10-K 1 form10k.htm COMPUWARE CORPORATION 10-K 3-31-2013 form10k.htm


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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED MARCH 31, 2013

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 T No o

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 No T

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T 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 T Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No T

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,812,523,714 based upon the closing sales price of the common stock on that date of $9.89 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 213,430,384 shares of $.01 par value common stock outstanding as of May 27, 2013.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's 2013 Annual Meeting of Shareholders (the “Proxy Statement”) filed pursuant to Regulation 14A are incorporated by reference in Part III.
 


 
1

 

COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
Table of Contents

Item
     
Number
Page
       
PART I
       
1.
3
 
       
1A.
16
 
       
1B.
24
 
       
2.
24
 
       
3.
24
 
       
4.
24
 
       
PART II
       
5.
24
 
       
6.
27
 
       
7.
29
 
       
7A.
59
 
       
8.
62
 
       
9.
102
 
       
9A.
102
 
       
9B.
106
 
       
PART III
       
10.
107
 
       
11.
107
 
       
12.
107
 
       
13.
108
 
       
14.
108
 
       
PART IV
       
15.
109
 


ITEM 1.
BUSINESS

We deliver services, software and best practices that enable our customers’ most important technologies to perform at their peak. Originally founded in 1973 as a professional services company, we began to offer mainframe productivity tools that information technology organizations (“IT”) used for fault diagnosis, file and data management, and application debugging in the late 1970's.

In the 1990's and 2000’s, our customers moved toward distributed and web-based platforms and more recently hosted services via the Internet (“cloud computing”). Our solutions portfolio grew in response, and we now market a focused portfolio of solutions across the full range of enterprise computing platforms that help:

·
Optimize the user experience, performance, availability and quality of web, non-web, mobile and cloud-based applications.

·
Securely share and integrate vital information and processes across users, business partners, customers, vendors and suppliers.

·
Maximize the profitability and efficiency of professional services engagements.

·
Provide executive visibility, decision support and process automation to align IT resources with business priorities.

·
Develop and deliver high-quality, high-performance enterprise applications in a timely and cost-effective manner.

·
Increase productivity and reduce operational costs on the mainframe platform.

We deliver these solutions through software that is installed and run on our customers’ owned hardware and applications (“on-premises”) and through a Software-as-a-Service (“SaaS”) model accessed via our hosted networks (see Technology and Network Operations section). We also continue to offer professional technical services in areas such as mobile application development, performance engineering and legacy system modernization.

We have six business segments: Application Performance Management (“APM”), Mainframe, Changepoint, Uniface, Professional Services and Covisint Application Services (“Covisint”). These segments are described in detail in note 1 to the consolidated financial statements.

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

For a discussion of developments in our business during fiscal 2013, 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.

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, software-as-a-service (“SaaS”) and 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.

Early in fiscal 2012, Compuware announced a new organizational model featuring a business unit structure for our APM, Changepoint, Mainframe, Uniface, Covisint and Professional Services lines of business. We believe this structure will maximize our market agility and responsiveness, enabling us to capitalize on market conditions and competitive advantages for maximum growth and profitability.

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. With the addition of dynaTrace, our APM solutions now provide visibility into the performance of every transaction, enabling optimal management of key applications throughout the application lifecycle.

Our secure collaboration solution, Covisint application services, gives users the ability to easily and securely share key communications, applications and information with employees, customers and partners. Covisint is growing through a targeted focus on industries such as healthcare, automotive and energy that require the secure sharing of complex and distributed data and applications.

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

Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications. Our strategy with the Uniface solution is to enhance the product with additional features most in demand for developing enterprise applications, with a recent focus on Rich Internet and mobile applications.

Our mainframe solutions optimize developer productivity, reduce costs and improve service quality throughout the application lifecycle. Specifically, we help customers: understand code, optimize test data, test and debug, pinpoint problems, validate quality, and tune applications and performance. To maximize productivity and better enable the next generation of mainframe developers, our solutions work in both a traditional “green screen” environment and a “point and click” environment. During November 2012, we released a new mainframe solution, PurePath for z/OS, which combines Strobe and dynaTrace technology on the mainframe. By combining dynaTrace's patented PurePath Technology® with Strobe's mainframe application management expertise, distributed system and mainframe teams can resolve performance problems faster, reduce MIPS costs, postpone hardware upgrades and accelerate time-to-market for new applications. We expect PurePath for z/OS to positively contribute to our mainframe revenues in 2014.


Our professional services solutions offer a broad range of IT services for mainframe, distributed and mobile environments. We believe that the market for professional services will continue to be driven by our customers’ need to grow revenue, support business expansion, adopt the latest technology to meet business demands, manage IT services, and for increased technical staffing for ongoing maintenance. Our business approach to professional services delivery emphasizes hiring highly skilled and experienced staff, ongoing training, high staff utilization and immediate, productive deployment of new personnel at client locations.

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,
   
Percentage of Total Revenues
 
Business Segment Revenue
 
2013
   
2012
   
2011
   
2013
   
2012
   
2011
 
                                     
APM
  $ 300,533     $ 270,443     $ 231,999       31.8 %     26.8 %     25.0 %
Mainframe
    332,677       419,317       413,332       35.2       41.6       44.5  
Changepoint
    39,775       47,867       39,423       4.2       4.7       4.2  
Uniface
    46,156       46,908       46,307       4.9       4.6       5.0  
Total software solutions revenue
    719,141       784,535       731,061       76.1       77.7       78.7  
Professional services
    134,714       151,506       142,844       14.3       15.0       15.4  
Application services
    90,694       73,731       55,025       9.6       7.3       5.9  
Total revenue
  $ 944,549     $ 1,009,772     $ 928,930       100.0 %     100.0 %     100.0 %

SOFTWARE SOLUTIONS

Our software solutions are comprised of the following business segments: (1) Application Performance Management; (2) Mainframe; (3) Changepoint; and (4) Uniface. Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services). Users of our products include executive management, line of business leadership, IT leadership and staff, IT service providers and professional services organizations. 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 for optimizing the performance of web, non-web, mobile, streaming and cloud applications. Compuware APM is 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 by monitoring tens of thousands of applications for customers, large and small, around the globe. Through the lens of end-user experience, smarter analytics, advanced APM automation and a unique performance lifecycle foundation, our customers are informed about their applications to provide faster performance, proactive problem resolution, accelerated time-to-market and reduced application management costs.

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 monitoring in a single powerful platform for managing performance, availability and service level agreements across web, mobile, cloud and enterprise applications. UEM is supported by Gomez SaaS, dynaTrace and Data Center Real-User Monitoring solutions.


