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

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

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

For the transition period from           to                                                                                                                           .

Commission file number 000-20900

COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)

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

One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer x      Accelerated filer o        Non-accelerated filer o  (Do not check if a smaller reporting company)       Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x
 
Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date:
 
As of November 4, 2014, there were outstanding 220,853,283 shares of Common Stock, par value $.01, of the registrant.

 

PART I.
FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements (unaudited)
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2014 and March 31, 2014
3
     
 
Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2014 and 2013
4
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended September 30, 2014 and 2013
5
     
 
Condensed Consolidated Statements of Shareholders’ Equity for the six months ended September 30, 2014 and 2013
6
     
 
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013
7
     
 
Notes to Condensed Consolidated Financial Statements
8
     
 
Report of Independent Registered Public Accounting Firm
29
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
52
     
Item 4.
Controls and Procedures
52
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
Risk Factors
54
     
Item 6.
Exhibits
58
     
SIGNATURES 
59
 
2

Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)

ASSETS
 
September 30,
2014
   
March 31,
2014
 
         
CURRENT ASSETS:
       
Cash and cash equivalents
 
$
255,270
   
$
300,059
 
Accounts receivable, net
   
313,944
     
385,232
 
Deferred tax asset, net
   
37,192
     
35,871
 
Income taxes refundable
   
4,313
     
4,161
 
Prepaid expenses and other current assets
   
30,892
     
27,231
 
Total current assets
   
641,611
     
752,554
 
                 
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION
   
279,748
     
287,013
 
                 
CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET
   
95,805
     
98,762
 
                 
ACCOUNTS RECEIVABLE
   
161,130
     
168,875
 
                 
GOODWILL
   
632,106
     
648,546
 
                 
DEFERRED TAX ASSET, NET
   
16,011
     
16,514
 
                 
OTHER ASSETS
   
23,460
     
24,845
 
                 
TOTAL ASSETS
 
$
1,849,871
   
$
1,997,109
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
 
$
18,947
   
$
14,251
 
Accrued expenses
   
79,451
     
107,452
 
Income taxes payable
   
14,998
     
33,093
 
Deferred revenue
   
347,092
     
382,558
 
Total current liabilities
   
460,488
     
537,354
 
                 
DEFERRED REVENUE
   
250,646
     
302,565
 
                 
ACCRUED EXPENSES
   
20,079
     
19,765
 
                 
DEFERRED TAX LIABILITY, NET
   
36,378
     
36,391
 
Total liabilities
   
767,591
     
896,075
 
                 
SHAREHOLDERS' EQUITY:
               
Common stock
   
2,208
     
2,193
 
Additional paid-in capital
   
847,172
     
828,264
 
Retained earnings
   
237,874
     
257,236
 
Accumulated other comprehensive loss
   
(21,635
)
   
(6,915
)
Total Compuware shareholders' equity
   
1,065,619
     
1,080,778
 
Non-controlling interest
   
16,661
     
20,256
 
Total shareholders' equity
   
1,082,280
     
1,101,034
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,849,871
   
$
1,997,109
 

See notes to condensed consolidated financial statements.
 
3

Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
REVENUES:
               
Software license fees
 
$
32,189
   
$
32,591
   
$
58,876
   
$
64,334
 
Maintenance fees
   
89,023
     
88,819
     
177,483
     
175,981
 
Subscription fees
   
19,949
     
19,931
     
39,311
     
40,063
 
Services fees
   
7,997
     
6,827
     
16,411
     
14,498
 
Application services fees
   
21,735
     
24,525
     
43,322
     
48,626
 
                                 
Total revenues
   
170,893
     
172,693
     
335,403
     
343,502
 
                                 
OPERATING EXPENSES:
                               
