the consolidated financial statements for additional information on acquisition activity.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In this section, we discuss our results of operations on a segment basis. We have two software segments, APM and Mainframe. We also have a platform-as-a-service (“PaaS”) offering called Covisint or Application Services. These segments are described in detail in note 1 to the consolidated financial statements.

Our business segment structure is intended to provide visibility and control over the operations of our business and to increase our market agility, enabling us to more effectively capitalize on market conditions and competitive advantages to maximize revenue growth and profitability.
 
On January 31, 2014, we sold substantially all of the assets and transferred certain liabilities associated with our Changepoint, Professional Services and Uniface business segments.  The results of operations of these segments during all periods presented have been included in discontinued operations in the statement of operations.  The discussion in this report is focused on our continuing operations.  See note 2 of the consolidated financial statements included in Item 8 of this report for additional information on the divestiture and the results of the divested business segments.

We evaluate the performance of our segments based primarily on revenue growth and contribution margin which represents operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges. References to years are to fiscal years ended March 31 unless otherwise specified. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes included in Item 8 of this report.
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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, including, without limitation, those discussed in Item 1A Risk Factors and elsewhere in this report, 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. 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.

OVERVIEW

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

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

The APM market is a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company’s brand awareness, revenue growth and overall market share. Because of this development, the market for APM solutions is significant and growing rapidly. Our APM solutions provide our customers with on-premises software and SaaS platform based hosted software. 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 hosted software network with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities and in video streaming performance; (2) enhancements to our solutions that are focused on optimizing application performance and accelerating time to market; and (3) enhancements which combine our on-premises software and SaaS solution into a single platform that provides performance metrics for web, non-web, mobile, streaming and cloud applications in a single solution.

The secure collaboration services market, served by our Covisint application services, is also a key source of revenue. 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 PaaS basis to customers primarily in the automotive, healthcare and energy industries, create an environment that simplifies and secures this collaboration atmosphere. Our focus in the automotive and manufacturing industries is on enabling our cutomers 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.
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Annual Update

The following occurred during fiscal 2014:

· APM segment revenue increased $26.8 million or 8.9% during FY14 as compared to FY13.  Contribution margin increased 761% from a negative $4.3 million to $28.4 million in the fiscal year ended March 31, 2014. See “Business Segment Analysis” for additional information.
 
· Covisint revenue increased $6.4 million or 7.1% during 2014 as compared to 2013 due to growth from recurring revenue of $9.7 million, partially offset by a $3.3 million decrease in services revenue. Recurring revenue grew 17.1% while services revenue declined 9.7%. Contribution margin declined to negative 23.8% during 2014 from positive 5.1% during 2013 due to the increase in expense primarily from stock compensation as a result of the Covisint initial public offering (“Covisint IPO”) and continued investment related to being a standalone public company.
 
· Total Revenue declined $3.1 million during 2014 as compared to 2013 due to an $8.0 million decrease in maintenance fees and a $2.7 million decrease in service fees, partially offset by a $6.4 million increase in application service fees and a $1.0 million increase in subscription fees.
 
· Operating margin from continuing operations increased to 6.6% during 2014 as compared to 5.9% during 2013 due primarily to a decrease of $19.0 million in administrative and general expense, a $9.2 million decrease in technology development and support expense, a $6.1 million decrease in cost of services and a $4.6 million decrease in sales and marketing expense, partially offset by a $33.9 million increase in cost of application services (see the “Business Segment Analysis,” section below for additional information).

· Net income from continuing operations including non-controlling interest increased to $38.2 million during 2014 as compared to $25.3 million during 2013.
 
· On a GAAP basis, earnings per share from continuing operations increased 58% from $0.12 to $0.19 in 2014 as compared to 2013.
 
· On a non-GAAP basis, excluding stock compensation expense, amortization of purchased software and other acquired intangibles, restructuring charges, certain advisory fees, impairment of goodwill and the gain on the divestiture of the Changepoint, Professional Services and Uniface business segments, earnings per share increased 25 percent in 2014 as compared to 2013. See the “GAAP to non-GAAP Reconciliation” section below for a complete reconciliation of operating income.