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, LDAP, HTTP, and Cerner, among others. Application-Aware Network Monitoring is supported by Data Center Real-User Monitoring solutions.

Compuware APM Lifecycle Performance Management

Compuware APM Lifecycle Performance Management fosters collaboration between production, application support, test and development teams, resulting in faster time to market, problem resolution and application performance. dynaTrace PurePath Technology® provides a unified, recorded data set for every transaction, capturing granular code-level detail, infrastructure parameters and payload information. Lifecycle Performance Management is supported by the Compuware APM solution.

Software related services

We offer a full range of software related services designed to accelerate the results of customers’ web, non-web and mobile application initiatives which include implementation services, consulting services, web load testing 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.

For fiscal 2013, 2012 and 2011, APM business segment revenue represented approximately 31.8%, 26.8% and 25.0%, respectively, of our total revenues.

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.

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.

Compuware APM for Mainframe combines 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.

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.


Software Related Services

We offer a range of services to help organizations ensure high-quality, high-performing mainframe applications, including implementation, consulting, training and managed services. These offerings are designed for maximum value realization. In the future, we expect most mainframe software related services to be delivered by our professional services segment.

For fiscal 2013, 2012 and 2011, mainframe business segment revenue represented approximately 35.2%, 41.6% and 44.5%, respectively, of our total revenues.

Business Portfolio Management and Professional Services Automation (Changepoint)

Changepoint combines professional services automation with project portfolio management capabilities to give customers complete visibility into projects, investments and resources for informed business planning and financial control.

Changepoint helps businesses gain competitive advantage and increase profitability through portfolio visibility, planning insight, process automation and improved resource utilization throughout a customer’s lifecycle. Changepoint’s business portfolio management services, comprised of professional services automation and project portfolio management, help businesses maximize return on investment.

Changepoint SaaS

Changepoint’s SaaS solution has been built with enterprise organizations in mind and is used by professional services organizations and IT departments worldwide. Our solution provides a high degree of security, as well as flexibility and control, while reducing costs. We do all of this while ensuring that the resulting solution adheres to the customer’s business model. We manage the installation, administration and maintenance of the solution, and our consultants oversee the process to ensure successful implementation and adoption.

Software Related Services

We provide a wide range of services to help organizations effectively align and manage project, application and infrastructure portfolios, including implementation, consulting, training and managed services. These offerings are designed for maximum value realization and are delivered by world-class services professionals.

For fiscal 2013, 2012 and 2011, Changepoint business segment revenue represented approximately 4.2%, 4.7% and 4.2%, respectively, of our total revenues.

Enterprise Application Development (Uniface)

Uniface is Compuware's Rapid Application Development environment for building, renewing and integrating some of the largest and most complex enterprise applications. Uniface helps IT organizations reduce the cost of ownership for business-critical applications and increase the return on investment for the IT budget.


Uniface enables enterprises to meet increasing demand for productively developing complex, secure, global Web 2.0 applications, deployable on any platform including the cloud.

Uniface also offers full technology independence over a wide range of operating systems, databases and third-party technologies. Customers can migrate from one environment to another without changing the Uniface applications.

Uniface manages upward compatibility so customers can migrate their Uniface applications to higher levels of technology without major investments in re-development.

Software Related Services

We offer a wide range of services to help organizations obtain the most value from their investments in our Uniface products. Our solutions include consulting services for both business and technical issues, additional training on the use of our Uniface products, development process optimization and application modernization.

For fiscal 2013, 2012 and 2011, Uniface business segment revenue represented approximately 4.9%, 4.6% and 5.0%, respectively, of our total revenues.

PROFESSIONAL SERVICES

Over the past few years, we have transformed our professional services organization to be more profitable by better aligning our solutions with the pressing needs of our customers. We focused on improving the financial results of the professional service segment, which included exiting low-margin engagements and focusing our resources on more profitable engagements. This improved the segment’s contribution margin but resulted in a significant revenue decline through fiscal 2011. During fiscal 2012, we experienced year-over-year revenue growth while maintaining higher margins than our historical professional services business. However, during fiscal 2013, we experienced weakened demand for our services resulting in an 11.1% decline in revenue and a 21.6% decline in contribution margin. The decline in revenue and margin contributed to the impairment of goodwill related to the professional services segment (see note 7 to the consolidated financial statements included in Item 8).
 
For fiscal 2013, 2012 and 2011, Professional Services segment revenue represented approximately 14.3%, 15.0% and 15.4%, respectively, of our total revenues.

APPLICATION SERVICES

Our Covisint application services provide a cloud engagement platform for enabling organizations to securely connect, engage and collaborate with large, distributed communities of customers, business partners and suppliers. Our platform allows global organizations with complex external business relationships to create, streamline and automate external mission-critical business processes that involve the secure exchange of and access to critical information from multiple sources. Our customers deploy our platform to deliver on current and new business initiatives, enhance competitiveness, create new revenue opportunities, increase customer retention and reduce operating costs.


Our cloud engagement platform is offered as a service, commonly referred to as a Platform-as-a-Service (PaaS), and combines robust, cloud-based identity management, portal, data exchange, integration and application development capabilities. Our platform integrates with on-premises and hosted enterprise systems, as well as other cloud-based data sources, and can be deployed quickly, scaled to millions of users, and configured to address our customers’ specific organizational requirements, including workflows, content and branding.

We deliver our platform through industry-specific solutions that address external mission-critical business processes common to companies across our target industries. To date, we have focused our solutions on the global automotive, healthcare and energy industries, in which the secure sharing of complex and distributed data is of particular importance. We are actively working to expand our platform to a wide range of industries which we believe have a significant opportunity to leverage our platform to enable mission-critical business processes and to improve collaboration with external parties such as customers, business partners and suppliers.

For fiscal 2013, 2012 and 2011, Covisint application services segment fees represented approximately 9.6%, 7.3% and 5.9%, respectively, of our total revenue.

SEASONALITY

We generally experience a higher volume of product 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.

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 2013, 2012 and 2011, software license fees represented approximately 18.9%, 21.9% and 21.0%, respectively, and maintenance fees represented approximately 43.2%, 42.3% and 45.1%, respectively, of our total revenues.

BACKLOG

We consider backlog orders for our software solutions 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 software solutions segments, the deferred revenue or backlog balance was $693.1 million and $778.4 million as of March 31, 2013 and 2012, respectively. The amount of the March 31, 2013 backlog not expected to be recognized in fiscal 2014 is $292.3 million which is recorded as non-current deferred revenue in our consolidated balance sheet.

For our professional services segment, the majority of our services contracts are terminable by the client. Therefore, there is substantially no backlog for these arrangements.

