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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

 

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

FOR THE FISCAL YEAR ENDED MARCH 31, 2014

Commission File Number: 000-20900

(Exact name of registrant as specified in its charter)

(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:

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes  o   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes o  No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer   x   Accelerated filer o   Non-accelerated filer o    (Do not check if a smaller reporting company)  Smaller reporting company o

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was $2,407,256,009 based upon the closing sales price of the common stock on that date of $11.19 as reported on The NASDAQ Global Select Market. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are assumed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.

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

DOCUMENTS INCORPORATED BY REFERENCE

None

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EXPLANATORY NOTE

We filed our Form 10-K for the year ended March 31, 2014 (the “2014 Form 10-K”) with the Securities and Exchange Commission on May 29, 2014. Pursuant to General Instruction G(3) to Form 10-K, we incorporated by reference the information required by Part III of Form 10-K from our definitive proxy statement for the 2014 Annual Meeting of Shareholders. Because we have decided to hold our annual meeting later in calendar 2014, the definitive proxy statement will not be filed with the Commission within 120 days after our fiscal year end and we are filing this Amendment No. 1 to the 2014 Form 10-K (the “Form 10-K/A”) to provide the additional information required by Part III of Form 10-K. In addition, Item 6 is amended to revise the breakdown of basic earnings per share and diluted earnings per share for fiscal 2011 between continuing operations and discontinued operations and to correct an error in the 2013 “Shares used in computing net income (loss) per share” figure. This Form 10-K/A does not otherwise change the previously reported financial statements or any of the other disclosures contained in Part I, Part II or Part IV, other than to revise the exhibit list under Item 15(a)(3). This Form 10-K/A should be read in conjunction with the 2014 Form 10-K as originally filed and with our other filings made subsequent to such filing.

ITEM 6.

SELECTED FINANCIAL DATA

The selected statement of operations and balance sheet data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.

(1)	During fiscal 2014 the Company divested our Changepoint, Uniface, and Professional Services business segments.  See note 2 of the consolidated financial statements included in this report for additional information regarding the divestiture.

(2)

During fiscal 2014 and 2013, the Company undertook various restructuring activities to reduce administrative and general and non-core operational costs. The activities associated with this plan resulted in a restructuring charge from continuing operations of $12.0 million for fiscal 2014 and $15.8 million for fiscal 2013, respectively. See note 9 of the consolidated financial statements included in this report for additional information regarding our restructuring plan.

During fiscal 2010, the Company undertook various restructuring activities to improve the effectiveness and efficiency of a number of the Company’s critical business processes.

(3)	In May 2009, we exited the Quality and Testing business by selling our Quality and DevPartner distributed product lines to Micro Focus International PLC, resulting in a gain on divestiture of product lines of $52.4 million.

(4)	See note 13 of the consolidated financial statements included in this report for the basis of computing earnings (loss) per share.

(5)	See note 10 of the consolidated financial statements included in this report for additional information on debt.

See note 3 of the consolidated financial statements for additional information on acquisition activity.

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PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The following table provides summary information about each director. Directors hold office until the next annual meeting of shareholders and until his or her successor is elected and qualified.

A brief description of each nominee's experience and qualifications follows:

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Gurminder S. Bedi

Mr. Bedi has served as one of our directors since October 2002 and as our Chairman of the Board since April 2013. Mr. Bedi is a private investor. He served as Vice President of Ford Motor Company from October 1998 until his retirement in December 2001. From 1998 until his retirement, Mr. Bedi was the Vice President of North America Truck, responsible for vehicle development and business and technical strategies. From October 1996 to October 1998, he served as Vehicle Line Director at Ford Motor Company and in a variety of other managerial positions at Ford for more than 30 years. Mr. Bedi is a director of KEMET Corporation, serving on its Governance and Compensation Committees, and Actuant Corporation, serving on its Governance and Compensation Committees. A graduate of George Washington University with a BS degree in Mechanical Engineering, Mr. Bedi also earned an MBA degree with a concentration in finance from the University of Detroit. Mr. Bedi’s experience and education in finance lends pertinent skill to the Audit Committee and to the Board generally. Moreover, with his strong background in the automotive sector, Mr. Bedi provides the Company and the Board with in-depth knowledge of an industry that includes some of our key customers.

 

Jeffrey J. Clarke

John G. Freeland

David G. Fubini

Mr. Fubini has served as one of our directors since April 2013. He is a Director Emeritus of McKinsey & Company, Inc., a global management consulting firm advising leading organizations across the private, public and social sectors. Mr. Fubini has served in various leadership roles with McKinsey since 1981. Mr. Fubini is currently a director of Leidos Holdings, Inc., serving as a member of their Finance and Human Resources/Compensation Committees. A graduate of UMass Amherst with High Honors and Harvard Business School, Mr. Fubini’s extensive experience leading major strategic repositioning of global organizations, enabling clients to architect and execute transformational programs that accompany acquisitions, divestitures and mergers, as well as his active role in the executive management of McKinsey, brings an important perspective to the Compuware board during the Company’s current transition efforts.

William O. Grabe

Mr. Grabe has served as one of our directors since April 1992. Mr. Grabe possesses broad experience in financial and technology companies. Mr. Grabe is an Advisory Director of General Atlantic LLC, a private equity firm that provides capital for global growth companies, and has been affiliated with General Atlantic LLC and its predecessors since April 1992. Prior to his role at General Atlantic, Mr. Grabe was the Vice President and General Manager for the Marketing and Services group at IBM United States. Mr. Grabe is currently a director of Lenovo Group Limited (serving on its Compensation Committee) and Gartner, Inc. (serving on its Governance Committee) and previously served on the boards of Infotech Enterprises Limited (2007 to 2010) and Patni Computer Systems, Ltd. (2002 to 2011). In November 2012, Mr. Grabe was appointed as a director for Covisint Corporation, a subsidiary of the Company, and currently serves on the Compensation and Governance Committees. Mr. Grabe holds a BS degree from New York University and an MBA degree from the UCLA Graduate School of Business. Mr. Grabe’s broad experience as a director of a number of public companies, along with his long career as a private equity investor and former manager at IBM and his long history with the Company, allow him to bring a unique and valuable perspective to the Board.

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Frederick A. Henderson

Mr. Henderson has served as one of our directors since April 2011. Mr. Henderson is Chairman and CEO of SunCoke Energy, Inc., the largest U.S. independent producer of metallurgical coke to the steel industry, where he has served since December 2010. He served as a Senior Vice President of Sunoco, Inc., a petroleum refiner and chemicals manufacturer with interests in logistics, from August 2010 until the completion of SunCoke’s initial public offering and separation from Sunoco in July 2011. Mr. Henderson also serves currently as Chairman and CEO of SunCoke Energy Partners GP LLC, established in 2013 as the coke-producing industry’s first publicly traded master limited partnership. Prior to his current roles, he was President and CEO of General Motors Corporation (“GM”) from April 2009 until December 2009 and held a number of other senior management positions during his 25 years with GM, including President and Chief Operating Officer, Vice Chairman and Chief Financial Officer, Chairman of GM Europe, Regional President of GM Asia Pacific and Regional President of GM Latin America, Africa and Middle East, and served as a consultant for GM and Alix Partners during 2010 before joining Sunoco. Mr. Henderson is also a current director of Marriott International, Inc. and the Chairman of their Audit Committee. He currently serves as a trustee of the Alfred P. Sloan Foundation. Mr. Henderson holds a BBA degree from the University of Michigan and an MBA degree from the Harvard Graduate School of Business. He is a certified public accountant and is an “audit committee financial expert,” as defined by the rules and regulations of the SEC. Mr. Henderson’s significant accounting skills, experience in leading the initial public offering of a subsidiary of a public company, expertise in large organization management and emerging markets and experience in the auto industry, which includes some of our key customers, make him an important member of the Board and its Audit Committee.

Faye Alexander Nelson

Ms. Nelson has served as one of our directors since October 2002. Ms. Nelson is Vice President, Public Affairs and President, DTE Energy Foundation for DTE Energy, a Detroit-based diversified energy company involved in the development and management of energy-related business and services nationwide. Prior to joining DTE in February 2014, Ms. Nelson was the President, Chief Executive Officer and a director of the Detroit Riverfront Conservancy, a non-profit organization formed to lead a public/private partnership in the redevelopment and sustainability of Detroit’s riverfront. Prior to joining the Conservancy in November 2003, Ms. Nelson was the Vice President of Government Affairs for Wayne State University. Prior to joining Wayne State in February 1996, Ms. Nelson was employed by Kmart Corporation for 15 years where she served as Corporate Attorney and Director for Government Affairs. Ms. Nelson serves on the board of several community, civic and economic development organizations, including the Detroit Symphony Orchestra, The Henry Ford Health System & Health Network Board, M-1 Rail and the Parade Company. As an attorney and corporate officer of a Fortune 500 company, Ms. Nelson is well trained in areas of critical thinking, complex problem solving and finance. Ms. Nelson’s considerable leadership, development and management skills, combined with her legal and government relations experience, enable her to bring a unique and valuable perspective to the Board.