· Realized $56 million in corporate and shared services expense reductions – 25% higher than the top end of our projection. These expense reductions are reflected in our unallocated costs ($29 million) and in our business segment operating expenses ($2.7 million).
 
· Incurred $13.1 million in advisory fees associated with certain shareholder actions and our business transformation initiative.
 
· Incurred $12.0 million in restructuring costs related to continuing operations as we move forward with our plans to eliminate a total of approximately $110 million to $120 million of administrative and general and non-core operational costs as a result of this program. See note 9  of the consolidated financial statements included in Item 8 of this report for more details regarding our restructuring plan.

· Declared and paid four quarterly dividends totaling $0.50 per share.

· Divested substantially all of the assets and transferred certain liabilities that primarily related to the Changepoint, Professional Services and Uniface business segments for $112 million cash, which resulted in a gain of $9.5 million, net of tax.
 
· Completed the initial public offering of 7.36 million shares of the common stock of our subsidiary Covisint Corporation on October 1, 2013. The shares began trading on the NASDAQ Global Select Market on September 26, 2013, under the symbol “COVS”. Compuware currently owns 80.03 percent of Covisint’s outstanding shares.
 
On May 22, 2014, we announced our intention to begin exploring the strategic separation of our APM and Mainframe business segments.  We believe such a separation would allow the management teams of both segments to be fully focused on the operations of their specific segment, provide distinct investment opportunities to the investor community and provide appropriate incentives to assist in attracting and retaining talent for each business.
 
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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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operational data from the consolidated statements of operations as a percentage of total revenues and the percentage change in such items compared to the prior period:
 
Percentage of
   
Period-to-Period
 
 
Total Revenues
   
Change
 
 
Fiscal Year Ended
   
2013
   
2012
 
 
March 31, (1)
   
to
   
to
 
 
2014
   
2013
   
2012
   
2014
   
2013
 
REVENUE:
                   
Software license fees
   
22.1
%
   
22.0
%
   
25.6
%
   
0.1
%
   
(18.7
)%
Maintenance fees
   
49.0
     
50.0
     
49.9
     
(2.2
)
   
(5.1
)
Subscription fees
   
11.2
     
11.0
     
10.0
     
1.2
     
4.7
 
Services fees
   
4.2
     
4.5
     
4.8
     
(8.2
)
   
(10.6
)
Application services fees
   
13.5
     
12.5
     
9.7
     
7.1
     
23.0
 
Total revenues
   
100.0
     
100.0
     
100.0
     
(0.4
)
   
(5.2
)
 
                                       
OPERATING EXPENSES:
                                       
Cost of software license fees
   
2.8
     
2.6
     
2.2
     
7.0
     
15.8
 
Cost of maintenance fees
   
3.9
     
4.4
     
4.5
     
(10.2
)
   
(8.9
)
Cost of subscription fees
   
4.5
     
4.2
     
3.8
     
7.1
     
4.0
 
Cost of services
   
3.6
     
4.4
     
4.8
     
(19.2
)
   
(12.4
)
Cost of application services
   
16.3
     
11.5
     
9.5
     
40.6
     
15.1
 
Technology development and support
   
12.0
     
13.2
     
12.3
     
(9.6
)
   
1.2
 
Sales and marketing
   
30.0
     
30.5
     
31.7
     
(2.1
)
   
(8.9
)
Administrative and general
   
18.6
     
21.1
     
20.2
     
(12.4
)
   
(0.4
)
Restructuring costs
   
1.7
     
2.2
             
(23.9
)
   
n/
a
Total operating expenses
   
93.4
     
94.1
     
89.0
     
(1.3
)
   
0.3
 
Income from continuing operations
   
6.6
     
5.9
     
11.0
     
12.9
     
(49.4
)
Other income (expense), net
   
0.5
     
(0.2
)
   
0.2
     
381.0
 
   
(171.6
)
 
                                       
Income from continuing operations before income tax provision
   
7.1
     
5.7
     
11.2
     
24.0
     
(51.7
)
Income tax provision - continuing operations
   
1.8
     
2.2
     
2.9
     
(18.7
)
   
(27.7
)
Income from continuing operations, net of tax
   
5.3
     
3.5
     
8.3
     
50.9
     
(60.1
)
Income (loss) from discontinued operations, net of tax
   
4.2
     
(5.9
)
   