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, 2013 and 2012, the backlog balance associated with our Covisint application services segment was $116.6 million and $106.0 million, respectively, of which $35.2 million and $42.0 million, respectively, was billed and included in deferred revenue. The amount of the March 31, 2013 backlog not expected to be recognized in fiscal 2014 is $50.4 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 2013, 2012 or 2011, or greater than 10% of accounts receivable at March 31, 2013 and 2012.

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, 2013, 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 development labs in Amsterdam, The Netherlands (Uniface); Gdansk, Poland (APM); Linz, Austria (APM); Toronto, Canada (Changepoint); Lexington, Massachusetts (APM); and Beijing, China (APM).


Total research and development (“R&D”) cost was $102.7 million, $87.2 million and $69.2 million, respectively, during fiscal 2013, 2012 and 2011, of which $31.8 million, $23.2 million and $15.5 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 comprehensive income, and the portion related to our application services is reported as “cost of application services”.

TECHNOLOGY AND NETWORK OPERATIONS

Hosted Software Network

We designed our hosted software as multi-tenant networked computing applications and deliver those services entirely through an on-demand, hosted model. As such, we provide customer provisioning, application installation, application configuration, server maintenance, server co-location, data center maintenance, short-term data backup and data security.

Our hosted software enables a customer to test and monitor the web experience from outside its firewall using the hosted software network, which encompasses the following:

 
·
over 160 backbone nodes located in more than 33 countries, and 32 mobile carriers in 10 countries.

 
·
our central data warehouse and five other third-party data center facilities.

 
·
our portal to our customer data warehouse.

Our backbone nodes are measurement computers, or sets of multiple computers, co-located at the data center facilities of major telecommunication providers. In addition, backbone nodes can be configured for use exclusively by a single customer as part of our Private Network XF service.

In order to establish our last mile measurement points, we engage individuals, or peers, located in more than 120 countries to provide bandwidth and computing resources on personal computers connected via local Internet service providers.

Our backbone nodes and last mile measurement points emulate a user accessing a web application from a web browser. As the software accesses the web application and executes transactions as a user would, it performs timing and availability measurements for the objects that comprise the web pages it traverses. When a customer measures the web experience using our backbone nodes or last mile measurement points, the test results and other measurement data are collected and stored in near-real-time at our data warehouse. Customers can access our hosted software portal in order to reach the measurement data that have been captured in our data warehouse.

We service customers from six third-party data center facilities, including our central data warehouse. Three of these facilities are located in Massachusetts, one in Texas, one in Virginia and one in China. Our data centers are designed to be scalable and to support control and data replication for large numbers of measurement nodes. Each of the facilities has multiple high bandwidth interconnects to the Internet.

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 use our AppCloud® service 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.

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 enterprises and healthcare 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.

Savvis, Inc. (“Savvis”) 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 Savvis relationship and international facilities, we maintain and operate a disaster recovery facility in our Detroit, Michigan headquarters.

SALES AND MARKETING

We market software solutions including hosted software and software related professional services primarily through a direct sales force in the United States, Canada, Europe, Japan, Asia-Pacific, Brazil and Mexico; an inside sales force in Lexington, 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 professional and application services primarily through account managers located in offices throughout 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

The markets for our software solutions are highly competitive and characterized by continual change and improvement in technology. We consider several of these competitors to be directly competitive with one or more of our products. The principal competitors for our software solutions include BMC Software Inc., CA, Inc., International Business Machines (“IBM”), Hewlett-Packard Company and Keynote Systems, Inc. We also compete with Progress Software Corporation and other smaller, privately held companies on a product specific basis. Some of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our software solutions 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 market for professional services is highly competitive, fragmented and characterized by low barriers to entry. Our principal competitors include Accenture, Computer Sciences Corporation, HP Enterprise Services (a Hewlett-Packard Company), Analysts International Corporation, Infosys Technologies and numerous other regional and local firms in the markets in which we have professional services offices. Several of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our professional services include: responsiveness to customer needs; breadth and depth of technical skills offered; availability and productivity of personnel; the ability to demonstrate achievement of results; and price.


The market for application services is highly competitive and characterized by rapid technological change, shifting customer needs and frequent introductions of new solutions and services. We currently provide application services primarily in the automotive, healthcare and energy vertical markets (“verticals”). Our principal competitors include system integrators, such as IBM, HP Enterprise Services, and Dell, cloud-based platform vendors, such as Salesforce.com and Microsoft Azure, and business-to-business integration and data exchange vendors, such as GXS and Sterling Commerce, a division of IBM, other regional and local firms in the markets in which we have customers or potential customers and our customers’ internal IT groups. 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; features and functionality; ability to meet customer service level requirements; 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 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, professional services 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, 2013, 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.


EMPLOYEES

As of March 31, 2013, we employed 4,491 people worldwide, with 1,007 in software solution sales, sales support and marketing; 1,196 in technology development and support, maintenance and network operations; 1,223 in professional services (including 277 personnel dedicated to software related services), 560 in Covisint application services and 505 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
         
Peter Karmanos, Jr.
 
70
 
Executive Chairman of the Board (retired March 31, 2013)
         
Robert C. Paul
 
50
 
Chief Executive Officer and member of the Board of Directors
         
Joseph R. Angileri
 
55
 
President and Chief Operating Officer
         
Laura L. Fournier
 
60
 
Executive Vice President and Chief Financial Officer
         
Denise A. Knobblock Starr
 
57
 
Executive Vice President and Chief Administrative Officer
         
Daniel S. Follis, Jr.
 
47
 
Senior Vice President, General Counsel and Secretary

Peter Karmanos, Jr., is a founder of the Company and served as Executive Chairman of the Board of Directors through March 2013. Mr. Karmanos served as Chairman of the Board from November 1978 until June 2011, as Chief Executive Officer from July 1987 until June 2011 and as President from January 1992 through October 1994 and October 2003 through March 2008.

Robert C. Paul was 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 joined Compuware in June 2011 as President and Chief Operating Officer. 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.

Laura L. Fournier has served as Executive Vice President since April 2008 and as Chief Financial Officer since April 1998. Ms. Fournier was Corporate Controller from June 1995 through March 1998. From February 1990 through May 1995, Ms. Fournier was Director of Internal Audit.

Denise A. Knobblock Starr has served as Executive Vice President of Administration since April 2002 and as Chief Administrative Officer since April 2007. Ms. Knobblock Starr was Executive Vice President of Human Resources and Administration from April 1998 through March 2002. From April 1995 through March 1998, she was Senior Vice President of Purchasing, Facilities, Administration and Travel. Ms. Knobblock Starr served as the Director of Administration and Facilities from April 1991 to March 1995. She joined Compuware in January 1989 as Manager of Administration and Facilities.