Robert C. Paul

Mr. Paul has served as our Chief Executive Officer since June 2011 and as our President and Chief Executive Officer since June 2013. He previously served as our President and Chief Operating Officer from April 2008 to June 2011. Mr. Paul brings to the Board a strong background in managing and leading a variety of technology companies. Since April 2009, Mr. Paul has served on the board of directors of Covisint Corporation, a subsidiary of Compuware. Prior to April 2008, Mr. Paul was President and Chief Operating Officer of Compuware’s Covisint division since Compuware acquired Covisint LLC in March 2004. Prior to the acquisition, Mr. Paul spent nearly three years at Covisint LLC, as the Chief Executive Officer and President from May 2003 to February 2004 and as Senior Vice President of Sales and Marketing from October 2001 to May 2003. Prior to his employment with Covisint LLC, Mr. Paul served as President of Future 3, a provider of supply chain management software applications for the automobile industry from May 2000 until October 2001. Prior to that, he served as President and Chief Operating Officer of Coherent Networks, Inc. from February 1999 to May 2000. Mr. Paul currently serves on the board for CareTech Solutions, a non-public healthcare IT services company. Mr. Paul’s industry perspective, leadership experience, intimate knowledge of Compuware and his ability to reposition technology companies for success provide an important skill set to the Board.

Jennifer J. Raab

Ms. Raab has served as one or our directors since November 2013. She currently serves as the President of Hunter College, the largest college of the City University of New York. Since assuming this position in 2001, President Raab has successfully raised academic standards while strengthening and modernizing the college’s system of fiscal management. Prior to joining Hunter College, she served for seven years as Chairman and Commissioner of the New York City Landmarks Preservation Commission. Ms. Raab also has significant legal expertise, having worked as a litigator at two of the nation’s most prestigious law firms – Paul, Weiss, Rifkind, Wharton & Garrison from 1990 to 1994 and Cravath, Swaine & Moore from 1985 to 1990. She is a member of the Council on Foreign Relations and serves on the boards of The After-School Corporation and United Way and on the Steering Committee of the Association for a Better New York. In 2007, 2009, 2011, and 2013, Crain’s New York Business named her one of New York’s “50 Most Powerful Women”. Ms. Raab is a graduate of Cornell University, the Woodrow Wilson School of Public and International Affairs at Princeton, and Harvard Law School. Ms. Raab’s experience as fiscal manager, reformer, leader, and public servant brings a diverse and innovative perspective to the Board.

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Lee D. Roberts

Mr. Roberts has served as one of our directors since April 2013. He is the President and Chief Executive Officer of BlueWater Management Consulting, a high-tech consulting company providing professional consulting services that leverage technology as a key competitive resource. He has served with BlueWater since 2008. From 2006 to 2008, Mr. Roberts was the Vice President and General Manager, IBM Document & Content Management for IBM Corporation. In 2006, IBM Corporation acquired FileNET Corporation, where Mr. Roberts had served as President and CEO from 1997 through 1999, and as Chairman and CEO from 2000 until its acquisition in 2006. Prior to FileNET Corporation, Mr. Roberts performed various sales and marketing leadership roles at IBM Corporation, working his way up from Account Executive in 1977 to General Manager and Vice President, Worldwide Marketing and Sales, Network Division in 1996. Mr. Roberts is currently a director of QAD, Inc., serving on its Audit and Governance Committees and as Chairman of its Compensation  Committee; and Unisys Corporation, serving as Chairman of its Compensation Committee. He was previously a director of infoGROUP, Inc. from October 2009 to July 2010. In addition, he is currently a member of the board of Inovalon, Inc., a private company, serving as Chairman of its Compensation Committee. Mr. Roberts’ vast experience in technology, leadership and consulting, coupled with his sales and marketing expertise bring a valuable combination of skills and insight to the Board.

Stephen F. Schuckenbrock

Mr. Schuckenbrock has served as one of our directors since March 2014. He has nearly thirty years of experience leading IT organizations, consulting businesses, and hardware companies. He served as President and CEO of Accretive Health, Inc., taking over the role in April 2013 to lead the company through a significant restructuring. He resigned from his President and CEO responsibilities in July 2014 but continues with the company through September 2014 to transition those responsibilities to the new CEO while maintaining his role on the Accretive Health board of directors. From January 2007 to March 2013, Mr. Schuckenbrock served in multiple roles at Dell, Inc., most recently as the President of Dell Services and a member of the Executive Leadership Team. Prior to working at Dell, he served at Electronic Data Systems as Co-Chief Operating Officer from November 2005 to June 2006 and Executive Vice President of Global Sales and Services from January 2003 to November 2005. Before joining EDS, Mr. Schuckenbrock served as Chief Operating Officer of The Feld Group, Global Chief Information Officer of PepsiCo, and spent almost a decade at IBM in a variety of sales and executive staff positions. Mr. Schuckenbrock’s experience in technology and as a turn-around leader provide him with the skills necessary to effectively analyze complex issues and make him a valuable member of the Board.

Nomination and Standstill Agreement

On January 8, 2014, the Company entered into a nomination and standstill agreement (the “Agreement”) with Elliott Associates, L.P., Elliott International, L.P. and Elliott International Capital Advisors Inc. (together, “Elliott”) pertaining to, among other things, the election of directors to the Company’s Board of Directors (the “Board”) and the formation of an advisory committee (the “Advisory Committee”). Pursuant to the Agreement, Elliott agreed to certain limited standstill and voting provisions. As of the date of the Agreement, Elliott was the beneficial owner of approximately 18,670,000 shares of the Company’s common stock, which represents approximately 8.6% of the issued and outstanding shares of common stock.

Under the terms of the Agreement, the Company agreed to nominate John G. Freeland and Stephen F. Schuckenbrock (the “New Independent Directors”) for election, along with nine incumbent directors (together with the New Independent Directors, the “2013 Nominees”) for re-election, as directors of the Company at the most recent annual meeting in March 2014. The Company agreed to convene and hold the annual meeting on or before March 31, 2014 and use the same solicitation efforts on behalf of all 2013 Nominees. Any New Independent Director elected at the Annual Meeting would serve until the next annual meeting of shareholders.

The Company agreed to form the Advisory Committee for the purpose of advising the Board on strategies to enhance the Company’s value, including by conducting a review of the Company’s operations (efficiency, cost structure, and other considerations) and evaluating the potential value and impact of alternative financing, capitalization and tax optimization strategies as well as other value-creating initiatives. The Advisory Committee consists of Jeffrey J. Clarke, William O. Grabe, Frederick A. Henderson and John G. Freeland. The Chairman of the Board and Chief Executive Officer of the Company are entitled to participate in the meetings of the Advisory Committee.

Under the terms of the Agreement, Elliott agreed not to, among other things, solicit proxies regarding any matter to come before the March 2014 annual meeting, including for the election of directors, or enter into a voting agreement or become a group with other shareholders with respect to the solicitation of proxies. Elliott agreed to vote its shares in favor of the 2013 Nominees for election to the Board and the other agenda items set forth in the proxy statement relating to the March 2014 annual meeting.

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Other elements of the Agreement include:

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The Company agreed the size of the Board may be increased to more than eleven (11) directors during the term of the Agreement only (i) following the first date that the New Independent Directors are seated on the Board and (ii) upon approval by a majority of the members of the Board (which vote must include the approval of at least two (2) of Jeffrey J. Clarke, Jennifer J. Raab, Stephen F. Schuckenbrock and John G. Freeland);

·

The Company agreed, subject to certain conditions, that during the term of the Agreement it will not amend the provisions of the Company’s Restated Articles of Incorporation or the Company’s Amended and Restated Bylaws relating to the Company’s shareholders’ ability (i) to call a special meeting, (ii) to act by written consent or (iii) to nominate candidates for election to the Board;

·

The Agreement will terminate on the earliest of (i) the Company’s material breach, if not cured within ten (10) days, of its obligations with respect to the nomination of the New Independent Directors and the holding of the March 2014 annual meeting, (ii) the earlier of (A) the date that is thirty (30) days prior to the Company’s advance notice deadline for the submission of director nominations at the next annual meeting of shareholders or (B) December 31, 2014, or (iii) such other date as established by mutual written agreement of the Company and Elliott; and

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Except as modified in the Agreement, the terms of the confidentiality agreement, dated February 14, 2013, entered into by and among the Company and Elliott, as amended, supplemented or extended (the “Confidentiality Agreement”) will remain in effect for at least the term of the Agreement notwithstanding any provision in the Confidentiality Agreement to the contrary.