3.3
     
170.3
 
   
(270.8
)
Net income (loss) including non-controlling interest
   
9.5
     
(2.4
)
   
11.6
     
494.9
 
   
(119.5
)
Net loss attributable to the non-controlling interest in Covisint Corporation
   
(0.5
)
   
0.0
     
0.0
     
n/
a
   
n/
a
Net income (loss) attributable to Compuware Corporation
   
9.9
%
   
(2.4
)%
   
11.6
%
   
514.9
%
   
(119.5
)%

(1) As discussed in Note 2, we have treated the operations of certain business segments as discontinued operations. The results for all periods have been restated to reflect such treatment.
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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 revenue growth and contribution margin which is operating profit before certain charges such as restructuring, internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). The allocation of income taxes is not evaluated at the segment level. Comparisons are to the comparable period of the prior year. Financial information for our business segments was as follows (in thousands):

 
 
   
   
   
   
Unallocated
   
 
 
 
   
   
Total
   
   
Expenses and
   
 
Year Ended:
 
APM
   
MF
   
Software
   
AS
   
Elimination (1)
   
Total
 
 
 
   
   
   
   
   
 
March 31, 2014
 
   
   
   
   
   
 
 
 
   
   
   
   
   
 
Total revenues
 
$
327,367
   
$
296,254
   
$
623,621
   
$
97,135
   
$
-
   
$
720,756
 
 
                                               
Operating expenses
   
298,924
     
74,384
     
373,308
     
120,233
     
179,360
     
672,901
 
 
                                               
Contribution /operating margin
 
$
28,443
   
$
221,870
   
$
250,313
   
$
(23,098
)
 
$
(179,360
)
 
$
47,855
 
 
                                               
Operating margin %
   
8.7
%
   
74.9
%
   
40.1
%
   
(23.8
%)
   
N/
A
   
6.6
%
 
                                               
March 31, 2013
                                               
 
                                               
Total revenues
 
$
300,533
   
$
332,677
   
$
633,210
   
$
90,694
   
$
-
   
$
723,904
 
 
                                               
Operating expenses
   
304,835
     
91,325
     
396,160
     
86,084
     
199,256
     
681,500
 
 
                                               
Contribution /operating margin
 
$
(4,302
)
 
$
241,352
   
$
237,050
   
$
4,610
   
$
(199,256
)
 
$
42,404
 
 
                                               
Operating margin %
   
(1.4
%)
   
72.5
%
   
37.4
%
   
5.1
%
   
N/
A
   
5.9
%
 
                                               
March 31, 2012
                                               
 
                                               
Total revenues
 
$
270,443
   
$
419,317
   
$
689,760
   
$
73,731
   
$
-
   
$
763,491
 
 
                                               
Operating expenses
   
317,621
     
99,310
   
$
416,931
     
72,717
     
190,030
     
679,678
 
 
                                               
Contribution /operating margin
 
$
(47,178
)
 
$
320,007
   
$
272,829
   
$
1,014
   
$
(190,030
)
 
$
83,813
 
 
                                               
Operating margin %
   
(17.4
%)
   
76.3
%
   
39.6
%
   
1.4
%
   
N/
A
   
11.0
%

(1) Unallocated expenses for fiscal 2014 and 2013 include $12.0 million and $15.8 million, respectively in restructuring expenses. See note 9 of the consolidated financial statements included in this report for additional information.

GAAP TO NON-GAAP RECONCILIATION

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

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

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

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

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

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

· Goodwill impairment charge. Our non-GAAP financial measures exclude an impairment charge associated with a decline in the estimated fair value of our professional services business unit (included in discontinued operations).  Management and the Board of Directors believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures, excluding goodwill impairment to provide comparability and consistency with historical operating results. This impairment charge is included in “Income (loss) from discontinued operations, net of tax” in the statements of operations.