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.

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 14 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.

A substantial portion of our mainframe segment revenue is dependent on our customers’ continued use of International Business Machines Corporation 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.

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 other operating segments.
Our mainframe segment generates significantly higher contribution margins than our other segments some of which are currently generating losses. We expect our future revenue growth to come primarily from our APM and application services segments. Declines in mainframe revenue, which could be exacerbated by lower than expected sales of our PurePath for z/OS offering, prior to these segments obtaining significant improvements in their respective contribution margins, will have a further negative impact on our results of operations and cash flow.

If we are not able to grow our APM revenue, we may fail to achieve our forecasted financial results and we may fail to meet the expectations of analysts or investors which could cause our stock price to decline.
The success of our APM business unit is dependent on continued revenue growth of our on-premise software solutions (dynaTrace and DCRum) and on our ability to return our hosted software (Gomez Saas) revenue growth rates to historical levels. We may be unable to grow our APM revenue due to a decline in market demand or an inability to deliver solutions desired by customers and potential customers. 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 (“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, 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 Gomez Saas offerings and 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 evolving offerings that customers purchase, our results of operations could be negatively affected.

Changes in the financial services industry could have a negative impact on our revenue and margins.
Approximately 20% of our mainframe revenue and 10% to 15% of our professional services 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 and on our professional services 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. These 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.

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.
In January 2013, we announced that our Board of Directors had rejected an unsolicited proposal by Elliott Management Corporation to acquire all of our outstanding shares of common stock. Elliott Management Corporation is being given an opportunity to perform due diligence on Compuware subject to a non-disclosure agreement and the Board has indicated its willingness to carefully review and evaluate any credible offer it receives that delivers full value to Compuware shareholders. There can be no assurance that Elliott Management Corporation or another third party will not make an unsolicited takeover proposal in the future or take other action to acquire control of Compuware. Considering and responding to a future proposal 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 and subject to wide price fluctuations based on various factors, including uncertainty associated with potential offers to acquire Compuware.

If we fail to achieve the results we expect from our expense reduction program, our results of operations and financial condition may be adversely affected.
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. There can be no assurance that our restructuring plan to reduce expenses will produce the cost savings we anticipate.

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.


If we are not successful in maintaining our professional services strategy, our revenue and margins may further decline.
Our business strategy for the professional services segment is to sustain the segment’s contribution margin by requiring certain margin thresholds for all new business and managing the segment operating expenses accordingly. If our customers do not accept the billing rates necessary to achieve these minimum thresholds, our revenues and margins may be negatively impacted which could have a material adverse effect on our results of operations and cash flow.

Economic uncertainties or slowdowns may reduce demand for our products and services, which may have a material adverse effect on our revenues and operating results.
Our revenues and profitability depend on the overall demand for our software products, hosted software, professional services 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 United States, Europe and/or other 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.

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 or application services networks 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.

Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our professional services and Covisint application services, which may have a material negative effect on our revenues and operating results.
A substantial portion of our worldwide professional services revenue and Covisint application services revenue has been generated from customers in the automotive industry, with General Motors Company currently our 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 us, we could experience a rapid decline in professional services and 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 reduce the demand for our services and increase the collection risk of accounts receivable from these customers, which could have a material adverse effect on our professional services and application services results of operations and margins in these business segments.

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. In our annual evaluation as of March 31, 2013, we determined the goodwill associated with our professional services reporting unit was impaired and wrote down the associated goodwill by $71.8 million to $42.8 million in the fourth quarter of 2013. In the continuing process of evaluating the recoverability of the carrying amount of our long-lived assets in this segment as well as the goodwill and other long-lived assets associated with our other operating segments, there is the possibility that we could identify other substantial impairments in the future, any of 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 through acquisitions.

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.

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.


The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.
We have numerous competitors in the professional services markets in which we operate. Several of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our professional services include: responsiveness to customer needs; breadth and depth of technical skills offered; availability and productivity of personnel; the ability to demonstrate achievement of results; and price. There is no assurance that we will be able to compete successfully in the future.

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.

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.
Over one-third of our total revenues 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 professional and 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.

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 professional services and software products personnel has historically been, and we expect that it will continue to be, intensely competitive. 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.

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 of the components that needs to be evaluated is the realization of our deferred tax assets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, 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.


Our stock repurchase plan and future dividend payments may be suspended or terminated at any time, which may result in a decrease in our stock price.
We have repurchased shares of our common stock in the market during the past several years and currently repurchase shares from time to time under an arrangement pursuant to which management is permitted to determine the amount and timing of repurchases in its discretion subject to an overall limit, as well as under a time-limited arrangement pursuant to which repurchases occur according to a formula without further discretion that is also subject to the overall limit and can be terminated at any time. Our ability and willingness to repurchase shares is subject to, among other things, the availability of cash resources and credit at rates and upon terms we believe are prudent. Stock market conditions, the market value of our common stock and other factors may also make it imprudent for us from time to time to engage in repurchase activity. There can be no assurance that we will continue to repurchase shares at historic levels or at all. If our repurchase program is curtailed, our stock price may be negatively affected.

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

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


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None

ITEM 2.
PROPERTIES

Our executive offices, our mainframe and some of our APM research and development labs, principal marketing department, primary professional and 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 291,000 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 78 sales offices (all supporting software solutions) and professional services offices in 29 countries, including 6 remote product research and development facilities (see “Research and Development” section in Item 1 of this report for additional information).

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.

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, 2013, there were 3,505 shareholders of record of our common stock. We have not paid any cash dividends on our common stock since fiscal 1986. However, in January 2013, our Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually, to be paid quarterly beginning in the first quarter of fiscal 2014. 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, 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  

 
Fiscal Year Ended March 31, 2012
 
High
   
Low
 
Fourth quarter
  $ 9.60     $ 7.35  
Third quarter
    9.01       6.97  
Second quarter
    10.32       7.43  
First quarter
    11.71       9.05  

Our revolving credit agreement contains a restriction requiring us to maintain at least a 0.25 to 1.0 cushion below our consolidated total leverage ratio maximum of 2.5 to 1.0 (at March 31, 2013, our ratio was 0.13 to 1.0) on a pro forma basis in the case of any stock repurchases, acquisitions or dividends in excess of $50 million in any fiscal year. See note 9 of the consolidated financial statements included in this report for more details regarding our credit agreement.