Cost of software license fees
   
4,300
     
5,227
     
9,295
     
10,156
 
Cost of maintenance fees
   
5,942
     
6,846
     
12,864
     
14,185
 
Cost of subscription fees
   
8,506
     
8,450
     
16,708
     
16,290
 
Cost of services
   
6,901
     
5,892
     
13,633
     
12,534
 
Cost of application services
   
27,231
     
33,689
     
58,133
     
57,950
 
Technology development and support
   
19,615
     
21,379
     
39,567
     
45,070
 
Sales and marketing
   
50,976
     
47,356
     
104,079
     
99,623
 
Administrative and general
   
30,580
     
32,838
     
64,593
     
68,886
 
Restructuring costs
   
2,255
     
219
     
5,230
     
5,022
 
                                 
Total operating expenses
   
156,306
     
161,896
     
324,102
     
329,716
 
                                 
INCOME FROM CONTINUING OPERATIONS
   
14,587
     
10,797
     
11,301
     
13,786
 
                                 
OTHER INCOME (EXPENSE), NET
   
(935
)
   
185
     
(712
)
   
387
 
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
   
13,652
     
10,982
     
10,589
     
14,173
 
                                 
INCOME TAX PROVISION - CONTINUING OPERATIONS
   
5,275
     
3,008
     
3,568
     
1,937
 
                                 
INCOME FROM CONTINUING OPERATIONS INCLUDING NON-CONTROLLING INTEREST
   
8,377
     
7,974
     
7,021
     
12,236
 
                                 
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
   
-
     
7,212
     
-
     
12,917
 
                                 
NET INCOME INCLUDING NON-CONTROLLING INTEREST
   
8,377
     
15,186
     
7,021
     
25,153
 
                                 
Less: Net loss attributable to the non-controlling interest in Covisint Corporation
   
(774
)
   
(1,154
)
   
(2,182
)
   
(1,154
)
                                 
NET INCOME ATTRIBUTABLE TO COMPUWARE CORPORATION
 
$
9,151
   
$
16,340
   
$
9,203
   
$
26,307
 
                                 
                                 
Basic earnings per share
                               
Continuing operations
   
0.04
     
0.04
     
0.04
     
0.06
 
Discontinued operations
   
-
     
0.03
     
-
     
0.06
 
Net income attributable to Compuware Corporation common shareholders
 
$
0.04
   
$
0.07
   
$
0.04
   
$
0.12
 
                                 
Diluted earnings per share
                               
Continuing operations
   
0.04
     
0.04
     
0.04
     
0.06
 
Discontinued operations
   
-
     
0.03
     
-
     
0.06
 
Net income attributable to Compuware Corporation common shareholders
 
$
0.04
   
$
0.07
   
$
0.04
   
$
0.12
 
                                 
Dividends declared per common share
 
$
-
   
$
0.125
   
$
0.125
   
$
0.250
 

See notes to condensed consolidated financial statements.
 
4

Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In Thousands, Except Per Share Data)
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
NET INCOME INCLUDING NON-CONTROLLING INTEREST
 
$
8,377
   
$
15,186
   
$
7,021
   
$
25,153
 
                                 
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
                               
Foreign currency translation adjustments
   
(14,839
)
   
9,004
     
(15,631
)
   
12,228
 
                                 
TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME (LOSS)
                               
Foreign currency translation adjustments
   
(857
)
   
1,239
     
(917
)
   
983
 
                                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
   
(13,982
)
   
7,765
     
(14,714
)
   
11,245
 
                                 
COMPREHENSIVE INCOME  (LOSS) INCLUDING NON-CONTROLLING INTEREST
   
(5,605
)
   
22,951
     
(7,693
)
   
36,398
 
                                 
Less: Net loss attributable to the non-controlling interest in Covisint Corporation
   
(774
)
   
(1,154
)
   
(2,182
)
   
(1,154
)
                                 
Less: Other comprehensive income attributable to the non-controlling interest in Covisint Corporation
   
5
     
-
     
6
     
-
 
                                 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPUWARE CORPORATION
 
$
(4,836
)
 
$
24,105
   
$
(5,517
)
 
$
37,552
 
 
See notes to condensed consolidated financial statements.
 