· Advisory fees associated with certain shareholder actions and our business transformation initiative. During the fourth quarter of fiscal 2013, in response to an unsolicited, nonbinding offer to purchase the outstanding shares of the Company from a shareholder, the Board of Directors announced its willingness to consider other viable offers.  We continue to incur consultant fees to analyze the business, review additional requests for information from other interested parties and to implement business transformation plans.  We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding such costs in order to provide comparability and consistency with historical operating results.
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· Provision for income taxes on above pre-tax non-GAAP adjustments. Our non-GAAP financial measures exclude the tax impact of the above pre-tax non-GAAP adjustments. This amount is calculated using the tax rates of each country to which these pre-tax non-GAAP adjustments relate. Management excludes the non-GAAP adjustments on a net-of-tax basis in evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

· Gain on divestiture of business segments, net of tax. Our non-GAAP financial measures exclude the gain from the divestiture of our Changepoint, Professional Services and Uniface business segments, net of tax. This gain is included in “Income (loss) from discontinued operations, net of tax” in the statements of operations. This gain is not comparable to activity in the other periods presented. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding the effect of this gain in order to provide comparability and consistency with historical results.
 
Our reconciliation of GAAP to non-GAAP financial information is presented below (in thousands, except for per share data):
 
 
TWELVE MONTHS ENDED
 
 
MARCH 31,
 
 
2014
   
2013
 
       
NET INCOME ATTRIBUTABLE TO COMPUWARE COPORATION
 
$
71,583
   
$
(17,251
)
ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST
               
STOCK COMPENSATION (EXCL. RESTRUCTURING)
   
35,045
     
27,105
 
AMORTIZATION OF PURCHASED SOFTWARE
   
8,418
     
9,604
 
AMORTIZATION OF ACQUIRED INTANGIBLES
   
7,178
     
7,581
 
RESTRUCTURING EXPENSES
   
13,196
     
16,573
 
GOODWILL IMPAIRMENT
   
-
     
71,840
 
ADVISORY FEES
   
13,096
     
2,797
 
INCOME TAX EFFECT OF ABOVE ADJUSTMENTS
   
(27,978
)
   
(30,420
)
GAIN ON DIVESTITURE OF BUSINESS SEGMENTS, NET OF TAX
   
(9,529
)
   
-
 
TOTAL ADJUSTMENTS
   
39,426
     
105,080
 
 
               
NON-GAAP NET INCOME
 
$
111,009
   
$
87,829
 
                
 
               
DILUTED EARNINGS PER SHARE - GAAP
 
$
0.32
   
$
(0.08
)
 
               
RECALCULATED USING DILUTIVE SHARES
 
$
0.32
   
$
(0.08
)
ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST
               
STOCK COMPENSATION (EXCL. RESTRUCTURING)
   
0.16
     
0.12
 
AMORTIZATION OF PURCHASED SOFTWARE
   
0.04
     
0.04
 
AMORTIZATION OF ACQUIRED INTANGIBLES
   
0.03
     
0.03
 
RESTRUCTURING EXPENSES
   
0.06
     
0.08
 
GOODWILL IMPAIRMENT
   
-
     
0.33
 
ADVISORY FEES
   
0.06
     
0.01
 
INCOME TAX EFFECT OF ABOVE ADJUSTMENTS
   
(0.13
)
   
(0.14
)
GAIN ON DIVESTITURE OF BUSINESS SEGMENTS, NET OF TAX
   
(0.04
)
   
-
 
TOTAL ADJUSTMENTS
   
0.18
     
0.48
 
 
               
NON-GAAP DILUTED EPS
 
$
0.50
   
$
0.40
 
 
               
DILUTED SHARES OUTSTANDING
   
221,180
     
219,580
 
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SOFTWARE SEGMENTS

Application Performance Management

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

 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
Revenue
                   
Software license fees
 
$
116,373
   
$
100,565
   
$
85,462
     
15.7
%
   
17.7
%
Maintenance fees
   
100,243
     
89,535
     
77,329
     
12.0
     
15.8
 
Subscription fees
   
80,857
     
79,862
     
76,246
     
1.2
     
4.7
 
Services fees
   
29,894
     
30,571
     
31,406
     
(2.2
)
   
(2.7
)
Total revenue
   
327,367
     
300,533
     
270,443
     
8.9
     
11.1
 
 
                                       
Operating expenses
   
298,924
     
304,835
     
317,621
     
(1.9
)
   
(4.0
)
 