Common Share Repurchases

The following table sets forth the repurchases of common stock for the quarter ended March 31, 2013:

Period
 
Total number of
shares purchased
   
Average
price paid
per share
   
Total number of
shares purchased
as part of publicly
announced plans
   
Approximate dollar
value of shares
that may yet be
purchased under
the plan or
program (1)
 
                         
For the month ended January 31, 2013
    327,400     $ 10.94       327,400     $ 144,126,000  
                                 
For the month ended February 28, 2013
    -       -       -       144,126,000  
                                 
For the month ended March 31, 2013
    89,555       12.32       89,555       143,023,000  
                                 
Total
    416,955       11.24       416,955          

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

Our purchases of common stock may occur on the open market or in negotiated or block transactions based upon market and business conditions. These repurchases are being made pursuant to the Board’s February 7, 2008 authorization of the repurchase of up to $750.0 million of our common stock under our discretionary share repurchase program. Unless terminated earlier by resolution of our Board of Directors, the discretionary share repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder. The maximum amount of repurchase activity under the repurchase plan continues to be limited on a daily basis to 25% of the average trading volume of our common stock for the previous four week period. In addition, no purchases are made during our self-imposed trading black-out periods in which the Company and our insiders are prohibited from trading in our common shares. Our standard quarterly black-out period commences 10 business days prior to the end of each quarter and terminates one full market day following the public release of our operating results for the period. We reserve the right to change the timing and volume of our repurchases at any time without notice. For further details regarding the Discretionary Plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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


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, 2008 through March 31, 2013. 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, 2008 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.
 
Image 1

Total Return To Shareholders
(Includes reinvestment of dividends)

   
Base
   
Indexed Returns
 
   
Period
   
Fiscal Years Ending
 
   
March 31,
   
March 31,
 
Company / Index
 
2008
   
2009
   
2010
   
2011
   
2012
   
2013
 
Compuware Corporation
  $ 100       89.78       114.44       157.36       125.20       170.16  
S&P 500 Index
    100       61.91       92.72       107.23       116.39       132.64  
NASDAQ Market Index
    100       67.15       105.94       124.71       139.71       150.83  
NASDAQ Computer & Data Processing Index
    100       72.40       112.48       128.69       139.45       145.22  

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.


ITEM 6.
SELECTED FINANCIAL DATA

The selected statement of comprehensive income (loss) 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,
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
   
(In thousands, except earnings per share data)
 
Statement of Comprehensive Income (Loss) Data:
     
Revenues:
                             
Software license fees
  $ 178,922     $ 220,885     $ 194,745     $ 194,504     $ 219,634  
Maintenance fees
    407,480       427,534       419,240       439,491       479,480  
Subscription fees
    82,442       78,438       67,718       16,852          
Professional services fees
    185,011       209,184       192,202       200,865       356,111  
Application services fees
    90,694       73,731       55,025       40,467       35,230  
Total revenues
    944,549       1,009,772       928,930       892,179       1,090,455  
Operating expenses:
                                       
Cost of software license fees
    20,165       17,572       14,216       15,430       24,491  
Cost of maintenance fees
    35,084       38,670       32,975       33,266       41,877  
Cost of subscription fees
    31,127       29,669       24,974       9,289          
Cost of professional services
    163,713       182,625       165,939       178,938       331,001  
Cost of application services
    83,298       72,384       51,011       37,923       37,029  
Technology development and support
    105,800       104,968       90,330       91,245       86,453  
Sales and marketing
    251,925       273,520       243,771       222,447       226,408  
Administrative and general
    162,810       163,723       155,400       164,633       148,019  
Goodwill impairment (1)
    71,840                                  
Restructuring costs (2)
    16,573                       7,960       10,037  
Gain on divestiture of product lines (3)
                            (52,351 )        
Total operating expenses
    942,335       883,131       778,616       708,780       905,315  
Income from operations
    2,214       126,641       150,314       183,399       185,140  
Other income (expense), net
    (1,170 )     1,633       4,462       25,721       27,581  
Income before income tax provision
    1,044       128,274       154,776       209,120       212,721  
Income tax provision
    18,295       39,903       47,335       68,314       73,074  
Net income (loss)
  $ (17,251 )   $ 88,371     $ 107,441     $ 140,806     $ 139,647  
                                         
Basic earnings (loss) per share (4)
  $ (0.08 )   $ 0.40     $ 0.49     $ 0.61     $ 0.56  
Diluted earnings (loss) per share (4)
    (0.08 )     0.40       0.48       0.60       0.55  
                                         
Shares used in computing net income (loss) per share:
                                       
Basic earnings computation
    214,627       218,344       220,616       232,634       250,916  
Diluted earnings computation
    214,627       222,378       226,095       234,565       252,402  
                                         
Balance Sheet Data (at period end):
                                       
Working capital
  $ 38,159     $ 54,386     $ 143,905     $ 92,688     $ 297,237  
Total assets
    1,973,282       2,167,538       2,038,377       2,013,325       1,874,850  
Long term debt (5)
    18,000       45,000                          
Total shareholders' equity (6)
    998,226       1,049,937       952,612       913,813       880,648  

(1)
During the fourth quarter of fiscal 2013, it was determined through the Company’s annual goodwill impairment analysis that the carrying value of the goodwill associated with our professional services reporting unit exceeded the implied fair value by approximately $71.8 million, resulting in an impairment charge for this amount. See note 7 of the consolidated financial statements included in this report for additional information on goodwill.


(2)
During fiscal 2013, the Company approved the initial phase of a plan designed to reduce administrative and general and non-core operational costs. The activities associated with this plan resulted in a restructuring charge of $16.6 million for fiscal 2013. See note 8 of the consolidated financial statements included in this report for additional information regarding our restructuring plan.

During fiscal 2010 and 2009, the Company undertook various restructuring activities to improve the effectiveness and efficiency of a number of the Company’s critical business processes, primarily within the products and professional services segments. These activities resulted in a restructuring charge of $8.0 million and $10.0 million for fiscal 2010 and 2009, respectively.

(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 12 of the consolidated financial statements included in this report for the basis of computing earnings (loss) per share.

(5)
See note 9 of the consolidated financial statements included in this report for additional information on debt.

(6)
No dividends were paid or declared during the periods presented.

See note 2 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 six business segments: APM, Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”). These segments are described in detail in note 1 to the consolidated financial statements.

This business unit 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.

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

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.

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), professional services and application services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our mainframe productivity tools (“mainframe”) that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have 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 (such as our PurePath for z/OS which was released in fiscal 2013) 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 growth segments.


We have identified the APM market as a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company’s brand awareness, revenue growth and overall market share. Because of this, the market for APM solutions is significant and growing rapidly. Our APM solutions 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.

