Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 000-25285
SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 94-2669809 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2755 CAMPUS DRIVE, 3rd FLOOR, SAN MATEO, CALIFORNIA 94403-2538
(Address of principal executive offices, including zip code)
650-522-6600
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
The number of shares of the registrant’s Common Stock, par value $0.001, outstanding as of August 31, 2004 was 43,565,660.
Table of Contents
Page | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1 | Financial Statements: | |||
Condensed Consolidated Balance Sheets as of July 31, 2004 and January 31, 2004 | 3 | |||
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three Months and Six Months Ended July 31, 2004 and 2003 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2004 and 2003 | 5 | |||
6 | ||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
Item 3 | 41 | |||
Item 4 | 42 | |||
PART II OTHER INFORMATION | ||||
Item 1 | Legal Proceedings | 44 | ||
Item 2 | Change in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities | 44 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 44 | ||
Item 5 | Other Information | 45 | ||
Item 6 | Exhibits and Reports on Form 8-K | 45 | ||
46 |
2
Table of Contents
ITEM 1. FINANCIAL STATEMENTS
SERENA SOFTWARE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
July 31, 2004 | January 31, 2004 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 140,530 | $ | 257,281 | |||
Restricted cash | 3,300 | 3,300 | |||||
Short-term investments | 41,534 | 39,214 | |||||
Accounts receivable, net of allowance of $3,125 and $951 at July 31 and January 31, 2004, respectively | 32,847 | 15,475 | |||||
Deferred taxes | 6,787 | 6,787 | |||||
Prepaid expenses and other current assets | 5,918 | 1,338 | |||||
Total current assets | 230,916 | 323,395 | |||||
Long-term investments | 9,603 | 70,692 | |||||
Restricted cash, non-current | 4,742 | 6,312 | |||||
Property and equipment, net | 6,125 | 3,209 | |||||
Goodwill, net | 321,389 | 40,471 | |||||
Other intangible assets, net | 121,636 | 22,987 | |||||
Other assets | 4,673 | 6,595 | |||||
TOTAL ASSETS | $ | 699,084 | $ | 473,661 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 1,955 | $ | 1,232 | |||
Income taxes payable | 12,272 | 6,294 | |||||
Accrued expenses | 29,260 | 7,782 | |||||
Accrued interest on subordinated notes | 413 | 413 | |||||
Deferred revenue | 57,575 | 29,496 | |||||
Total current liabilities | 101,475 | 45,217 | |||||
Deferred revenue, net of current portion | 13,405 | 9,683 | |||||
Long-term liabilities | 2,819 | — | |||||
Deferred taxes | 45,203 | 3,483 | |||||
Subordinated notes | 220,000 | 220,000 | |||||
Total liabilities | 382,902 | 278,383 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding | — | — | |||||
Common stock, $0.001 par value; 90,000,000 shares authorized; 43,947,324 and 38,277,820 shares issued and outstanding at July 31 and January 31, 2004, respectively | 44 | 38 | |||||
Additional paid-in capital | 207,580 | 78,892 | |||||
Deferred stock-based compensation | (1,567 | ) | — | ||||
Accumulated other comprehensive (loss) income | (1,933 | ) | 272 | ||||
Retained earnings | 112,058 | 116,076 | |||||
Total stockholders’ equity | 316,182 | 195,278 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 699,084 | $ | 473,661 | |||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the Three Months and Six Months Ended July 31, 2004 and 2003
(In thousands, except per share data)
(Unaudited)
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Revenue: | ||||||||||||||||