                                       
Contribution margin
 
$
28,443
   
$
(4,302
)
 
$
(47,178
)
   
761.2
%
   
90.9
%
 
                                       
Contribution margin %
   
8.7
%
   
(1.4
%)
   
(17.4
%)
               

APM segment revenue increased $26.8 million during 2014 due primarily to increased license and maintenance fees related to the growth in our customer base.  Service and subscription fees were consistent with prior year. We are focused on maintaining customer satisfaction and increasing demand for our Saas offerings through dedicated resources focused on customer renewals and through continued enhancement to our offerings. Responding to customer needs, we anticipate a greater percentage of our APM revenue will be booked ratably going forward which is expected to negatively impact revenue in 2015.

APM segment revenue increased $30.1 million during 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 $3.6 million due to new SaaS solution sales during the previous year.
 
Operating expenses decreased $5.9 million during 2014 due to a decline in salary and benefits expense related to headcount reductions associated with our restructuring initiatives and a decrease in amortization of intangibles, partially offset by an increase in expenses related to stock compensation and amortization of capitalized software and increased bonus and commissions expense related to the increase in revenue.  Revenue growth and cost reductions for 2014 had a positive impact on our contribution margin as compared to the prior year.

Operating expenses decreased $12.8 million during 2013 due to reductions in headcount and marketing expenses. Revenue growth and cost reductions for 2013 had a positive impact on our contribution margin as compared to the prior year.
 
Application performance management revenue by geographic location is presented in the table below (in thousands):
 
 
Year Ended March 31,
 
 
2014
   
2013
   
2012
 
United States
 
$
176,021
   
$
160,212
   
$
139,030
 
Europe and Africa
   
93,533
     
84,590
     
85,720
 
Other international operations
   
57,813
     
55,731
     
45,693
 
Total APM segment revenue
 
$
327,367
   
$
300,533
   
$
270,443
 
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Mainframe

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

 
Year Ended March 31,
   
Period-to-Period Change 
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
Revenue
                   
Software license fees
 
$
42,824
   
$
58,528
   
$
110,289
     
(26.8
)%
   
(46.9
)%
Maintenance fees
   
253,131
     
271,824
     
303,639
     
(6.9
)
   
(10.5
)
Services fees
   
299
     
2,325
     
5,389
     
(87.1
)
   
(56.9
)
Total revenue
   
296,254
     
332,677
     
419,317
     
(10.9
)
   
(20.7
)
 
                                       
Operating expenses
   
74,384
     
91,325
     
99,310
     
(18.6
)
   
(8.0
)
 
                                       
Contribution margin
 
$
221,870
   
$
241,352
   
$
320,007
     
(8.1
)%
   
(24.6
)%
 
                                       
Contribution margin %
   
74.9
%
   
72.5
%
   
76.3
%
               
 
Mainframe segment revenue decreased $36.4 million during 2014 primarily due to pricing pressures on and cancellations of maintenance contracts.  Furthermore, the reduction in revenue is consistent with the general downward trend in our Mainframe product revenues we have experienced throughout the past several years. This decline slowed during 2014, and while we expect Mainframe revenues to continue to decline, we expect the rate of decline to further slow. 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 and competition have had a negative impact on our revenues.  In 2014, the Mainframe segment transitioned its Solutions Delivery Group (software related services) to the professional services business segment.  In 2015, we intend to continue to make strategic enhancements to modernize, simplify, and automate our Mainframe solutions through research and development investments to retain customers in longer term commitments, and to expand the footprint to new customers.

Mainframe segment revenue decreased $86.6 million during 2013 primarily due to a $23.6 million decline in significant software license transactions (license fees over $2 million) and due to pricing pressures on and cancellations of maintenance contracts. Furthermore, the reduction in revenue is consistent with the general downward trend in our Mainframe product revenues we have experienced throughout the past several years. Changes in our current customers’ IT computing environments and spending habits have reduced their demand for additional mainframe computing capacity. In addition, increased pricing pressures, competition and the effects of foreign exchange rate changes have had a negative impact on our revenues.

During 2013, we introduced APM for Mainframe. In 2015 we will transition this product to the APM business segment. APM for Mainframe revenues were approximately $6.4 million and $1.7 million in 2014 and 2013, respectively.
 