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

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

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

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

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


Annual Update

The following occurred during fiscal 2013:

 
·
Experienced a decline in total revenue of $65.2 million during 2013 as compared to 2012 due to a $42.0 million decrease in software license fees, a $20.1 million decrease in maintenance fees and a $24.2 million decrease in professional services fees, partially offset by a $17.0 million increase in application services fees and a $4.0 million increase in subscription fees.

 
·
Experienced a decline in operating margin to 0.2% during 2013 as compared to 12.5% during 2012 due primarily to a $71.8 million goodwill impairment charge and $16.6 million in restructuring expenses recorded during 2013 as well as the overall decline in revenue (see the “Business Segment Analysis,” “Restructuring Charge” and “Goodwill Impairment Charge” sections below for additional information).

 
·
On a non-GAAP basis, excluding restructuring charges, goodwill impairment and certain advisory fees, the operating margin declined from 12.5% in 2012 to 9.9% in 2013. See the “GAAP to non-GAAP Reconciliation” section below for a complete reconciliation of operating income.

 
·
Software solutions revenue declined $65.4 million or 8.3% for 2013 as compared to 2012 due primarily to a decline in mainframe revenue, partially offset by an increase in APM revenue. Software solutions contribution margin declined to 36.1% during 2013 from 38.3% during 2012 due to the decline in mainframe revenue, which generates higher margins than other segments.

 
·
Professional services segment revenue declined $16.8 million or 11.1% during 2013 as compared to 2012 due primarily to a decline in application development services for customers within the financial services industry. On a GAAP basis, the professional services margin was negative 39.2% which included an impairment charge that was 53.3% of professional services segment revenue. Excluding the goodwill impairment, the contribution margin declined to 14.2% on a non-GAAP basis from 16.1% in 2012. (See “Professional Services” and “GAAP to non-GAAP Reconciliation” for additional information and a complete reconciliation).

 
·
Covisint revenue increased $17.0 million or 23.0% during 2013 as compared to 2012 due to growth from both recurring and services fees across automotive and healthcare customers as well as customers in other industries. Contribution margin improved to 5.1% during 2013 from 1.4% during 2012 due to the increase in revenue.

 
·
Released PurePath for z/OS, which combines Strobe and dynaTrace technology on the mainframe, during November 2012. We expect PurePath for z/OS to positively contribute to our mainframe revenues in 2014.

 
·
Repurchased approximately 8.6 million shares of our common stock at an average price of $9.37 per share through our stock repurchase plans.

In May 2013, Covisint Corporation, currently a wholly owned subsidiary of Compuware, filed a registration statement with the U.S. Securities and Exchange Commission for a possible initial public offering of up to 20% of its common stock ("Proposed IPO"). The Proposed IPO is intended, among other things, to give Covisint greater flexibility to pursue strategic opportunities and to increase its visibility in the marketplace. The Proposed IPO is expected to commence during fiscal 2014 as market conditions permit and is also subject to completion of the SEC's review process. Our current plan is to distribute any remaining Covisint shares owned by Compuware directly to Compuware shareholders within 12 months of completing the IPO, subject to approval by our Board of Directors, receipt of consent from the lenders under our revolving credit agreement and applicable regulatory approvals.


In January 2013, our Board of Directors approved an action plan to increase shareholder value. In addition to the planned spin-off of the Covisint business, we are implementing plans to significantly reduce costs over the next two years, and our Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually to be paid quarterly starting in fiscal 2014. While we are focused on executing and delivering on our plan, the Board is committed to carefully review and evaluate any credible offer it receives that delivers full value to our shareholders.

See note 8 of the consolidated financial statements included in this report for more details regarding our restructuring plan.

In May 2013, the Board of Directors declared the first quarterly cash dividend of $0.125 per share to be paid June 19, 2013 to shareholders of record at the close of business on June 5, 2013. The payment of future dividends is subject to the availability of funds after taking into account our operational funding requirements, the terms of any indebtedness and applicable state law. The revolving credit agreement to which we are a party contains financial covenants that could limit our ability to pay dividends, as well as a covenant that would prohibit us from paying dividends if we are in default or if payment of the dividend would result in a default. We anticipate being able to pay the planned dividends during fiscal 2014.

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


RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operational data from the consolidated statements of comprehensive income (loss) 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
   
2012
   
2011
 
   
March 31,
   
to
   
to
 
   
2013
   
2012
   
2011
   
2013
   
2012
 
REVENUE:
                             
Software license fees
    18.9 %     21.9 %     21.0 %     (19.0 ) %     13.4 %
Maintenance fees
    43.2       42.3       45.1       (4.7 )     2.0  
Subscription fees
    8.7       7.8       7.3       5.1       15.8  
Professional services fees
    19.6       20.7       20.7       (11.6 )     8.8  
Application services fees
    9.6       7.3       5.9       23.0       34.0  
Total revenues
    100.0       100.0       100.0       (6.5 )     8.7  
                                         
OPERATING EXPENSES:
                                       
Cost of software license fees
    2.1       1.8       1.5       14.8       23.6  
Cost of maintenance fees
    3.7       3.8       3.5       (9.3 )     17.3  
Cost of subscription fees
    3.3       2.9       2.7       4.9       18.8  
Cost of professional services
    17.3       18.1       17.9       (10.4 )     10.1  
Cost of application services
    8.8       7.2       5.5       15.1       41.9  
Technology development and support
    11.2       10.4       9.8       0.8       16.2  
Sales and marketing
    26.7       27.1       26.2       (7.9 )     12.2  
Administrative and general
    17.3       16.2       16.7       (0.6 )     5.4  
Goodwill impairment
    7.6                       n/a          
Restructuring costs
    1.8                       n/a          
Total operating expenses
    99.8       87.5       83.8       6.7       13.4  
Income from operations
    0.2       12.5       16.2       (98.3 )     (15.7 )
Other income (expense), net
    (0.1 )     0.2       0.5       (171.6 )     (63.4 )
                                         
Income before income tax provision
    0.1       12.7       16.7       (99.2 )     (17.1 )
Income tax provision
    1.9       3.9       5.1       (54.2 )     (15.7 )
Net income (loss)
    (1.8 ) %     8.8 %     11.6 %     (119.5 ) %     (17.7 ) %


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):
 
   
Software Solutions
               
Unallocated
       
Year Ended:
 
APM
   
MF
   
CP
   
UF
   
Total
   
PS (1)
   
AS
   
Expenses (2)
   
Total
 
                                                       
March 31, 2013
                                                     
                                                       
Total revenues
  $ 300,533     $ 332,677     $ 39,775     $ 46,156     $ 719,141     $ 134,714     $ 90,694     $ -     $ 944,549  
                                                                         
Operating expenses
    304,835       91,325       41,226       21,831       459,217       187,472       86,084       209,562       942,335  
                                                                         