5

Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In Thousands, Except Per Share Data)
(Unaudited)

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

   
 
 
Common Stock
   
 
Additional
Paid-In
   
 
 
Retained
   
Accumulated
Other
Comprehensive
   
Total
Compuware
Shareholders’
   
 
 
Non-controlling
   
 
Total
Shareholders’
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Equity
   
Interest
   
Equity
 
BALANCE AT APRIL 1, 2013
   
213,218,048
   
$
2,132
   
$
713,580
   
$
301,298
   
$
(18,784
)
 
$
998,226
   
$
-
   
$
998,226
 
Net income (loss)
                           
26,307
             
26,307
     
(1,154
)
   
25,153
 
Foreign currency translation, net of tax
                                   
11,245
     
11,245
             
11,245
 
Cash dividends declared ($0.25 per share)
   
8,949
             
796
     
(54,425
)
           
(53,629
)
           
(53,629
)
Impact of equity transactions of non-controlling interest
                   
44,059
                     
44,059
     
22,263
     
66,322
 
Issuance of common stock
   
124,096
     
1
     
1,301
                     
1,302
             
1,302
 
Repurchase of common stock
   
(300,000
)
   
(5
)
   
(1,792
)
   
(4,243
)
           
(6,040
)
           
(6,040
)
Exercise/release of employee stock awards and related tax benefit (Note 6)
   
2,656,127
     
29
     
16,391
                     
16,420
             
16,420
 
Stock awards compensation
                   
25,312
                     
25,312
             
25,312
 
BALANCE AT SEPTEMBER 30, 2013
   
215,707,220
   
$
2,157
   
$
799,647
   
$
268,937
   
$
(7,539
)
 
$
1,063,202
   
$
21,109
   
$
1,084,311
 

See notes to condensed consolidated financial statements.
 
6

Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

   
Six Months Ended
September 30,
 
   
2014
   
2013
 
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
       
Net income including non-controlling interest
 
$
7,021
   
$
25,153
 
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
   
29,017
     
32,501
 
Stock award compensation
   
15,277
     
25,312
 
Deferred income taxes
   
(861
)
   
(16,450
)
Other
   
1,902
     
42
 
Net change in assets and liabilities, net of effects from currency fluctuations:
               
Accounts receivable
   
63,202
     
33,366
 
Prepaid expenses and other assets
   
(2,483
)
   
5,640
 
Accounts payable and accrued expenses
   
(9,153
)
   
(24,180
)
Deferred revenue
   
(72,879
)
   
(58,934
)
Income taxes
   
(19,273
)
   
4,634
 
Net cash provided by operating activities
   
11,770
     
27,084
 
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Purchase of:
               
Property and equipment
   
(5,923
)
   
(5,953
)
Capitalized software
   
(14,648
)
   
(11,649
)
Reimbursement of proceeds from divestiture of business segments
   
(8,046
)
   
-
 
Other
   
-
     
(275
)
Net cash used in investing activities
   
(28,617
)
   
(17,877
)
                 
CASH FLOWS USED IN FINANCING ACTIVITIES:
               
Proceeds from borrowings
   
-
     
37,500
 
Payments on borrowings
   
-
     
(41,500
)
Net proceeds from exercise of stock awards including excess tax benefits
   
9,203
     
15,333
 
Employee contribution to stock purchase plans
   
617
     
1,235
 
Repurchase of common stock
   
(6,960
)
   
(6,415
)
Dividends
   
(27,474
)
   
(53,629
)
Other
   
-
     
(608
)
Net cash used in financing activities
   
(24,614
)
   
(48,084
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(3,328
)
   
(624
)
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
(44,789
)
   
(39,501
)
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
300,059
     
89,873
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
255,270
   
$
50,372
 

See notes to condensed consolidated financial statements.
 
7

Table of Contents
Note 1 - Basis of Presentation

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

In the opinion of management of the Company, the accompanying financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2014 included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet at March 31, 2014 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of results expected to be achieved for the full fiscal year.

Merger Agreement

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

Discontinued Operations

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

At the initial closing on January 31, 2014, Marlin paid a cash payment of $112 million.  During the first quarter of fiscal 2015, the Company paid approximately $8.0 million to Marlin as reimbursement of purchase price related to customer accounts receivable which were retained by the Company in excess of the initially estimated amount.
 
