Note 6 – Stock Benefit Plans and Stock-Based Compensation

Stock Benefit Plans

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

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

ESOP/401(k)

The Company provides a matching program for the 401(k) component of the ESOP/401(k). The Company matches 33% of employees’ 401(k) contributions up to 2% of eligible earnings. Matching contributions by the Company vest 100% when an employee attains three years of service with the Company. During the three months ended December 31, 2013 and 2012, the Company expensed $944,000 and $900,000, respectively, and for both the nine months ended December 31, 2013 and 2012, the Company expensed $3.3 million related to this plan.

Compuware Stock Option Activity

Options that Vest Based on Service Conditions Only

A summary of activity for options that vest based on service conditions only under the Company’s stock-based compensation plans as of December 31, 2013, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended December 31, 2013
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2013		19,076		$	8.44
Granted		1,146			10.63
Exercised		(3,447	)		7.81			$	10,811
Forfeited		(376	)		10.18
Cancelled/expired		(1,424	)		8.22
Options outstanding as of December 31, 2013		14,975		$	8.73		6.57	$	38,076

Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2013		14,465		$	8.68		6.49	$	37,378

Options exercisable as of December 31, 2013		9,628		$	8.32		5.64	$	28,385

The average fair value of stock options vested during the nine months ending December 31, 2013 and 2012 was $3.99 and $4.14 per share, respectively.

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

As of December 31, 2013, 2.7 million stock options that vest based on both service and performance conditions were outstanding. The performance vesting conditions for these options are based on company-wide revenue and earnings targets. As of December 31, 2013, it is deemed probable that the performance targets for approximately 190,000 of these options will be achieved. Expense totaling $394,000 and a reduction to expense of $21,000 were recorded in the condensed consolidated statement of operations related to these stock options during the nine months and three months ended December 31, 2013, respectively. The reduction to expense during the three months ended December 31, 2013 was related to a change in the expected attainment associated with certain performance conditions. No expense was recorded in the condensed consolidated statement of operations related to these stock options during the nine months ended December 31, 2012.

A summary of activity for options that vest based on the achievement of both service and performance conditions under the Company’s stock-based compensation plans as of December 31, 2013, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended December 31, 2013
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options outstanding as of March 31, 2013		3,648		$	9.79
Granted		594			11.30
Forfeited/Cancelled		(1,529	)		10.00
Options outstanding as of December 31, 2013		2,713		$	10.00		8.79	$	3,435

Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2013		190		$	11.30		9.37	$	-

Options exercisable as of December 31, 2013		-		$	-		-	$	-

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

	Nine Months Ended December 31,
	2013			2012

Expected volatility		39.52	%		40.83	%
Risk-free interest rate		1.59	%		0.95	%
Expected lives at date of grant (in years)		6.3			6.3
Weighted-average fair value of the options granted	$	2.69		$	4.02
Dividend yield assumption (1)		4.42	%		0.00	%

(1)	In January 2013, our Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually. Prior to that, the Company had never paid a dividend or announced any intentions to pay a dividend.

Restricted Stock Units and Performance-Based Stock Awards Activity

A summary of non-vested restricted stock units (“RSUs”) and performance-based stock awards (“PSAs” and collectively “Non-vested RSUs”) activity under the Company’s LTIP as of December 31, 2013, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended December 31, 2013
	Shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value

Non-vested RSUs outstanding as of March 31, 2013		4,850
Granted		518		$	11.26
Dividend equivalents issued		99			10.98
Released		(1,681	)			$	18,204
Forfeited		(1,362	)
Non-vested RSUs outstanding as of December 31, 2013		2,424

Approximately 31,000 PSAs with performance conditions based on company-wide revenue and earnings targets were outstanding as of December 31, 2013. It is not deemed probable that these targets will be achieved as of December 31, 2013.

During the first nine months of 2014, the Company paid three quarterly dividends of $0.125 per share. In connection with this, approximately 21,000 and 99,000 dividend equivalent shares were issued to participants holding non-vested RSUs in the form of additional non-vested RSUs with the same terms, as of the dividend record date during the three and nine months ended December 31, 2013, respectively.

Covisint Corporation 2009 Long-Term Incentive Plan

In August 2009, Covisint established a 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the board of directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and annual cash incentive awards to employees and directors of Covisint and its affiliates. The 2009 Covisint LTIP reserves 4.5 million common shares of Covisint for issuance under this plan. On December 30, 2013, the board of directors of Covisint adopted an amendment to the 2009 Covisint LTIP, subject to shareholder approval which increased the number of shares of Covisint’s common stock available for issuance pursuant to stock-based awards granted under the LTIP by 3.0 million shares to 7.5 million (less shares subject to previous grants). The amendment was approved by shareholders and became effective in January 2014.

As of December 31, 2013, there were 4.2 million stock options outstanding from the 2009 Covisint LTIP, which reflects the 30-for-1 stock split approved by the Covisint board of directors on May 23, 2013. These options include a performance condition requiring a change in control or IPO of Covisint prior to vesting. Many of these options vested upon the October 1, 2013 closing of Covisint’s IPO. Expense related to these options of $3.6 million and cumulative expense of $16.1 million was recorded to cost of application services during the three months and nine months ended December 31, 2013, respectively.

Certain employees who received stock options from the 2009 Covisint LTIP were also awarded PSAs from the Company’s 2007 LTIP. Approximately 1.1 million of these PSAs were cancelled during the three months ended December 31, 2013 upon the closing of the Covisint IPO.

Stock Awards Compensation

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

	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Stock-based compensation classified as:

Cost of maintenance fees	$	-		$	164		$	348		$	616
Cost of subscription fees		(54	)		(47	)		(24	)		6
Cost of professional services		67			65			244			225
Cost of application services		3,765			396			14,271			1,105
Technology development and support		(27	)		468			1,078			1,842
Sales and marketing		1,152			1,328			4,736			4,515
Administrative and general		1,861			3,110			9,632			12,354
Restructuring costs		450			-			2,241			-

Total stock-based compensation expense before income tax provision	$	7,214		$	5,484		$	32,526		$	20,663

As of December 31, 2013, it is expected that total unrecognized compensation cost of $29.6 million, net of estimated forfeitures, related to nonvested Compuware and Covisint equity awards that are expected to vest will be recognized over a weighted-average period of approximately 1.72 years.