Contribution /operating margin
  $ (4,302 )   $ 241,352     $ (1,451 )   $ 24,325     $ 259,924     $ (52,758 )   $ 4,610     $ (209,562 )   $ 2,214  
                                                                         
Operating margin %
    (1.4 %)     72.5 %     (3.6 %)     52.7 %     36.1 %     (39.2 %)     5.1 %     N/A       0.2 %
                                                                         
March 31, 2012
                                                                       
                                                                         
Total revenues
  $ 270,443     $ 419,317     $ 47,867     $ 46,908     $ 784,535     $ 151,506     $ 73,731     $ -     $ 1,009,772  
                                                                         
Operating expenses
    317,621       99,310       45,027       21,740       483,698       127,178       72,717       199,538       883,131  
                                                                         
Contribution / operating margin
  $ (47,178 )   $ 320,007     $ 2,840     $ 25,168     $ 300,837     $ 24,328     $ 1,014     $ (199,538 )   $ 126,641  
                                                                         
Operating margin %
    (17.4 %)     76.3 %     5.9 %     53.7 %     38.3 %     16.1 %     1.4 %     N/A       12.5 %
                                                                         
March 31, 2011
                                                                       
                                                                         
Total revenues
  $ 231,999     $ 413,332     $ 39,423     $ 46,307     $ 731,061     $ 142,844     $ 55,025     $ -     $ 928,930  
                                                                         
Operating expenses
    246,212       99,659       47,514       20,149     $ 413,534       118,937       51,011       195,134       778,616  
                                                                         
Contribution / operating margin
  $ (14,213 )   $ 313,673     $ (8,091 )   $ 26,158     $ 317,527     $ 23,907     $ 4,014     $ (195,134 )   $ 150,314  
                                                                         
Operating margin %
    (6.1 %)     75.9 %     (20.5 %)     56.5 %     43.4 %     16.7 %     7.3 %     N/A       16.2 %

 
(1)
Professional services business unit operating expenses for fiscal 2013 include a $71.8 million goodwill impairment charge. See note 7 of the consolidated financial statements included in this report for additional information.

 
(2)
Unallocated expenses for fiscal 2013 include $16.6 million in restructuring expenses. See note 8 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 the Company's results as determined by U.S. generally accepted accounting principles (GAAP), the Company has provided the following non-GAAP information: (a) non-GAAP professional services margin, (b) non-GAAP operating income, (c) non-GAAP net income and (d) 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 a goodwill impairment charge; restructuring charges; advisory fees associated with certain shareholder actions; and the related tax impacts of these items. Each of the non-GAAP adjustments is described in more detail below. The table below provides a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our operating results because they exclude amounts that management and the board of directors do not consider part of core operating results when assessing the performance of the organization. We believe that inclusion of these non-GAAP financial measures provides consistency and comparability with past reports of financial results. Accordingly, we believe these non-GAAP financial measures are useful to investors in allowing for greater transparency of supplemental information used by management.


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, and 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 a goodwill impairment charge; restructuring charges; advisory fees associated with certain shareholder actions; and the related tax impacts of these items that are excluded from our non-GAAP financial measures can have a material impact on net income. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net income or loss, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial measure. We have procedures in place to ensure that these measures are calculated using the appropriate GAAP components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons.

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

 
·
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. 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.

 
·
Restructuring charges. Our non-GAAP financial measures exclude restructuring charges, and any subsequent changes in estimates, as they relate to our corporate restructuring and exit activities, including asset impairments resulting from a fourth quarter fiscal 2013 operational review. 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 restructuring charges, in order to provide comparability and consistency with historical operating results.

 
·
Advisory fees associated with certain shareholder actions. During the third quarter of fiscal 2013, the Company received an unsolicited, nonbinding offer to purchase the outstanding shares of the Company from a shareholder. The Company has incurred costs of approximately $3 million for unplanned consultant fees to review the offer, analyze the business and review additional requests for information from other interested parties. 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 such costs, in order to provide comparability and consistency with historical operating results.

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


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

   
Year Ended March 31,
 
   
2013
   
2012
   
2011
 
                   
Income from operations
  $ 2,214     $ 126,641     $ 150,314  
                         
Restructuring expenses
    16,573       -       -  
Goodwill impairment
    71,840       -       -  
Advisory fees
    2,797       -       -  
                         
Income from operations before restructuring, impairment and advisory fees
  $ 93,424     $ 126,641     $ 150,314  
                         
                         
                         
Net income (loss)
  $ (17,251 )   $ 88,371     $ 107,441  
                         
Restructuring expenses
    16,573       -       -  
Goodwill impairment
    71,840       -       -  
Advisory fees
    2,797       -       -  
                         
Total adjustments
    91,210       -       -  
Income tax effect of adjustments
    (16,661 )     -       -  
                         
Net income before restructuring, impairment and advisory fees
  $ 57,298     $ 88,371     $ 107,441  
                         
                         
                         
Diluted earnings per share - GAAP
  $ (0.08 )   $ 0.40     $ 0.48  
                         
Recalculated using dilutive shares
  $ (0.08 )   $ 0.40     $ 0.48  
                         
Restructuring expenses
    0.08       -       -  
Goodwill impairment
    0.33       -       -  
Advisory fees
    0.01       -       -  
                         
Total adjustments
    0.42       -       -  
Income tax effect of adjustments
    (0.08 )     -       -  
                         
Diluted earnings per share before restructuring, impairment and advisory fees
  $ 0.26     $ 0.40     $ 0.48  


SOFTWARE SOLUTIONS AS A GROUP

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

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

               
Period-to-Period Change
   
Year Ended March 31,
   
2012 to
 
2011 to
   
2013
   
2012
   
2011
   
2013
 
2012
Software license fees
  $ 178,922     $ 220,885     $ 194,745       (19.0 ) %     13.4 %
Maintenance fees
    407,480       427,534       419,240       (4.7 )     2.0  
Subscription fees
    82,442       78,438       67,718       5.1       15.8  
Professional services fees
    50,297       57,678       49,358       (12.8 )     16.9  
Total software solutions revenue
  $ 719,141     $ 784,535     $ 731,061       (8.3 ) %     7.3 %

Software license fees (“license fees”) decreased $42.0 million during 2013, which included a negative impact from foreign currency fluctuations of $4.1 million, and increased $26.1 million during 2012, which included a positive impact from foreign currency fluctuations of $4.3 million. Excluding the impact from foreign currency fluctuations, license fees decreased $37.9 million for 2013 and increased $21.8 million for 2012. The decrease for 2013 was due to the decline in mainframe license fees, partially offset by an increase in APM license fees. The increase for fiscal 2012 was due largely to an increase in mainframe license fees and, to a lesser extent, increases in APM and Changepoint license fees (see the discussion within “Software Solutions by Business Segment” for more details).