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The Changepoint, Professional Services and Uniface segment results have been presented as discontinued operations herein for the three and six months ended September 30, 2013. The following table provides the financial results included in income from discontinued operations, net of tax during the periods presented (in thousands):
 
   
Three Months Ended
September 30,
2013
   
Six Months Ended
September 30,
2013
 
Revenues
 
$
55,409
   
$
112,116
 
Operating expenses
   
44,316
     
92,248
 
Income from operations
   
11,093
     
19,868
 
Income tax provision
   
3,881
     
6,951
 
Income from discontinued operations, net of tax
 
$
7,212
   
$
12,917
 

Non-Controlling Interest

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

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

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

Basis for Revenue Recognition

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

The Company sometimes enters into arrangements that include both software related deliverables (licensed software products, maintenance services or software related services) and non-software deliverables (hosted software or application services). Our hosted software and application services do not qualify as software deliverables because our license grant does not allow the customer the right or capability to take possession of the software. For arrangements that contain both software and non-software deliverables, in accordance with ASC 605 “Revenue Recognition,” the Company allocates the arrangement consideration to the non-software deliverables as a group, and to the software deliverables as a group (the “Deliverable Groups”). The Company determines the selling price to allocate the arrangement consideration to the Deliverable Groups based on the following hierarchy of evidence: vendor specific objective evidence of selling price (“VSOE,” meaning price when sold separately) if available; third-party evidence of selling price if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. The Company currently is unable to establish VSOE or third-party evidence of selling price for either our software related deliverables or our non-software deliverables as a group. Therefore, the best estimate of selling price for each Deliverable Group is determined primarily by considering various factors, including, but not limited to stated renewal rates in a contract, if any, the historical selling price of these deliverables in similar stand-alone transactions and pricing practices. Total arrangement consideration is then allocated on the basis of the Deliverable Group’s relative selling price.
 
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Once the Company has allocated the arrangement consideration between the Deliverable Groups, the Company recognizes revenue as described in the respective software license fees, maintenance fees, subscription fees, services fees and application services fees sections below.

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

Software license fees

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

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

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

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

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

Subscription fees

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

Services fees

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

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

Application services fees

Our application services fees consist of fees related to our Covisint on-demand software including associated services. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. Many of our application services contracts include a services project fee and a recurring fee for ongoing platform-as-a-service (“PaaS”) operations. Certain services related to these projects have stand-alone value (e.g., other vendors provide similar services) and qualify as a separate unit of accounting. Services that have stand-alone value are recognized as delivered. For those services that do not have stand-alone value, the revenue is deferred and recognized over the longer of the committed term of the subscription agreement (generally one to five years) or the expected period over which the customer will receive benefit (generally five years). For services rendered under fixed-price contracts, revenues are recognized using the proportional performance method and if it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent. The recurring fees are recognized ratably over the applicable service period.

Deferred Revenue

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

Research and development (“R&D”) costs from continuing operations, that include primarily the cost of programming personnel, amounted to $21.8 million and $22.1 million for the three months ended September 30, 2014 and 2013, respectively, and $41.8 million and $43.7 million for the six months ended September 30, 2014 and 2013, respectively. R&D costs related to our software solutions are reported as “technology development and support” and for our application services network, the costs are reported as “cost of application services” in the condensed consolidated statements of operations.

Income Taxes

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

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

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

The Company’s effective tax rate for the six months ended September 30, 2014 was 33.7% compared to 13.7% for the six months ended September 30, 2013. The effective rate for the six months ended September 30, 2014, reflects a benefit due to the recording of interest income resulting from a refund claim approved by the IRS during the first quarter of fiscal year 2015.  The effective rate for the six months ended September 30, 2013, reflects the recording of a benefit related to stock compensation that was previously expected to not result in a tax deduction.  This benefit resulted due to a change in the Company’s expectation regarding the tax deductibility of compensation for certain officers during the first quarter of fiscal year 2014.

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

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

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

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

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

Note 2 – Financing Receivables

In accordance with ASU No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” the Company allows deferred payment terms that exceed one year for customers purchasing licenses (perpetual or time-based) for our software products and the related maintenance services (“multi-year deferred payment arrangements”). A financing receivable exists when the license transfers to the customer or the related maintenance service has been provided (i.e., revenue recognition has occurred) prior to the due date of the related receivable. Our products financing receivables primarily consist of the perpetual license portion of outstanding multi-year deferred payment arrangements.
 