Audit Committee

The Audit Committee of the Board is comprised of Messrs. Bedi, Fubini, Henderson (chair) and Schuckenbrock.  The Board determined that all the current members of our Audit Committee are independent as required by the rules of the SEC and the listing standards of NASDAQ for purposes of Audit Committee membership. In addition, the Board of Directors has determined that all members of the Audit Committee are financially literate, and that Mr. Henderson qualifies as an audit committee financial expert, as defined by the rules and regulations of the SEC.

Codes of Conduct

The Board has adopted a Code of Conduct that applies to all of our employees, including our chief executive officer and chief financial officer, and a similar Code of Conduct for non-employee directors. The Codes of Conduct identify those areas in which we must act in accordance with law or regulation, and also establish the responsibilities, policies and guiding principles that will assist us in our commitment to adhere to the highest ethical standards and to conduct our business with the highest level of integrity. Our Codes of Conduct and Board committee charters are posted in the Corporate Governance section of the “Investor Relations” page at www.compuware.com. To the extent any amendment is made to the Codes of Conduct that requires disclosure under applicable SEC rules, information regarding such amendment will be posted on the Company's website.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common shares and other equity securities. Officers, directors and greater-than-10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.

 

To our knowledge, based solely on our review of the copies of such reports furnished to us during or with respect to fiscal 2014, or written representations that no Form 5 was required, we believe that all Section 16(a) filing requirements applicable to our officers, directors and greater-than-10% beneficial owners were met since the beginning of fiscal 2014, with the exception of late Form 4s filed by Messrs. Archer, Bedi, Fubini, Grabe, Henderson, Roberts, Romney, Szygenda, Ms. Nelson and Dr. Price (all of whom are directors or former directors) to report the June 16, 2013 dividend equivalent allocation and one Form 4 by Mr. Szygenda to report twelve transactions relating to the release of his deferred RSUs and Dividend Equivalent Rights triggered by his September 15, 2013 resignation from the Board.

 

Executive Officers of the Registrant

 

Our executive officers as of July 21, 2014, who serve at the discretion of our Board of Directors, are listed below:

 

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

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

Daniel S. Follis, Jr. has served as Senior Vice President, General Counsel and Secretary since March 2008. He was also appointed as Senior Vice President Human Resources in April 2014. From January 2006 through February 2008, he served as Vice President, Associate General Counsel. Mr. Follis joined Compuware in March 1998 as Senior Counsel.

Christopher O’Malley has served as our President of Mainframe Operations since July 21, 2014. Prior to joining Compuware, Mr. O’Malley was the Chief Executive Officer of VelociData, a provider of leading-edge Big Data solutions from 2013 to July 2014. He was the Founder and Chief Executive Officer of Christopher Ventures LLC from 2012 to 2013.  Mr. O’Malley held a variety of executive positions with CA Technologies from 1988 to 2012, including Chief Executive Officer and Executive Director of Nimsoft, Executive Vice President of the Cloud Product Solutions Business Line and Executive Vice President and General Manager of the Mainframe Business Unit.

John Van Siclen has served as Senior Vice President, General Manager APM since November 2011. From August 2008 through October 2011, Mr. Van Siclen served as the Chief Executive Officer and President of dynaTrace Software, Inc. He joined Compuware in July 2011 with our acquisition of dynaTrace.

 

Kris F. Manery has served as Senior Vice President, Mainframe since June 2011. He also served as the General Manager of Mainframe from June 2011 through July 21, 2014. Mr. Manery joined Compuware in October 1985 as a Product Sales Representative. From April 1998 to December 2000, he served as a Sales Manager for North America Sales and from January 2001 through May 2011, he served as a Vice President in various roles, including Product Line Sales Management, Sales Development, Customer Relationship Management, Enterprise Products Management, Products Regional Management and Business Unit Management.

 

ITEM 11.

EXECUTIVE COMPENSATION

Compensation of Executive Officers

Compensation Discussion and Analysis

Executive Summary

Business Highlights

Fiscal 2014 was a transformational year for Compuware.  We have made great progress toward our strategic goal of transforming into a growth company and positioning ourselves for improved profitability. Some of our business performance and operational highlights in fiscal 2014 included:

 

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Increased APM license revenue by 16%, total revenue by 9% and contribution margin by 761% year-over-year;

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Boosted Mainframe maintenance renewals to 94%, the highest rate in the last five years;

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Continued executing on the Board’s restructuring plan intended to eliminate $110 million to $120 million of administrative, general and non-core operational costs over fiscal years 2014-2015, accomplishing $56 million reduction in expenses in fiscal 2014, which was 25% higher than projected;

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Completed the initial public offering of our Covisint Corporation subsidiary in September 2013;

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Completed the sale of the Changepoint, Professional Services and Uniface Business Units ; and

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Paid quarterly cash dividends totaling $0.50 per share.

 

Compensation Paid

 

Due to the results of operations for the year and consistent with our philosophy of linking a substantial portion of executive pay to Company performance, NEOs received a short-term cash bonus and a deferred-payment long-term cash bonus under the Executive Incentive Program, or EIP. One NEO received a salary increase early in fiscal 2014 and another NEO received a salary increase late in fiscal 2014. Otherwise, there were no salary increases for NEOs for fiscal 2014.

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Executives received equity-based grants, some of which will vest only if performance targets derived from our long term business plan are satisfied and some of which are time-vested. The performance-based vesting provisions for stock options to executive officers were simplified beginning in fiscal 2014 under the EIP to include a single measurement date at the conclusion of a three-year period.

Retention and Severance Agreements

As noted above, fiscal 2014 was a transformational year for us. We pursued a number of strategic initiatives intended to deliver value to our shareholders, the execution of which required the focus and commitment of key personnel, including our NEOs. In addition to the work completed in fiscal 2014, in early fiscal 2015 we announced our intention to explore the potential separation of the Company’s APM and Mainframe business units to further enhance shareholder value. To ensure that key personnel, including NEOs, would remain with us and continue to execute on our strategic transformation, including the potential separation, the Compensation Committee and Board authorized the Company to enter into severance agreements and retention and transaction bonus agreements with such key personnel. As more fully described below, the severance agreements provide recipients with, among other things, specified lump sum severance payments, accelerated vesting of unvested equity awards and reimbursement for health and welfare benefits for a specified period of time in the event the recipient is terminated without cause or the recipient terminates employment for good reason within a specified period of time following a change in control of the Company. In addition, following the May 2014 announcement of our intention to explore a separation of the APM and Mainframe business units, the Compensation Committee and Board approved the award of retention and transaction bonus agreements to incentivize key personnel, including NEOs, to remain with the Company to continue the transformational work that was begun in fiscal 2014 and potentially execute the separation of those business units. The retention and transaction bonus arrangements are more fully described below.

Overview of Compensation Philosophy and Programs

The competition for talent in the technology industry is fierce. We believe that finding and keeping such talent is critical to growing our business for the benefit of our shareholders and employees. Accordingly, our compensation programs are intended to attract and retain highly-skilled and experienced employees, while maintaining the link between performance and pay in order to deliver sustained, strong business and financial results. We emphasize performance-based compensation by tying cash incentives to the achievement of specific performance goals and strategically granting stock options and other types of equity to key employees to align their long-term interests with that of our shareholders.

The fundamentals of our executive compensation program remained the same for fiscal 2014. The program continues to emphasize pay for performance tied to corporate financial objectives and includes the following compensation best practices to the extent they support the Company’s strategic objectives:

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we employ a market analysis of executive compensation relative to peer companies;

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our compensation mix is generally weighted toward long-term incentives;

·

our restricted stock unit and stock option awards have long-term vesting schedules;

·

our form of equity grant agreements includes a “double-trigger” change-in-control mechanism wherein accelerated vesting occurs only if the participant’s employment is terminated under certain circumstances after  a change-in-control transaction;

·

we adhere to stock ownership guidelines that require our senior management team and directors to hold a specific number of Compuware shares and unvested RSUs;

·

our claw-back policy provides that senior management may be required to return some or all incentive compensation to the Company under certain circumstances involving restatement of Compuware’s financial statements as determined by the Board;

·

our Long Term Incentive Plan prohibits the repricing of options without shareholder approval, except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, statutory share exchange, acquisition of property or stock, or liquidation); and

·

we provide only limited perquisites to our executive officers.