During 2013, 2012 and 2011, for software license transactions that were required to be recognized ratably, we deferred $25.6 million, $15.8 million and $29.9 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $30.3 million, $48.5 million and $61.2 million of previously deferred license revenue during 2013, 2012 and 2011, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees decreased $20.1 million during 2013, which included a negative impact from foreign currency fluctuations of $11.1 million, and increased $8.3 million during 2012, which included a positive impact from foreign currency fluctuations of $9.9 million. Excluding the impact from foreign currency fluctuations, maintenance fees declined $9.0 million for 2013 and declined $1.6 million for 2012. Approximately $8 million of the decline was due to a single mainframe customer cancellation. The remaining decline was due to smaller customer cancellations and lower renewal values for maintenance fees associated with our mainframe product lines. Although we continue to experience high maintenance renewal rates with our current mainframe customers, new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements. The declines in both 2013 and 2012 were partially offset by an increase in APM maintenance fees due primarily to sales growth in our APM product line including additional maintenance related to the dynaTrace acquisition.

Subscription fees increased $4.0 million during 2013, which included a negative impact from foreign currencies of $817,000, and increased $10.7 million during 2012, which included a positive impact from foreign currency fluctuations of $549,000. Excluding the impact from foreign currency fluctuations, subscription fees increased $4.8 million for 2013 and increased $10.2 million for 2012 primarily as a result of new SaaS solution sales exceeding customer cancellations.


Professional services fees within our software solutions business segments decreased $7.4 million during 2013 and increased $8.3 million during 2012. The decline in profesional services fees during 2013 primarily occurred within our mainframe and Changepoint segments due to a decline in our test data privacy services and a decline in new software license sales, respectively. The improvement in professional services fees during fiscal 2012 primarily occurred within our APM business unit due to increased implementation fees associated with new APM solution sales and increases in demand for our managed service offerings.

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

   
Year Ended March 31,
 
   
2013
   
2012 (1)
   
2011 (1)
 
United States
  $ 375,871     $ 401,198     $ 373,644  
Europe and Africa
    205,870       234,909       222,538  
Other international operations
    137,400       148,428       134,879  
Total software solutions revenue
  $ 719,141     $ 784,535     $ 731,061  

(1)
March 31, 2012 and 2011 amounts between the United States and other international operations have been reclassified to conform to the current year presentation.

SOFTWARE SOLUTIONS BY BUSINESS SEGMENT

Application Performance Management

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

               
Period-to-Period Change
 
   
Year Ended March 31,
   
2012 to
   
2011 to
 
   
2013
   
2012
   
2011
   
2013
   
2012
 
Revenue
                             
Software license fees
  $ 100,565     $ 85,462     $ 77,823       17.7 %     9.8  
Maintenance fees
    89,535       77,329       64,283       15.8       20.3  
Subscription fees
    79,862       76,246       67,718       4.7       12.6  
Professional services fees
    30,571       31,406       22,175       (2.7 )     41.6  
Total revenue
    300,533       270,443       231,999       11.1       16.6  
                                         
Operating expenses
    304,835       317,621       246,212       (4.0 )     29.0  
                                         
Contribution margin
  $ (4,302 )   $ (47,178 )   $ (14,213 )     90.9 %     (231.9 )
                                         
Contribution margin %
    (1.4 %)     (17.4 %)     (6.1 %)                

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. While our revenue from subscription fees increased during 2013, our current deferred revenue for subscription fees has declined approximately five percent from the March 2012 balance. The decline is due to customer cancellations and delays in renewals. 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.

APM segment revenue increased $38.4 million during 2012. The increase in software license fees during 2012 can be attributed to additional revenue related to the acquisition of dynaTrace (see note 2 of the consolidated financial statements included in this report for additional information), partially offset by the effects of integrating our on-premises and SaaS sales force and related changes in the sales strategy during 2012, which had a negative impact on license sales.


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.

Operating expenses increased $71.4 million for 2012, primarily due to investments in our APM solutions including hiring developers and sales personnel, increasing the capacity of our web application services network and the acquisition of dynaTrace. The costs associated with these investments exceeded revenue growth during 2012, which had a negative impact on our contribution margin.

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

   
Year Ended March 31,
 
   
2013
   
2012 (1)
   
2011 (1)
 
United States
  $ 160,212     $ 139,030     $ 122,311  
Europe and Africa
    84,590       85,720       68,554  
Other international operations
    55,731       45,693       41,134  
Total APM segment revenue
  $ 300,533     $ 270,443     $ 231,999  

(1)
March 31, 2012 and 2011 amounts between the United States and other international operations have been reclassified to conform to the current year presentation.

Mainframe

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

               
Period-to-Period Change
 
   
Year Ended March 31,
   
2012 to
   
2011 to
 
   
2013
   
2012
   
2011
   
2013
   
2012
 
Revenue
                             
Software license fees
  $ 58,528     $ 110,289     $ 95,820       (46.9 )%     15.1  
Maintenance fees
    271,824       303,639       310,965       (10.5 )     (2.4 )
Professional services fees
    2,325       5,389       6,547       (56.9 )     (17.7 )
Total revenue
    332,677       419,317       413,332       (20.7 )     1.4  
                                         
Operating expenses
    91,325       99,310       99,659       (8.0 )     (0.4 )
                                         
Contribution margin
  $ 241,352     $ 320,007     $ 313,673       (24.6 )%     2.0  
                                         
Contribution margin %
    72.5 %     76.3 %     75.9 %                

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. We intend to continue to make strategic enhancements to our mainframe solutions through research and development investments, including the PurePath for z/OS product we released during the third quarter of 2013 which combines dynaTrace and Strobe technology to provide application performance management for the mainframe. We expect PurePath for z/OS to positively contribute to our mainframe revenues in 2014.


Mainframe segment revenue increased $6.0 million during 2012 primarily due to a $14.5 million increase in software license fees partially offset by a $7.3 million decline in maintenance fees. Six significant license transactions that resulted in the recognition of $36.0 million of license fees were completed during 2012, some of which we had anticipated closing in the fourth quarter of 2011. Significant license transactions during fiscal 2011 resulted in the recognition of approximately $19.1 million in license fees.

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. Contribution margin and expenses for 2012 were essentially unchanged from 2011.

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

   
2013
   
2012 (1)
   
2011 (1)
 
United States
  $ 190,542     $ 232,350     $ 228,762  
Europe and Africa
    81,244       104,048