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The following is an aged analysis of our products and loans financing receivables based on invoice dates as of September 30, 2014 and March 31, 2014 (in thousands):
 
 
As of September 30, 2014
 
 
0-29 days
past
invoice date
 
30-90 days
past
invoice date
Greater than
90 days
past
invoice date
 
 
 
Unbilled
 
Total
financing
receivables
Pass rating
                   
Software products
 
$
761
   
$
157
   
$
164
   
$
38,207
   
$
39,289
 
 
 
As of March 31, 2014
 
 
0-29 days
past
invoice date
 
30-90 days
past
invoice date
Greater than
90 days
past
invoice date
 
 
 
Unbilled
 
Total
financing
receivables
Pass rating
                   
Software products
 
$
2,684
   
$
628
   
$
26
   
$
33,807
   
$
37,145
 

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

Note 3 - Foreign Currency Transactions and Derivatives

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

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

The Company has derivative contracts maturing through October 2014 to sell $4.7 million and purchase $14.3 million in foreign currencies at September 30, 2014 and had derivative contracts maturing through April 2014 to sell $3.1 million and purchase $24.1 million in foreign currencies at March 31, 2014.
 
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Note 4 - Fair Value of Assets and Liabilities

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

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

   
As of September 30, 2014
 
   
 
 
Estimated
Fair Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
               
                 
Cash equivalents - money market funds
 
$
165,693
   
$
165,693
     
-
     
-
 
                                 
Liabilities:
                               
                                 
Foreign exchange derivatives
 
$
59
     
-
   
$
59
     
-
 

   
As of March 31, 2014
 
   
 
 
Estimated
Fair Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
               
                 
Cash equivalents - money market funds
 
$
232,252
   
$
232,252
     
-
     
-
 
                                 
Liabilities:
                               
                                 
Foreign exchange derivatives
 
$
39
     
-
   
$
39
     
-
 

Non-financial assets such as goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. See note 7 of the condensed consolidated financial statements for further information.
 
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Note 5 - Computation of Earnings per Common Share

Earnings per common share data were computed as follows (in thousands, except per share amounts):
 
   
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Amounts attributable to Compuware common shareholders
               
Income from continuing operations
 
$
8,377
   
$
7,974
   
$
7,021
   
$
12,236
 
Loss attributable to non-controlling interests
   
(774
)
   
(1,154
)
   
(2,182
)
   
(1,154
)
                                 
Income from continuing operations, net of tax
   
9,151
     
9,128
     
9,203
     
13,390
 
Income from discontinued operations, net of tax
   
-
     
7,212
     
-
     
12,917
 
                                 
Net income attributable to Compuware Corporation common shareholders
 
$
9,151
   
$
16,340
   
$
9,203
   
$
26,307
 
                                 
Basic earnings per share:
                               
Continuing operations
   
0.04
     
0.04
     
0.04
     
0.06
 
Discontinued operations
   
-
     
0.03
     
-
     
0.06
 
Basic earnings per share
 
$
0.04
   
$
0.07
   
$
0.04
   
$
0.12
 
                                 
Weighted-average common shares outstanding
   
220,285
     
214,926
     
219,978
     
214,287
 
                                 
Diluted earnings per share:
                               
Continuing operations
   
0.04
     
0.04
     
0.04
     
0.06
 
Discontinued operations
   
-
     
0.03
     
-
     
0.06
 
Diluted earnings per share
 
$
0.04
   
$
0.07
   
$
0.04
   
$
0.12
 
                                 
Weighted-average common shares outstanding
   
220,285
     
214,926
     
219,978
     
214,287
 
Dilutive effect of stock awards
   
3,385
     
5,503
     
3,511
     
5,720
 
Total shares
   
223,670
     
220,429
     
223,489
     
220,007
 

During the three months ended September 30, 2014 and 2013, stock awards to purchase 6.1 million and 3.3 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 2.5 million and 5.1 million shares, respectively, were excluded from the calculation because the performance conditions for vesting had not yet been met. During the six months ended September 30, 2014 and 2013, stock awards to purchase 5.2 million and 2.6 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive and stock awards to purchase 2.5 million and 5.2 million shares, respectively, were excluded from the calculation because the performance conditions for vesting had not yet been met. See note 6 for a discussion of options with performance conditions and performance based stock awards.