In this section we will explain how our compensation programs are established and how they work with respect to our CEO, CFO and the other Named Executive Officers who served during fiscal 2014. In fiscal 2014, our NEOs included the following individuals:

·

Robert C. Paul, President (beginning June 26, 2013) and Chief Executive Officer

·

Joseph R. Angileri, Chief Financial Officer (beginning June 15, 2013), formerly President and Chief Operating Officer

·

Laura L. Fournier, former Executive Vice President and Chief Financial Officer

·

Daniel S. Follis, Jr.,  General Counsel, Corporate Secretary and Senior Vice President Human Resources

·

Kris F. Manery, Senior Vice President and General Manager, Mainframe Business Unit

·

John Van Siclen, Senior Vice President and General Manager, APM Business Unit

Ms. Fournier, who left the Company in May 2013, is included as an NEO because she served as our Chief Financial Officer during a portion of fiscal 2014. References in this discussion to the current NEOs are to the NEOs other than Ms. Fournier.

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Mr. Manery remains employed as a Senior Vice President in the Mainframe Business Unit, but was replaced as the General Manager on July 21, 2014 by Christopher O’Malley who joined the Company as President of Mainframe Operations on that date.

Our performance-based compensation philosophy applies to all of our employees, but is especially relevant to the NEOs. We believe that our NEOs and other key employees should have a significant portion of their potential annual cash compensation tied to our performance as measured by profitability and sales goals. Additionally, we seek to align their ability to earn long-term incentives directly with the interests of our shareholders through the use of equity-based incentives.

Executive Compensation Elements

How Executive Compensation Is Determined

The Compensation Committee establishes and administers our executive compensation program. The Compensation Committee periodically reviews the Company’s philosophy regarding compensation for key employees, including the NEOs. It also reviews and considers each element of compensation in making compensation determinations. Each year, the CEO evaluates the performance of the NEOs and other Company officers. Based on his evaluation, the CEO may recommend adjustments in base salary, the structure of the cash incentive plans and the magnitude and form of the equity grants. The Compensation Committee considers these recommendations when making compensation decisions regarding compensation for executive officers other than the CEO. The Compensation Committee independently assesses the performance of the CEO, analyzes relevant competitive data (recognized industry surveys and peer group information) and presents its recommendation regarding compensation for the CEO to the independent directors of the Board for their review and approval.

The Compensation Committee reviews all elements of compensation as a whole in measuring total compensation packages against the objectives of the compensation program. The proportion of variable or incentive compensation varies with the level of an executive’s responsibility within the Company. Since the NEOs have the highest level of responsibility in the Company, the proportion of their potential incentive compensation is higher in relation to their base salaries than other employees. The Compensation Committee also reviews market data and evaluates the competitiveness of pay levels for the NEOs based on a combination of recognized industry executive compensation surveys and data gathered from annual reports and proxy statements of companies identified and approved by the Committee as the peer group.

For fiscal 2014, the Compensation Committee selected and directly engaged Towers Watson to assist with its evaluation of compensation for our executives. In addition to the work performed at the request of the Compensation Committee, Towers Watson performed other services for the Company relating to executive compensation programs for Covisint Corporation, a subsidiary of the Company, for which it was paid an immaterial amount.

Towers Watson helped formulate our peer group, provided data on executive compensation practices and levels at the peer group companies, reviewed and made recommendations related to our overall compensation philosophy, and provided an evaluation of total compensation for our NEOs.

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For fiscal 2014, our industry peers included the following companies:

These companies were chosen because they are comparable to us with regard to revenue size, maturity level as established businesses, operating in the software industry and/or are direct competitors. The expertise and skills needed for executives at such companies are very similar to the skills required for our executives. Lawson Software, Inc., ModusLink Global Solutions, Inc., Novell Inc., Quest Software Inc. and SRA International were removed from the fiscal 2014 peer group because they no longer met the Company’s criteria for peer companies due to their changed business circumstances. Based on available data, Ansys, Inc., Informatica Corporation, Mentor Graphics Corporation, MicroStrategy Inc. and Red Hat, Inc. were added as peer companies in fiscal 2014 because they meet the criteria stated above.

The peer group data and Towers Watson’s analyses and findings were presented to the CEO and the Compensation Committee and were used to evaluate compensation recommendations. Peer group data provides the Committee with a perspective on the magnitude and components of compensation provided to NEOs at comparable companies. This helps the Committee to set compensation at levels that support our attraction/retention objectives, and ensures that the resulting costs are reasonable based on our financial plan and that equity awards are fair and not unreasonably dilutive. Peer group data is reviewed and considered by the Compensation Committee as a reference point; however, the Compensation Committee does not formally benchmark the compensation of individual executives to any particular amount or range based upon such data. Deviations from the reference point may occur in individual cases due to an NEO’s individual contributions to the Company, tenure, experience, and other competitive factors as determined by the Committee.

 

Base Salary

 

Similar to other companies in the technology industry, we believe that competitive base salaries play an important role in helping us attract and retain high-performing executive officers. When reviewing base salaries for officers, including the NEOs other than CEO, the Compensation Committee takes into account a number of related factors including, but not limited to, the CEO’s assessment of their individual performance and recommendation for salary level changes, the performance of the NEO’s particular organization, the NEO’s experience, level of responsibility and unique contributions to the Company and the Company’s need for certain types of expertise. These factors, along with the peer group data provided by the Committee’s independent compensation consultant, are used to determine appropriate base salaries.

The Compensation Committee independently assesses the CEO’s performance utilizing an approach similar to that used to evaluate our other NEOs (i.e., overall Company performance, accomplishment of strategic objectives, development of subordinates and other relevant measures of performance, as well as market data). Based upon its assessment, the Committee makes a recommendation to the independent directors of the Board regarding any adjustments to the CEO’s base salary.

Base salaries for fiscal 2014 were determined in accordance with the process described above. For fiscal 2014, there was no increase to base salary from fiscal 2013 levels for Messrs. Paul, Angileri and Manery or for Ms. Fournier. Mr. Follis received a 4.6 percent increase to his base salary in March 2014 in in connection with his assumption of additional management responsibilities for fiscal 2015. In recognition of the continued growth in revenue and contribution margin in the APM business unit, Mr. Van Siclen received a 20 percent increase to his base salary in May 2013 for fiscal 2014.

Executive Incentive Program

Annual and long-term incentive opportunities are generally provided under the Executive Incentive Program, or “EIP.” The Compensation Committee, in consultation with the CEO, annually approves performance criteria and goals for measuring corporate performance for use under the EIP.

The EIP is structured to: (1) base a significant portion of compensation on the attainment of Company performance targets; (2) align the financial interests of the participants with that of the Company and the shareholders; and (3) encourage the NEOs and other key employees to work together as a team to achieve specific annual financial goals. The NEOs and other key executives work closely together to formulate the Company’s strategy and oversee the implementation of that strategy.

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Earning Opportunity Under EIP In Fiscal 2014

Based on an analysis of pay levels at our peer group companies and other benchmark data, and with the recommendation of Towers Watson, the Compensation Committee determined that the long-term incentive targets (as a percentage of salary) for our executive officers should remain the same as the prior fiscal year. The following table illustrates the annual and long-term incentive targets for fiscal 2014:

For fiscal 2014, Messrs. Paul, Angileri and, Follis and Ms. Fournier (“Executive NEOs”) shared a common set of performance goals for the annual and long-term incentive targets, comprised of earnings per share (“EPS”) and revenue (“Revenue”). Messrs. Manery and Van Siclen, who are our Business Unit General Managers (“BU NEOs”) shared the same EPS performance goals as the Executive NEOs for the annual incentive target, as well as performance goals based on Revenue and Contribution Margin target for their respective business units. The BU NEOs’ long-term incentive target performance goals are the same as the Executive NEOs, comprised of EPS and overall corporate Revenue. All NEO incentive plans have goals with percentage levels established for minimum (threshold), target and maximum attainment. Each NEO’s earning opportunity at the target attainment percentage level is the sum of what we refer to as their “Annual EIP Target” and “Long-Term EIP Target.” Compared to other employees, our NEOs have the highest percentage of their total cash compensation tied to achieving the EIP performance targets due to their higher level of responsibility, consistent with our overall philosophy of basing pay on performance.