Mainframe costs declined due to lower headcount related to the restructuring and lower commissions and bonus due to the decline in sales in both 2014 and 2013.  In 2014, the percentage decrease in costs exceeded the percentage decrease in sales resulting in an increase in the contribution margin percentage.  Although Mainframe costs declined from 2012 to 2013, many of our costs are relatively fixed and the significant decline in Mainframe revenue during 2013 resulted in a decline in contribution margin as compared to the prior year.
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Mainframe revenue by geographic location is presented in the table below (in thousands):

 
Year Ended March 31,
 
 
2014
   
2013
   
2012
 
United States
 
$
159,072
   
$
190,542
   
$
232,350
 
Europe and Africa
   
79,743
     
81,244
     
104,048
 
Other international operations
   
57,439
     
60,891
     
82,919
 
Total Mainframe segment revenue
 
$
296,254
   
$
332,677
   
$
419,317
 
 
Software Revenue Combined
 
Software revenue includes both APM and Mainframe.

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

 
Year Ended March 31,
   
Period-to-Period Change  
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
Software license fees
 
$
159,197
   
$
159,093
   
$
195,751
     
0.1
%
   
(18.7
)%
Maintenance fees
   
353,374
     
361,359
     
380,968
     
(2.2
)
   
(5.1
)
Subscription fees
   
80,857
     
79,862
     
76,246
     
1.2
     
4.7
 
Services fees
   
30,193
     
32,896
     
36,795
     
(8.2
)
   
(10.6
)
Total software revenue
 
$
623,621
   
$
633,210
   
$
689,760
     
(1.5
)%
   
(8.2
)%

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

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

 
Year Ended March 31,
 
 
2014
   
2013
   
2012
 
United States
 
$
335,093
   
$
350,754
   
$
371,380
 
Europe and Africa
   
173,276
     
165,834
     
189,768
 
Other international operations
   
115,252
     
116,622
     
128,612
 
Total software solutions revenue
 
$
623,621
   
$
633,210
   
$
689,760
 
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APPLICATION SERVICES

The financial results of operations for our Covisint application services segment were as follows (in thousands):
 
 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Application services fees
 
$
97,135
   
$
90,694
   
$
73,731
     
7.1
%
   
23.0
%
                                       
Operating expenses
   
120,234
     
86,084
     
72,717
     
39.7
     
18.4
 
                                       
Contribution margin
 
$
(23,099
)
 
$
4,610
   
$
1,014
     
(601.1
)%
   
354.6
%
                                       
Contribution margin %
   
(23.8
%)
   
5.1
%
   
1.4
%
               
 
Application services fees increased $6.4 million during 2014 due to an increase in Covisint recurring fees, which was partially offset by a decline in Covisint services revenue. The increase in recurring fees was primarily due to continued growth within the non-automotive verticals, offset in part, by a decline in revenue of $1.8 million from customers that terminated or elected not to renew their agreements.

Application services segment fees increased $17.0 million during 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 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.  We continue to recognize the deferred services revenue and related expenses recorded prior to establishment of stand-alone value over the expected period of benefit to the customer.

Our application services segment generated 47%, 56% and 58% of its revenue from the automotive industry during 2014, 2013 and 2012, respectively.

Operating expense increased $34.1 million during 2014 primarily due to expenses associated with the Covisint IPO which closed during 2014. This resulted in recognition of expense associated with certain options to purchase Covisint shares, including a cumulative catch up, and the reversal of expense associated with performance awards to receive Compuware shares which were terminated upon closing of the offering on October 1, 2013. Operating expenses for the year ended March 31, 2014 included $17.3 million of stock compensation expense including $1.3 million of stock compensation expense unrelated to the IPO. Operating expenses also increased due to higher salaries and benefits expense resulting from an increase in headcount to support the expected growth of the business, a reduction in capitalized research and development costs, increased use of subcontractors and an increase in amortization of capitalized research and development costs.

Operating expenses increased $13.4 million during 2013 due to continued investment in our Covisint business. In anticipation of capitalizing on the growth of the secured collaboration services market, we hired additional developers, customer support and sales personnel, and we increased the capacity of our global application services network during 2013. Additionally, costs associated with services with stand-alone value were recognized in 2013 consistent with the associated revenue recognition. The additional investments in 2013 were partially offset by increases in capitalized software and development costs.
 