Note 6 – Stock Benefit Plans and Stock-Based Compensation

Stock Benefit Plans

The Company has the following stock benefit plans: (1) the Amended and Restated 2007 Long Term Incentive Plan (“2007 LTIP”) allows the Company’s Compensation Committee to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and cash incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase Plan allows participating U.S. and Canadian employees the right to have up to 10% of their compensation withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock Ownership Plan and Trust/401(k) Plan (“ESOP/401(k)”), which includes a qualified cash or deferred arrangement as described under Section 401(k) of the Internal Revenue Code, allows the Company to make contributions to the ESOP/401(k) for the benefit of substantially all U.S. employees.
 
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Covisint maintains a stock benefit plan referred to as the 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the board of directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and cash incentive awards to employees and directors of Covisint and the Company.

ESOP/401(k)

The Company provides a matching program for the 401(k) component of the ESOP/401(k). The Company matches 33% of employees’ 401(k) contributions up to 2% of eligible earnings. Matching contributions by the Company vest 100% when an employee attains three years of service with the Company. During the three months ended September 30, 2014 and 2013, the Company expensed $666,000 and $733,000, respectively, and for the six months ended September 30, 2014 and 2013, the Company expensed $1.5 million and $1.6 million, respectively, related to this plan.

Stock Option Activity

Options that Vest Based on Service Conditions Only

A summary of activity for options that vest based on service conditions only under the Company’s stock-based compensation plans as of September 30, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

   
Six Months Ended
September 30, 2014 
 
   
 
 
 
Number of
Options
   
 
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term in Years
   
 
 
Aggregate
Intrinsic
Value
 
Options outstanding as of March 31, 2014
   
14,236
   
$
8.80
         
Granted
   
2,631
     
9.87
         
Exercised
   
(918
)
   
7.69
       
$
2,428
 
Forfeited
   
(92
)
   
9.99
             
Cancelled/expired
   
(85
)
   
9.65
             
Options outstanding as of September 30, 2014
   
15,772
   
$
9.03
     
6.67
   
$
26,278
 
                                 
Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2014
   
15,167
   
$
8.99
     
6.58
   
$
25,907
 
                                 
Options exercisable as of September 30, 2014
   
10,860
   
$
8.59
     
5.70
   
$
22,848
 

The average fair value of stock options vested during the six months ending September 30, 2014 and 2013 was $3.50 and $3.98 per share, respectively.
 
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Options that Vest Based on both Performance and Service Conditions (“Performance Options”)
 
As of September 30, 2014, 2.6 million stock options that vest based on both service and performance conditions were outstanding. The performance vesting conditions for these options are based on company-wide revenue and earnings targets. As of September 30, 2014, it is deemed probable that the performance targets for approximately 1.1 million of these options will be achieved. Expense totaling $205,000 and $323,000 was recorded in the condensed consolidated statement of operations related to these stock options during the three and six months ended September 30, 2014.

A summary of activity for options that vest based on the achievement of both service and performance conditions under the Company’s stock-based compensation plans as of September 30, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

   
Six Months Ended
September 30, 2014
 
   
 
 
 
Number of
Options
   
 
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term in Years
   
 
 
Aggregate
Intrinsic
Value
 
Options outstanding as of March 31, 2014
   
2,150
   
$
10.07
         
Granted
   
1,116
     
10.11
         
Forfeited/Cancelled
   
(708
)
   
9.83
         
Options outstanding as of September 30, 2014
   
2,558
   
$
10.16
     
8.74
   
$
1,476
 
                                 
Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2014
   
1,116
   
$
10.11
     
9.64
   
$
-
 
                                 
Options exercisable as of September 30, 2014
   
-
   
$
-
     
-
   
$
-
 

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

   
Six Months Ended
September 30,
 
   
2014
   
2013
 
         
Expected volatility
   
34.09
%
   
39.52
%
Risk-free interest rate
   
1.88
%
   
1.59
%
Expected lives at date of grant (in years)
   
5.7
     
6.3
 
Weighted-average fair value of the options granted
 
$
1.96
   
$
2.69
 
Dividend yield assumption
   
4.99
%
   
4.42
%
 
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Restricted Stock Units and Performance-Based Stock Awards Activity

A summary of non-vested restricted stock units (“RSUs”) and performance-based stock awards (“PSAs” and collectively “Non-vested RSU”) activity under the Company’s LTIP as of September 30, 2014, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):
 