To ensure that we remain competitive with our peers in the market for executive talent, the Compensation Committee determined for fiscal 2014 that a combination of cash and equity should continue to be awarded as the long-term component of compensation. Specifically, the long-term EIP component is divided in thirds, with one third payable in cash as Long-Term Performance Cash, one third granted in performance-based stock options and one third granted in time-based RSUs.

To illustrate the annual and long-term incentive mix, the following tables provide hypothetical examples of the fiscal 2014 EIP components. The first table shows the various tiered targets for an Executive NEO with an annual salary of $500,000 and performance goals attained at target. The second table shows the various targets for BU NEOs, also assuming an annual salary of $500,000, with all performance goals attained at target.

EXECUTIVE NEO

BU NEO

(1)

The number of shares awarded as stock options will be determined by applying a Black-Scholes option pricing model calculation to the target dollar value.

(2)

The number of share units awarded as RSUs will be determined by dividing the target dollar value by the fair market value (closing price on the date preceding the award date) of the Company’s common stock.

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Performance Measures

The Compensation Committee approved performance under the fiscal 2014 EIP to be measured for Executive NEOs according to total Company Revenue and EPS for both annual and long-term incentive goals, and for BU NEOs according to Company EPS, BU Revenue and BU Contribution Margin for annual incentive goals, but according to total Company Revenue and EPS for long-term incentive goals. The long-term incentive measures for the BU NEOs were chosen because they reflect our philosophy of aligning a portion of executives officers’ compensation around a common set of Company-wide goals. The performance measures are defined as follows:

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Revenue – defined as the sum of revenue from all software license, maintenance, subscription, professional services and application services arrangements recognized during the fiscal year in conformity with U.S. GAAP.

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EPS – defined as net income, before the impact of unusual items (such as gain on divestiture of product lines; restructuring and related costs; and impairment of intangible assets), divided by the weighted average diluted shares outstanding for the year.

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BU Revenue – defined as the sum of the business unit revenue from software license, maintenance, subscription and professional services recognized during the fiscal year in conformity with U.S. GAAP.

·

BU Contribution Margin – defined as BU Revenue, less operating expenses of the business unit, excluding certain administrative and general costs during the fiscal year.

We chose these performance measures because we believe that our share price will increase if we grow our sales (Revenue) profitably (EPS and Contribution Margin).

For fiscal 2014, there were three performance levels of attainment established for each of the EPS, total company Revenue, BU Revenue and BU Contribution Margin components (see chart below), with cash award amounts prorated between each performance level based on actual results. For example, if the Company met 100% of its EPS target and 100% of its Revenue target, the Executive NEO would receive an Annual Incentive Award equal to 100% of his or her base salary, half for meeting the EPS target and half for meeting the Revenue target. If performance were below the threshold level for either component, no cash award would be earned with respect to that component. If performance exceeded the maximum level, the cash award would be capped at the maximum payout level.

 All performance levels were formulated by executive management using the fiscal year business plan for the Company as a baseline. The fiscal year business plan was reviewed and approved by the Board. Once the fiscal year business plan was approved, the performance levels applicable to the EIP were then reviewed and approved by the Compensation Committee.

The fiscal year 2014 performance targets for the EIP were set in May 2013. Due to the transformation of our business, in particular the divestitures of the Changepoint, Professional Services and Uniface business units at the beginning of the fourth quarter, the full-year targets became a less meaningful measure of the Company’s actual performance. To take this transformation into consideration, the Compensation Committee approved a revised framework for the EIP targets in March 2014. Specifically, the fiscal 2014 EIP targets were restructured under two components for the Executive NEOs: Component 1 representing 75% of the original target and measuring EPS and Revenue for the three quarters, or nine months, during which the Company was operating as “old Compuware,” prior to the divestitures; and Component 2 representing 25% of the original target and measuring Revenue and Contribution Margin for the last quarter, or 3 months, during which the Company operated as “new Compuware,” comprised of the remaining APM, Mainframe and Covisint business units. Contribution Margin is defined as the sum of the APM, Mainframe and Covisint margins for the fourth quarter of fiscal 2014. The BU Revenue and BU Contribution Margin performance measures for the BU NEOs were not modified, however, the EPS performance measure was pro-rated to conform to the EPS measure as described above in Component 1.

Based on the same ratios used to set the original fiscal 2014 EIP targets, the following tables reflect the adjusted performance measurements and attainment levels.

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Cash Incentive Awards under the EIP

If we meet or exceed the minimum thresholds, the cash incentive referred to as the “Annual Incentive Award,” is paid shortly after the fiscal year-end results of operations are final. In addition, an amount based on a targeted one-third of the long-term incentive compensation, referred to as the “Long-Term Performance Cash,” is earned but payment is deferred and paid only if the NEO remains employed by the Company for two years after the Annual Incentive Award is earned. This deferral is intended to enhance retention of skilled executives in an extremely competitive environment for experienced, executive talent.

A NEO whose employment terminates due to disability or death prior to the end of the fiscal year is entitled to a prorated payment of the Annual Incentive Award, based on the number of full months of employment during the fiscal year, if the applicable performance goal(s) are otherwise satisfied for the fiscal year. Any such prorated Annual Incentive Award would be paid to the NEO or to the NEO’s designated beneficiary or legal representative at the same time as all other Annual Incentive Awards payments. Unless the Compensation Committee determines otherwise, an Annual Incentive Award is forfeited if the NEO’s employment terminates for any reason other than disability or death before the payment date.

The Long-Term Performance Cash is forfeited if the NEO’s employment is terminated voluntarily or involuntarily after the two-year period referenced above but before payment of the cash award is made, unless the Compensation Committee determines otherwise or the termination is caused by death or disability. However, under the NEO severance agreements as described in detail below, any Long-Term Performance Cash that has been allocated to the NEO for a completed fiscal year shall be paid if the NEO’s employment is terminated by the Company without cause or by the NEO for good reason within a prescribed period of time following a change in control of the Company.

In fiscal 2014, the Company’s performance for the first three quarters of the fiscal year as “old Compuware” met the maximum level for EPS and exceeded the minimum thresholds for Revenue under Component 1 of the revised EIP framework. For purposes of the EIP, we achieved an EPS of $.30 (or 200% of target) and $706 million (or 57% of target) in Revenue as “old Compuware.” Under Component 2 of the revised EIP framework for Executive NEOs, the Company’s performance for the fourth quarter of the fiscal year as “new Compuware” did not meet the minimum threshold for Contribution Margin or Revenue. The APM BU achieved $372.3 million in BU Revenue, which did not meet the minimum threshold for BU Revenue, and exceeded the minimum threshold for BU Contribution Margin, achieving $28.4 million (74% of target) in BU Contribution Margin. The Mainframe BU achieved $296.4 million in BU Revenue, which did not meet the minimum threshold for BU Revenue, and exceeded the minimum threshold for BU Contribution Margin, achieving $222 million (71.1% of target) in BU Contribution Margin. As a result, a portion of the Annual Incentive Award and the Long-Term Performance Cash under the EIP for fiscal 2014 was earned and paid to current NEOs in accordance with these results.  The earned payouts were determined as a percentage of the target bonus amounts calculated by dividing each of the performance measure results by four (quarters), multiplying by the number of quarters for which the performance measure applied (three quarters for Component 1 and one quarter for Component 2), multiplying by the percentage that each performance goal comprises of the total Annual Target, and finally adding together the results for each performance measure. The table below illustrates this formula:

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In accordance with the separation agreement described below, former CFO Laura Fournier did not receive any cash bonus under the fiscal 2014 EIP.

Although the Compensation Committee has the authority under the LTIP to grant discretionary bonuses from time to time, there were no discretionary bonuses paid to the NEOs in fiscal 2014.

Equity Awards

To enhance the link between creating shareholder value and long-term incentive compensation, the Compensation Committee may grant equity awards to our NEOs. The Committee believes equity awards are an excellent way to motivate key employees to improve our financial performance and drive stock price growth. The Committee grants equity awards to the NEOs based on each NEO’s contribution to the Company, the desire to promote strategic collaboration across the entire Company, and the need to maintain competitive compensation levels within our industry. Additionally, our approach to vesting is intended to enhance retention of key talent. Equity awards are made as part of the EIP each year and occasionally are also made outside the EIP when the Committee believes circumstances warrant further grants, such as the attainment of key strategic and operational objectives or the hiring, retention or promotion of key executives. EIP related equity grants are made as soon as practical in the new fiscal year after the Board has reviewed and approved our fiscal year financial plan and the Compensation Committee has reviewed and approved proposed salaries, EIP targets and equity awards to NEOs.