In May 2014, Convisint announced numerous initiatives to be undertaken by its new leadership including additional leadership changes and reductions in workforce intended to better align costs with revenues in the future. Based upon the scope and importance of these initiatives, we anticipate that fiscal 2015 will be a year of transformation for our Covisint business segment and we expect continued losses from this business segment during fiscal 2015.
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Application services segment revenue by geographic location is presented in the table below (in thousands):
 
 
Year Ended March 31,
 
 
2014
   
2013
   
2012
 
United States
 
$
83,309
   
$
77,944
   
$
64,555
 
Europe and Africa
   
8,101
     
4,859
     
3,827
 
Other international operations
   
5,725
     
7,891
     
5,349
 
Total application services segment revenue
 
$
97,135
   
$
90,694
   
$
73,731
 

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”.

Fiscal year ended March 31, 2014 and 2013 unallocated expenses also included $12.0 million and $15.8 million, respectively in restructuring expenses and $13.1 million and $2.8 million, respectively, in advisory expenses related to shareholder activities and our transformation. These expenses are discussed in the “Restructuring Charge” and the “Administrative and  General” sections respectively below.

OPERATING EXPENSES

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

Cost of Software License Fees

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

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

 
Year Ended March 31,
   
Period-to-Period Change 
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Cost of software license fees
 
$
20,310
   
$
18,986
   
$
16,391
     
7.0
%
   
15.8
%
 
                                       
Percentage of software license fees
   
12.8
%
   
11.9
%
   
8.4
%
               

Cost of software license fees increased $1.3 million during 2014 and increased $2.6 million during 2013. The increase in 2014 was due primarily to increased amortization of capitalized research and development costs. The increase in 2013 was due primarily to additional amortization expense on intangible assets acquired as part of the dynaTrace acquisition during the second quarter of 2012. As dynaTrace was acquired during the second quarter of 2012, only a partial year of amortization was recognized during 2012 as compared to a full year of amortization for 2013. These expense increases resulted in the increase in cost as a percentage of software license fees.
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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):

 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Cost of maintenance fees
 
$
28,387
   
$
31,621
   
$
34,715
     
(10.2
)%
   
(8.9
)%
 
                                       
Percentage of maintenance fees
   
8.0
%
   
8.8
%
   
9.1
%
               

Cost of maintenance fees declined $3.2 and $3.1 million during 2014 and 2013, respectively. The decrease in 2014 is a result of a reduction in customer support costs. The decrease for 2013 primarily resulted from a reduction in maintenance costs related to our APM and Mainframe products.

Cost of Subscription Fees

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

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

 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Cost of subscription fees
 
$
32,406
   
$
30,264
   
$
29,102
     
7.1
%
   
4.0
%
 
                                       
Percentage of subscription fees
   
40.1
%
   
37.9
%
   
38.2
%
               

Cost of subscription fees increased $2.1 million during 2014, primarily due to increased amortization of capitalized research and development costs related to on-going product enhancements. Additionally, costs increased, to a lesser extent, due to continued investment in our mobile network.

Cost of subscription fees from increased $1.2 million during 2013, primarily due to additional amortization of capitalized research and development costs. We continued to invest in research and development throughout 2012 and 2013 which increased the amortizable base. To a lesser extent, increased compensation and benefits costs from hiring additional employees to support future business growth also contributed to the increase in cost of subscription fees for 2013.

Cost of Services

Cost of services consists primarily of personnel-related costs of providing our software related services.
Cost of services is presented in the table below (in thousands):
 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Cost of services
 
$
25,662
   
$
31,777
   
$
36,276
     
(19.2
)%
   
(12.4
)%
 
                                       
Percentage of services fees
   
85.0
%
   
96.6
%
   
98.6
%
               
 
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Cost of services decreased $6.1 million and $4.5 million during 2014 and 2013, respectively. The decreases during 2014 and 2013 were primarily due to a decline in salaries and benefits expense resulting from headcount reduction.