   
Six Months Ended
 
   
September 30, 2014
 
   
 
 
 
Shares
   
Weighted
Average
Grant-Date
Fair Value
   
 
Aggregate
Intrinsic
Value
 
             
Non-vested RSU outstanding as of March 31, 2014
   
2,124
         
Granted
   
1,416
   
$
10.10
     
Dividend Equivalents Issued
   
32
     
9.98
     
Released
   
(614
)
         
$
5,869
 
Forfeited
   
(38
)
               
Non-vested RSU outstanding as of September 30, 2014
   
2,920
                 

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

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

Covisint Corporation 2009 Long-Term Incentive Plan

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

Stock award compensation expense was allocated as follows (in thousands):
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Stock-based compensation classified as:
               
                 
Cost of maintenance fees
 
$
78
   
$
169
   
$
171
   
$
348
 
Cost of subscription fees
   
4
     
1
     
32
     
30
 
Cost of services
   
22
     
21
     
31
     
41
 
Cost of application services
   
1,255
     
10,020
     
3,874
     
10,506
 
Technology development and support
   
256
     
528
     
523
     
1,100
 
Sales and marketing
   
1,888
     
803
     
3,782
     
3,573
 
Administrative and general
   
2,974
     
3,253
     
6,864
     
7,771
 
Restructuring costs
   
-
     
-
     
-
     
1,791
 
Discontinued operations
   
-
     
80
     
-
     
152
 
                                 
Total stock-based compensation expense before income tax provision
 
$
6,477
   
$
14,875
   
$
15,277
   
$
25,312
 

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

Note 7 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

The Company has the following reporting units: Dynatrace (formerly “Application Performance Management” or “APM”), Mainframe (“MF”), and Covisint Application Services (“AS” or “Covisint”). The changes in the carrying amount of goodwill by reporting unit during the six months ended September 30, 2014 are summarized as follows (in thousands):

   
Dynatrace
   
MF
   
AS
   
Total
 
                 
Goodwill as of March 31, 2014
 
$
482,857
   
$
140,304
   
$
25,385
   
$
648,546
 
                                 
Effect of foreign currency translation
   
(16,440
)
   
-
     
-
     
(16,440
)
                                 
Goodwill as of September 30, 2014
 
$
466,417
   
$
140,304
   
$
25,385
   
$
632,106
 
 
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Capitalized software and other intangible assets

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

   
As of September 30, 2014
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
             
Unamortized intangible assets
 
$
667
       
$
667
 
                     
Amortized intangible assets:
                   
Capitalized software
                   
Internally developed
   
239,895
   
$
(176,359
)
   
63,536
 
Purchased
   
120,141
     
(109,084
)
   
11,057
 
Customer relationship
   
46,706
     
(26,161
)
   
20,545
 
Other
   
19,756
     
(19,756
)
   
-
 
Total amortized intangible assets
 
$
426,498
   
$
(331,360
)
 
$
95,138
 

   
As of March 31, 2014
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
             
Unamortized intangible assets
 
$
358
       
$
358
 
                     
Amortized intangible assets:
                   
Capitalized software
                   
Internally developed
   
225,249
   
$
(165,720
)
   
59,529
 
Purchased
   
122,396
     
(107,116
)
   
15,280
 
Customer relationship
   
47,000
     
(24,185
)
   
22,815
 
Other
   
20,530
     
(19,750
)
   
780
 
Total amortized intangible assets
 
$
415,175
   
$
(316,771
)
 
$
98,404
 

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

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

Other amortized intangible assets include amortizable trademarks and patents relating to acquisition activity and are amortized over periods up to three years.
 
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Unamortized intangibles include a trademark acquired as part of the Covisint acquisition and a domain name, each of which are deemed to have an indefinite life.

Amortization of intangible assets

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

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Amortized intangible assets:
               
Capitalized software
               
Internally developed
 
$
5,366
   
$
4,817
   
$
10,640
   
$
9,353
 
Purchased
   
1,664
     
2,391
     
3,378
     
4,761
 
Customer relationship
   
1,032
     
1,032
     
2,067
     
2,063
 
Other
   
-
     
770
     
780
     
1,532
 
                                 
Total amortization expense
 
$
8,062
   
$
9,010
   
$
16,865
   
$
17,709
 

Capitalized software amortization related to our on-premises software is reported as “cost of software license fees”, amortization related to our hosted software is reported as “cost of subscription fees” and amortization related to our application services is reported as “cost of application services” in the condensed consolidated statements of operations.