Stock options are awarded with an exercise price equal to the closing price of Compuware common stock on the last trading day immediately preceding the date of grant in accordance with the terms of our LTIP. Accordingly, stock options are inherently a form of performance-based compensation, as recognized under Internal Revenue Code Section 162(m), because they have value to the recipient only if the market price of the common stock increases after the date of grant. Historically, the stock option grants have generally vested over time provided that the participant remains continuously employed with the Company and have vested immediately upon a change in control of the Company or if the recipient dies or becomes disabled. If the recipient’s employment ceases for any other reason, the recipient’s right to shares of common stock subject to stock options will automatically terminate. Options expire ten years after the date of grant. The stock option awards are intended to align the recipient’s interests with those of our shareholders.

Restricted stock units are granted to retain key talent and to tie the long-term financial interests of executive officers to the interests of shareholders. Each restricted stock unit represents the right to receive one share of our common stock on the vesting date. The units typically vest annually in equal installments over a four-year period provided that the recipient remains continuously employed with the Company during that time. The RSUs also vest upon a change in control of the Company or if the recipient dies or becomes disabled. If the recipient’s employment ceases for any other reason, the recipient’s right to shares of common stock subject to unvested RSUs will automatically terminate. Once vested, the Company will issue one common share for each vested RSU. The RSUs have Dividend Equivalent Rights. Since the units have value in all market conditions, the vesting schedule provides a strong retention mechanism. The value of the underlying shares to be issued upon vesting, however, rises and falls with the market value of our common stock so that RSUs also align the interests of the recipient with our shareholders.

Fiscal 2014 Equity Awards under the EIP

As of May 16, 2013, the Compensation Committee approved the EIP related grants of stock options and RSUs to be made to Executive NEOs (other than the CEO). Grants to the CEO were approved by the independent members of the Board of Directors on May 16, 2013. On June 27, 2013, Compensation Committee approved the EIP related grants to the BU NEOs who were determined by the Board to be executive officers effective June 26, 2013. All of the May 16, 2013 and June 27, 2013 grants were made under the LTIP and the EIP for fiscal 2014 based on a formula in the EIP. Under the fiscal 2014 EIP, the total value of the NEO’s Long-Term Incentive Awards was determined by multiplying each NEO’s base salary by the NEO’s Long-Term EIP Target percentage. This amount is then divided by three to yield a Long-Term EIP equity target dollar value (“Equity Value”) for each of the two equity components and the cash component of the Long-Term Incentive Award (also referred to as Long-Term Performance Cash as discussed above). To determine the number of shares awarded as stock options, Equity Value is divided by the Black-Scholes value (((base salary * Long-Term EIP Target) / 3) / Black-Scholes value), with fractional shares being disregarded. These options have an exercise price equal to the fair market value of our stock on the date of grant. To determine the number of shares awarded as RSUs, the Equity Value was divided by the fair market value of our common stock as of the award date (((base salary * Long-Term EIP Target) / 3) / fair market value), with fractional shares being disregarded.

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The stock options granted to the Executive NEOs, referred to as “Performance NQSOs,” vest only upon attainment of Company long-term performance goals based on Revenue and Operating Income in the third fiscal year following the date of grant (fiscal year 2016). Attainment of the performance targets will determine the number of shares for which the stock option would be exercisable. The total potential shares for which the Performance NQSOs may become exercisable are split equally between the Revenue and Operating Income performance goals. Revenue is defined in the same way as otherwise used in the EIP. Operating Income is defined as the income from operations as determined in accordance with U.S. GAAP, adjusted for certain items including, but not limited to, restructuring expenses and impairment of goodwill. The number of shares that can be earned will be prorated between the threshold and the target levels of attainment for each measurement category. The Revenue and Operating Income targets applicable to the Performance NQSOs granted in fiscal 2014 are aggressive, requiring compound annual growth rates from fiscal 2013 of 7% to 8% in Revenue and 27% to 30% in Operating Income.  While we believe these targets are achievable, reaching them, even at the threshold level, will require us to consistently deliver significant revenue growth and profitability in the applicable three-year period.

Following the close of fiscal year 2016, the Compensation Committee will determine the extent to which each of the performance targets has been attained based on the Company’s actual fiscal 2016 financial results. No additional shares will be earned if the target performance levels are exceeded. Unearned portions of the Performance NQSOs will be forfeited and cancelled. The earned portion of a Performance NQSO will vest on May 31, 2016. Prior to the performance vesting date, vesting of the entire Performance NQSO will be accelerated on the earlier of the death or disability of the participant, or if employment ends involuntarily other than for cause within twelve months following a change in control. If the Executive NEO’s employment ceases for any other reason, all unvested Performance NQSOs will automatically terminate. To the extent they become exercisable, the Performance NQSOs expire on the tenth anniversary of the date of grant.

The stock options granted on June 27, 2013 to the BU NEOs vest over time in equal installments on each of the first through fourth anniversaries of the grant date, and will become immediately exercisable in full on the earlier of the death or disability of the BU NEO or if employment ends involuntarily other than for cause within twelve months following a change in control. If the BU NEO’s employment ceases for any other reason, all unvested stock options will automatically terminate. These options expire 10 years after grant.

The formulas described above were chosen because they produce a number of options and restricted stock units that the Compensation Committee believes bear an appropriate relationship to the amount of cash incentive compensation and total compensation, enhance retention of key talent, and align with shareholder interests. The following table identifies the stock options and RSUs granted to NEOs under the fiscal 2014 EIP.

Fiscal 2014 Summary of EIP Awards

The following table summarizes the total actual cash incentives earned by and the equity incentives granted to the NEOs under the EIP for fiscal 2014.

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Total Realized Compensation in Fiscal 2014

We believe it is helpful for our shareholders to understand what our top executives actually received in compensation in a given year. The table below reports the total compensation actually received (“Total Realized Compensation”) by each NEO during fiscal 2014. The amounts reported below differ substantially from the amounts reported in the Total column in the Summary Compensation Table in light of the SEC requirements for that table and should not be viewed as a substitute for those Total amounts. Total Realized Compensation includes salary, bonus payments, the value realized before taxes in fiscal 2014 from the vesting of RSUs and PSUs and the exercise of stock options (as also reflected in the Option Exercises and Stock Vested table), the cash incentives paid in fiscal 2014 that were earned under the EIP in prior fiscal years (fiscal 2011 Long-Term Performance Cash and Business Unit 2013 Annual Incentive Award) and all other compensation (from the Summary Compensation Table). Total Realized Compensation excludes the grant date fair value of unvested fiscal 2014 Stock Awards and Option Awards.

(1)

See footnote 4 to the Summary Compensation Table, All Other Compensation for a description of the amounts included in this column.

Stock Ownership Guidelines

As a public company, Compuware believes that the interests of its executive leadership team must be aligned with the long-term interests of our shareholders. The most direct way to establish and maintain this alignment is to ensure that such executives have a continuing equity stake in the Company. In support of this objective, the Compensation Committee adopted formal stock ownership guidelines for senior executives of the Company beginning in fiscal 2013. The stock ownership guidelines specify that executives should hold an amount of Company stock having a value approximately equal to a percentage of salary and, if an executive owns less than the target amount of shares, he must hold 50% of after-tax shares that vest in the case of RSUs or 50% of the shares received upon exercise of stock options until the target amount is reached. This holding requirement applies until the executive meets the guideline. Management and the Compensation Committee will review the share ownership guidelines periodically. The table below illustrates the salary percentage goals established for the various executive positions.

In addition to directly owned stock, shares held in Company qualified savings plans and unvested RSUs are included in calculating ownership levels. Unexercised stock options do not count toward the ownership goals. All of the NEOs either have met these goals or are on track to meet them within the next two fiscal years.

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Claw-Back Policy

One of the objectives of our compensation program is to make a substantial portion of compensation dependent on the Company’s overall financial performance. In the event of a financial restatement arising out of the willful actions, including without limitation fraud or intentional misconduct, or the gross negligence of any participant in the Company’s compensation plans or programs, including without limitation, cash award and stock incentive plans, welfare plans, or deferred compensation plans, it is the Board’s policy that the Compensation Committee shall have the authority to determine the appropriate action to take, which may include recoupment of previously awarded equity-based incentive compensation and/or previously paid cash compensation to a participant under such plans and programs.