Cost of Application Services - Covisint

Cost of application services consists primarily of personnel-related costs of providing application services, including billable and technical staff, subcontractors and sales personnel net of the amounts capitalized for development of internal use software.

Cost of application services incurred and capitalized are presented in the table below (in thousands):

 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Cost of application services incurred
 
$
122,835
   
$
95,619
   
$
80,250
     
28.5
%
   
19.2
%
 
                                       
Capitalized internal software costs
   
(5,680
)
   
(12,321
)
   
(7,866
)
   
53.9
     
(56.6
)
 
                                       
Cost of application services expensed
 
$
117,155
   
$
83,298
   
$
72,384
     
40.6
%
   
15.1
%
 
                                       
Percentage of application services fees
   
120.6
%
   
91.8
%
   
98.2
%
               

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

Capitalization of internally developed software costs decreased $6.6 million during 2014 and increased $4.4 million during 2013. The decrease in 2014 is a result of changes to the agile delivery methodology for our platform enhancements, which has resulted in significantly shorter development cycles thereby reducing our capitalized costs. Capitalized internal software costs increased during 2013, as we continued to invest in enhancements and additional functionality for the platform.

Technology Development and Support

Technology development and support includes, primarily, the costs of programming personnel associated with development and support of our products and our hosted software network less the amount of capitalized internal software costs during the reporting period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives.
 
Technology development and support costs incurred and capitalized are presented in the table below (in thousands):
 
 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Technology development and support costs incurred
 
$
103,844
   
$
113,017
   
$
108,355
     
(8.1
)%
   
4.3
%
 
                                       
Capitalized software costs
   
(17,663
)
   
(17,661
)
   
(14,122
)
   
(0.0
)
   
(25.1
)
 
                                       
Technology development and support costs expensed
 
$
86,181
   
$
95,356
   
$
94,233
     
(9.6
)%
   
1.2
%
 
                                       
Technology development and support costs expensed as a percentage of software revenue
   
13.8
%
   
15.1
%
   
15.7
%
               
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Technology development and support decreased $9.2 million before capitalized software costs during 2014 due primarily to a decrease in salary and benefits resulting from headcount reductions associated with our restructuring initiatives.

Technology development and support increased $4.7 million before capitalized software costs during 2013 due primarily to higher compensation and benefits costs related 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. To a lesser extent, higher software maintenance costs also contributed to the increase in technology development and support costs. The increase in costs 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 revenue decreased for both 2014 and 2013. During 2014 the decrease was a result of reductions in internal information systems headcount which proportionately exceeded the decrease in software solutions revenue. During 2013 the increase was a result of additional investment in our products and technology which proportionately exceeded the increase in software revenue.

The capitalized software cost remained consistent during 2014. The fluctuations in capitalized internal software costs during 2013 relate primarily to the timing of projects that were in the technological feasibility phase of development. The $3.5 million increase in capitalized software costs during 2013 was primarily related to additional capitalization of costs for APM SaaS and Mainframe projects during 2013.

Sales and Marketing

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

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

 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Sales and marketing costs
 
$
216,115
   
$
220,714
   
$
242,211
     
(2.1
)%
   
(8.9
)%
 
                                       
Percentage of software revenue
   
34.7
%
   
34.9
%
   
35.1
%
               

Sales and marketing costs decreased $4.6 million during 2014 due to decreased compensation and travel expenses associated with headcount reductions related to our restructuring initiatives. These decreases were partially offset by an increase in bonus expense due to our increase in earnings.
 
Sales and marketing costs decreased $21.5 million during 2013 due to decreased compensation and travel expense related to lower bonus and commissions associated with the declines in revenue and earnings as well as headcount reductions, primarily in Europe. Additionally, advertising expense declined from the prior year due to lower costs related to a significant marketing agreement. Sales and marketing costs as a percentage of software revenue remained consistent with the prior year.

Administrative and General

Administrative and general expenses consist primarily of costs associated with the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, administrative and general expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities, associated with our worldwide offices.
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Administrative and general expenses are presented in the table below (in thousands):
 
 
Year Ended March 31,
   
Period-to-Period Change
 
 
2014
   
2013
   
2012
   
2013 to 2014
   
2012 to 2013
 
                   
Administrative and general expenses
 
$
134,695
   
$