Customer relationship amortization related to our Dynatrace segment is reported as “sales and marketing” and amortization related to our application services segment is reported as “cost of application services” in the condensed consolidated statements of operations.

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

Based on the capitalized software, customer relationship and other intangible assets recorded through September 30, 2014, the annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (in thousands):

   
Fiscal Year Ended March 31,
 
   
2015
   
2016
   
2017
   
2018
   
2019
   
Thereafter
 
Amortized intangible assets:
                       
Capitalized software
 
$
28,426
   
$
26,787
   
$
17,549
   
$
9,727
   
$
4,777
   
$
1,345
 
Customer relationship
   
4,124
     
4,113
     
3,949
     
3,805
     
3,805
     
2,816
 
Other
   
780
                                         
                                                 
Total amortization expense
 
$
33,330
   
$
30,900
   
$
21,498
   
$
13,532
   
$
8,582
   
$
4,161
 
 
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Note 8 – Segment Information

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

   
Three Months Ended
September 30, 2014
 
   
 
 
Dynatrace
   
 
 
MF
   
 
 
AS
   
Unallocated
Expenses
& Eliminations (1)
   
 
 
Total
 
                     
Software license fees
 
$
25,883
   
$
6,306
           
$
32,189
 
                                     
Maintenance fees
   
29,400
     
59,623
                 
89,023
 
                                     
Subscription fees
   
19,949
                         
19,949
 
                                     
Services fees
   
7,923
     
74
                 
7,997
 
                                     
Application service fees
                  $
21,735
             
21,735
 
                                         
Total revenues
   
83,155
     
66,003
     
21,735
             
170,893
 
                                         
Operating expenses
   
73,285
     
15,907
     
28,899
     
38,215
     
156,306
 
                                         
Income (loss) from continuing operations
 
$
9,870
   
$
50,096
   
$
(7,164
)
   
(38,215
)
 
$
14,587
 

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

   
Three Months Ended
September 30, 2013
 
   
 
 
Dynatrace
   
 
 
MF
   
 
 
AS
   
Unallocated
Expenses
& Eliminations (1)
   
 
 
Total
 
                     
Software license fees
 
$
25,027
(2)
 
$
7,564
(2)
         
$
32,591
 
                                     
Maintenance fees
   
24,596
(2)
   
64,223
(2)
               
88,819
 
                                     
Subscription fees
   
19,931
                         
19,931
 
                                     
Services fees
   
6,796
     
31
                 
6,827
 
                                     
Application service fees
                 
24,525
             
24,525
 
                                         
Total revenues
   
76,350
     
71,818
     
24,525
             
172,693
 
                                         
Operating expenses
   
69,260
(2)
   
16,821
(2)
   
34,362
     
41,453
     
161,896
 
                                         
Income (loss) from continuing operations
 
$
7,090
   
$
54,997
   
$
(9,837
)
 
$
(41,453
)
 
$
10,797
 

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

(2) Prior year amounts have been reclassified to reflect the transition of Dynatrace for Mainframe from the Mainframe segment to the Dynatrace segment.
 
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Table of Contents
   
Six Months Ended
September 30, 2014
 
   
 
 
Dynatrace
   
 
 
MF
   
 
 
AS
   
Unallocated
Expenses
& Eliminations (1)
   
 
 
Total
 
                     
Software license fees
 
$
47,270
   
$
11,606
           
$
58,876
 
                                     
Maintenance fees
   
57,695
     
119,788
                 
177,483
 
                                     
Subscription fees
   
39,311
                         
39,311
 
                                     
Services fees
   
16,255
     
156
                 
16,411
 
                                     
Application service fees
                  $
43,322
             
43,322
 
                                         
Total revenues
   
160,531
     
131,550
     
43,322
             
335,403
 
                                         
Operating expenses
   
148,918
     
33,023
     
62,291
     
79,870
     
324,102