Fiscal 2015 Equity Awards under the EIP

Effective May 1, 2014, the Compensation Committee approved a modification to the Long-Term Incentive target for fiscal 2015. As described above, the target value of Long-Term Incentive Awards is based upon a pre-determined multiple of base salary, divided in thirds, with one third payable in cash as Long-Term Performance Cash, one third granted in Performance NQSOs and one third granted in RSUs. Following a review and analysis of an independent compensation consultant, the Committee approved, and the Board approved for Robert C. Paul, Chief Executive Officer, upon the recommendation of the Committee, increases to the base salary multiples applicable to the long-term incentive component of the EIP. The table below illustrates the new multiples approved for fiscal 2015.

In addition, the Committee approved a change to the performance measures used in the fiscal 2015 EIP by replacing Earnings Per Share (“EPS”) with Operating Income (non-GAAP basis), defined as income from continuing operations (before other income and income taxes), and adjusted for the impact of certain items (such as gain/loss on divestiture of product lines; restructuring and related costs; advisory fees; stock compensation; amortization of acquired intangibles; and revenue and expenses associated with Covisint). The second performance measure in the fiscal 2015 EIP will be Revenue from continuing operations (excluding Covisint), defined as the sum of revenue from software license, maintenance, subscription and professional services arrangements recognized during the fiscal year in conformity with U.S. GAAP. The amount of the Annual Incentive Awards and Long-Term Performance Cash will be determined based on the attainment of fiscal 2015 goals set for Operating Income and Revenue.

Performance NQSO grants under the fiscal 2015 EIP are subject to the Company achieving specified performance targets for Revenue and Operating Income in fiscal year 2017. Up to 100% of the total shares subject to the stock option grant may become exercisable, with amounts split equally between the Revenue and Operating Income performance targets. The number of shares that can be earned will be prorated between the threshold and the target levels of attainment for each measurement category. The fiscal 2015 Performance NQSO grants otherwise have substantially the same terms as the fiscal 2014 grants.

The Compensation Committee approved grants of Performance NQSOs and RSUs to NEOs under the Plan and the FY15 EIP effective May 1, 2014. Grants to the CEO were approved by the independent members of the Board of Directors upon the recommendation of the Committee. The RSUs have the same terms as grants made in fiscal 2014. The options have an exercise price equal to the fair market value on the date of grant and have vesting and termination provisions described above. The table below identifies the grants made on May 1, 2014 to the NEOs who continue to serve as officers of the Company.

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Also effective May 1, 2014, the Compensation Committee approved special retention incentive equity grants of 350,000 non-qualified stock options (“NQSO”) with an exercise price equal to the fair market value on the grant date and 225,000 RSUs under the Plan to John Van Siclen based on the need to retain his services as the leader of our growth oriented business unit and to further align his interests with those of our shareholders by tying a significant portion of his compensation to our share price. The amount of the grant was determined following a review of existing Company equity held by our other top executives, which showed that Mr. Van Siclen’s equity awards were significantly less than other senior executives. The terms of the NQSO and RSU agreements are the same as those described above under Equity Awards, with the exception of the vesting schedule. Both grants vest as follows: forty percent vest on the first anniversary and thirty percent vest on each of the second and third anniversaries.

Effective June 1, 2014, to provide incentives for Messrs. Paul, Angileri and Follis to remain with the Company throughout fiscal 2015 and execute on the Company’s strategic transformation, including pursuit of a potential separation of the Company’s APM and Mainframe business units, the Compensation Committee approved retention and transaction bonus agreements with Messrs. Paul, Angileri and Follis. Upon recommendation by the Compensation Committee, the independent directors of the Board authorized the retention and transaction arrangements with the CEO, Mr. Paul. These agreements provide: (A) a retention bonus in the amount of one-hundred percent of the officer’s target annual bonus, payable one-half cash and one-half in restricted stock units which shall vest upon the earliest of: (i) March 31, 2015; (ii) a change in control of the Company and corresponding termination of employment (as such terms are defined in the amended and restated Severance Agreements); or (iii) involuntary termination without cause; and (B) a transaction cash bonus payable in a lump sum in an amount equal to a multiple of the executive officer’s annual base salary, contingent upon the completion of a transaction or series of transactions pursuant to which the Company ceases to own substantially all of the assets of both its APM and Mainframe business units, whether by way of spin off, one or more sales of subsidiaries or assets, or otherwise. The applicable multiples (Mr. Paul – two times, Mr. Angileri – one and one-half times, and Mr. Follis – one times) were approved by the Committee based on the recommendation of Towers Watson following its’ review and analysis of market data and practices related to transaction-based awards.

Employee Benefits and Other Perquisites

Benefit Programs

The Company provides customary benefits such as medical, dental and life insurance and disability coverage to each NEO and all other eligible employees. The Company also provides vacation and other paid holidays to all employees, including the NEOs, which are comparable to those provided at similar companies.

Qualified Plans

 

Since 1986, the Company has maintained a qualified defined contribution plan known as the Employee Stock Ownership Plan, or “ESOP”, and 401(k) Salary Reduction Arrangement, or “401(k)”. All U.S. employees are eligible to participate immediately upon hire in the 401(k). The NEOs are eligible to contribute a portion of their salaries to the 401(k). The Company matches one-third of the first 6% of salary contributed by each participant to the 401(k), including NEO participants.

 

The Company occasionally makes discretionary contributions of Company stock to the ESOP. While the Company no longer contributes shares of Company stock to the accounts of the executive officers, the NEOs continue to hold shares in their ESOP accounts and from time to time receive a pro rata allocation of the value of partial shares and interest earnings accumulated by the plan administrator in the form of common shares. There was no such allocation made in fiscal 2014.

NEOs and other employees are also permitted to participate in the Employee Stock Purchase Plan (“ESPP”) under which employees can elect to have up to 10% of their eligible compensation withheld to purchase Company stock at the close of the offering period selected from time to time by the Board. The value of the stock purchased in any calendar year cannot exceed $25,000 per employee. The purchase price is 95% of the fair market value on the last day of each offering period. The fair market value is determined as the closing market price on the market date immediately preceding the last day of the offering period.

Use of Automobiles

Under a Motorsports Sponsorship Agreement between the Company and General Motors Corporation (the “GM Marketing Agreement”), GM provided the Company with the option to use nine automobiles. Some of the NEOs were granted the use of automobiles under the GM Marketing Agreement for which the participating NEO paid the maintenance costs incurred and the Company paid the insurance costs. For each NEO using one of these automobiles, an equivalent “lease value” was reported as IRS Form W-2 imputed income. The incremental cost to the Company is the employment tax assessed on the imputed income plus the insurance cost. The Company terminated the Motorsports Sponsorship Agreement effective December 31, 2013.

Beginning in January 2014, to replace the benefits of the GM Marketing Agreement for the use of automobiles, the Executive NEOs are provided a $1,500 per month automobile allowance to cover their expenses for the purchase or lease of an automobile, insurance and maintenance.

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Other Perquisites

The NEOs are provided a limited number of perquisites in addition to benefits provided to our other employees. The purpose of these perquisites is to facilitate their access to work functions and personnel and encourage interactions among NEOs and others within professional, business and local communities. NEOs are provided perquisites such as tickets to sporting and special events and travel expenses for spouses to certain Company conferences. These perquisites are further discussed in footnote 5 to the Summary Compensation Table.

The Company leased a 25% share of a jet owned by an unrelated third party for business purposes at a flat monthly management fee. On occasion, the Company allows NEOs to use the jet for personal purposes. For each flight, the Company is charged a flat rate for each flight hour, catering fees for food and beverage, a variable fuel charge and local transportation (collectively, “Flight Expense”). When an NEO uses the jet for personal travel or personal business, the NEO is required to reimburse the Company for the Flight Expense charged to the Company. Therefore, there is no incremental cost to the Company for personal use of the jet. In fiscal 2014, there were no personal flights booked on the leased jet. Our obligations under the lease terminated effective March 21, 2014.

Relationship of Executive Compensation to Risk

 

In connection with fulfilling its responsibilities, the Compensation Committee considers whether the design of the Company’s executive compensation program encourages executives to engage in excessive risk-taking. The Committee reviews the overall program design, as well as the balance between short-term and long-term compensation, the metrics used to measure performance and the award opportunity under the Company’s executive incentive program, and the implementation of other administrative features designed to mitigate risk such as vesting requirements, stock ownership guidelines, capped incentive compensation and a claw-back policy as described above. Based on its review, the Committee believes that the Company’s executive compensation program is aligned to the interests of shareholders, appropriately rewards pay for performance, and does not promote unnecessary and excessive risk.

Deductibility of Executive Compensation

 

Internal Revenue Code Section 162(m) (“Section 162(m)”) restricts the deductibility of executive compensation paid to the Company's CEO and certain other NEOs to not more than $1 million in annual compensation (including gains from vesting RSUs and the exercise of certain stock option grants). Certain performance-based compensation is exempt from this limitation if it complies with the various conditions described in Section 162(m). The LTIP and some of the Company's other option plans contain a shareholder-approved restriction on the number of options that may be granted which is intended to cause compensation realized in connection with the exercise of options granted under these plans to be exempt from the restriction on deductibility. In addition, the LTIP contains provisions that permit us to pay other performance-based compensation that would be exempt from restrictions on deductibility under Section 162(m) if properly structured. Some components of our compensation program result in payments that are subject to these restrictions on deductibility. However, the Compensation Committee has concluded that the effect on the Company’s results of operations from the limit on deductibility is not material and that it is appropriate to exceed the restrictions on deductibility under Section 162(m) to ensure that executive officers are compensated in a manner that it believes to be consistent with the best interests of the Company and its shareholders. The Committee may continue to approve non-deductible compensation in appropriate circumstances.

 

Termination of Employment

 

Employment or Severance Arrangements

We have not entered into any employment agreements with any of our current NEOs. We have from time to time entered into severance arrangements with executives leaving the Company. Historically, we have not had a formal policy of providing salary and/or benefits continuation associated with either a change in control or termination of employment, with the exception of the provisions in our outstanding stock option grants, RSU and PSU awards that accelerate vesting upon death, disability or a change in control and the provisions of our EIP (which is subject to the LTIP) that provide prorated payment of Annual Incentive Awards and accelerated payment of earned Long-Term Performance Cash upon death or disability. Instead, such arrangements are made and structured based on individual circumstances, such as the recipient’s tenure and position. We do not provide any tax gross-ups if the value of accelerated stock options, RSUs or PSUs exceeds the limits in the Code relating to “golden parachute” payments.

In view of the Company’s on-going transformation efforts and in the face of distractions arising from the potential of a change in control, the Board determined that fostering the continued employment of key management personnel was in the best interest of shareholders and that appropriate steps should be taken to reinforce and encourage the dedication and performance of such key personnel. For these reasons, in fiscal 2013 the Compensation Committee authorized the Company to enter into change in control severance agreements with certain executives, including each of the NEOs. The independent directors of the Board subsequently authorized entering into such severance agreement with CEO, Robert C. Paul. Severance Agreements were executed by the relevant executives on March 15, 2013.

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Under the material terms of these agreements, if an executive’s employment is terminated other than for cause within a specified period of time following a change in control of Compuware, the executive would be entitled to receive a lump sum severance payment in cash equal to a multiple of the sum of (i) base salary and (ii) target annual bonus under any applicable annual bonus or incentive plan. In addition, the executive would be entitled to receive, for a specified period immediately following the date of termination for the executive and any dependents, health, life, disability and accident insurance benefits at no greater after-tax cost than the after-tax cost to the executive immediately prior to termination. See “Potential Payments Upon Termination or Change in Control – Severance Agreements” for the table that illustrates the variable terms of the Severance Agreements executed by the executives.

On October 28, 2013, based on an analysis of market and peer data by Towers Watson, the Compensation Committee and Board approved certain modifications to the Severance Agreements previously entered into with Robert Paul and Joseph Angileri to provide for severance payments and continued benefits upon certain terminations of employment not related to a change in control of the Company and to make certain other modifications. On May 22, 2014, the Compensation Committee and Board authorized the Company to amend and restate the Severance Agreements previously entered into with certain executive officers of the Company, including Robert Paul, Joseph Angileri, Daniel Follis and John Van Siclen, who are NEOs for fiscal 2014 and 2015. These amendments were made to address the potential consequences of the separation of our APM and Mainframe business units. See “Potential Payments Upon Termination or Change in Control – Severance Agreements” for a description of the amended severance agreements.

On June 14, 2013, the Company entered into a separation agreement with Ms. Fournier in connection with her retirement, the terms of which are described below. The June 14, 2013 agreement superseded and replaced the change in control severance agreement with Ms. Fournier dated March 15, 2013, and was provided to her in recognition of her twenty-three years of service to the Company. In addition, the agreement provides that the non-compete and non-solicitation restrictions applicable to Ms. Fournier shall continue for one year following her separation, and further provides that Ms. Fournier releases all claims she may have against the Company. Under her separation agreement, Ms. Fournier is entitled to receive: (i) her net salary, as in effect at the time of her departure, in semi-monthly installments through December 15, 2014; (ii) reimbursement of COBRA continuation coverage premium payments through December 31, 2014; and (iii) $273,350 for her Long-Term Performance Cash deferred under the Company’s FY12 Executive Incentive Agreement. In addition, all of Ms. Fournier’s vested and unvested stock options, restricted stock units and performance units granted on or before May 15, 2013 will continue to vest and/or be exercisable through the expiration date set forth in the applicable grant agreements as if she remained employed by the Company.

Compensation Committee Report

The information contained in this report 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.

In accordance with its written charter adopted by the Board of Directors, the Compensation Committee determines and implements compensation and benefit programs for executive officers and other employees of the Company.

The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” (“CD&A”) section of this Form 10-K, as amended. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this Form 10-K, as amended.

 

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Summary Compensation Table

 

 

(1)

Represents the award date fair value associated with RSUs awarded in the respective fiscal years, calculated in accordance with ASC No. 718-10 “Share Based Payment,” excluding any forfeiture adjustments. The assumptions we used to calculate these amounts are discussed in Note 1 to our audited consolidated financial statements included in this Annual Report on Form 10-K, as amended. The value of Dividend Equivalent Right units are not included in the table, consistent with the valuations and assumptions reflected in our income statements.

The amount for Mr. Angileri in fiscal 2012 includes the award date fair value of the special one-time RSU award in connection with his hiring.

(2)

Represents the grant date fair value associated with stock options awarded in the respective fiscal years, calculated in accordance with ASC No. 718-10 “Share Based Payment,” excluding any forfeiture adjustments. These amounts do not necessarily represent the amount of the benefit, if any, that the option holder may realize from the exercise of options. The assumptions we used to calculate these amounts are discussed in Note 1 to our audited consolidated financial statements included in this Annual Report on Form 10-K, as amended. The amounts for the 2013 and 2014 performance-vested options represent the value based upon the probable outcome of the performance conditions, consistent with the amount used in our financial statements, excluding estimated forfeitures. The table below shows the value of the performance options if the highest level of performance conditions is achieved.

The amounts for Mr. Paul and Mr. Angileri in fiscal 2012 include the grant date fair value of options to purchase Compuware stock under special one-time grants in connection with the implementation of Compuware’s succession plan.

(3)

The table below shows the component amounts of non-equity incentive payments made to the NEOs under the EIP in fiscal 2014, 2013 and 2012. The fiscal 2014 Annual Incentive Award was paid in May 2014 and payment of the fiscal 2014 Long-Term Performance Cash is deferred until April 2016. The fiscal 2012 Annual Incentive Award was paid in May 2012 and payment of the fiscal 2012 Long-Term Performance Cash was deferred until April 2014. All deferred Long-Term Performance Cash is paid only if the recipient meets the continuing employment condition described in “Compensation Discussion and Analysis.”

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(4)

All Other Compensation includes 401(k) matching contributions and amounts for perquisites such as use of automobiles, insurance and maintenance; auto stipend; travel bonus, which is a portion of the savings to the Company when using personal frequent-flyer miles to obtain plane tickets for business travel; tickets to sporting and special events; and travel expenses for spouses to certain Company conferences and events. Perquisites have been valued for purposes of these tables on the basis of 100% of the aggregate incremental cost to the Company. The amount in fiscal 2014 for Ms. Fournier includes $453,231 of severance pay and COBRA premium reimbursements from June 2013 through March 2014. Her severance compensation continues through December 31, 2014.

(5)

See “Total Realized Compensation in Fiscal 2014” in “Compensation Discussion and Analysis” for a report of the compensation actually received by each NEO during the fiscal year.

Grants of Plan-Based Awards

The following table shows both the range of cash awards that could have been earned and the actual equity awards granted to the NEOs during fiscal 2014.