Software licenses | $ | 19,416 | $ | 10,047 | $ | 35,256 | $ | 20,899 | ||||||||
Maintenance | 25,732 | 12,449 | 40,497 | 24,360 | ||||||||||||
Professional services | 6,812 | 2,417 | 9,949 | 4,021 | ||||||||||||
Total revenue | 51,960 | 24,913 | 85,702 | 49,280 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Software licenses | 1,025 | 171 | 1,351 | 383 | ||||||||||||
Maintenance | 3,151 | 1,605 | 4,714 | 3,109 | ||||||||||||
Professional services | 6,258 | 2,278 | 9,048 | 4,044 | ||||||||||||
Amortization of acquired technology | 3,932 | 1,628 | 5,977 | 2,709 | ||||||||||||
Total cost of revenue | 14,366 | 5,682 | 21,090 | 10,245 | ||||||||||||
Gross profit | 37,594 | 19,231 | 64,612 | 39,035 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 18,131 | 7,014 | 27,488 | 13,667 | ||||||||||||
Research and development | 8,875 | 3,420 | 13,824 | 6,459 | ||||||||||||
General and administrative | 4,963 | 1,728 | 7,011 | 3,468 | ||||||||||||
Stock-based compensation | 237 | — | 255 | — | ||||||||||||
Amortization of intangible assets | 2,985 | 508 | 3,936 | 508 | ||||||||||||
Acquired in-process research and development | — | — | 10,400 | — | ||||||||||||
Restructuring, acquisition and other charges | 1,556 | — | 1,766 | — | ||||||||||||
Total operating expenses | 36,747 | 12,670 | 64,680 | 24,102 | ||||||||||||
Operating income (loss) | 847 | 6,561 | (68 | ) | 14,933 | |||||||||||
Interest income | 728 | 814 | 2,043 | 1,819 | ||||||||||||
Interest expense | (825 | ) | — | (1,650 | ) | — | ||||||||||
Amortization of debt issuance costs | (335 | ) | — | (796 | ) | — | ||||||||||
(Loss) income before income taxes | 415 | 7,375 | (471 | ) | 16,752 | |||||||||||
Income taxes | 157 | 2,655 | 3,547 | 6,218 | ||||||||||||
Net income (loss) | $ | 258 | $ | 4,720 | $ | (4,018 | ) | $ | 10,534 | |||||||
Comprehensive income (loss): | ||||||||||||||||
Net income (loss) | $ | 258 | $ | 4,720 | $ | (4,018 | ) | $ | 10,534 | |||||||
Other comprehensive (loss): | ||||||||||||||||
Foreign currency translation adjustment | 97 | (65 | ) | (157 | ) | 45 | ||||||||||
Unrealized loss on marketable securities | (161 | ) | (449 | ) | (385 | ) | (517 | ) | ||||||||
Other comprehensive (loss) | (64 | ) | (514 | ) | (542 | ) | (472 | ) | ||||||||
Total comprehensive income (loss) | $ | 194 | $ | 4,206 | $ | (4,560 | ) | $ | 10,062 | |||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.01 | $ | 0.12 | $ | (0.10 | ) | $ | 0.26 | |||||||
Diluted | $ | 0.01 | $ | 0.12 | $ | (0.10 | ) | $ | 0.26 | |||||||
�� | ||||||||||||||||
Weighted average shares used in per share calculations: | ||||||||||||||||
Basic | 43,955 | 40,102 | 41,413 | 40,276 | ||||||||||||
Diluted | 44,626 | 41,028 | 41,413 | 40,973 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 31, 2004 and 2003
(In thousands)
(Unaudited)
Six Months Ended July 31, | ||||||||
2004 | 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (4,018 | ) | $ | 10,534 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,201 | 740 | ||||||
Provision in allowance for bad debts | 650 | 84 | ||||||
Accrued interest on pledged securities | (80 | ) | — | |||||
Accrued interest income, net of cash received | 145 | — | ||||||
Accrued interest on notes receivable from stockholders, net of cash received | — | 1,243 | ||||||
Accrued interest expense on subordinated notes | 1,650 | — | ||||||
Amortization of debt issuance costs | 796 | — | ||||||
Amortization of deferred stock-based compensation | 255 | — | ||||||
Amortization of acquired technology | 5,977 | 2,709 | ||||||
Amortization of intangible assets | 3,936 | 508 | ||||||
Acquired in-process research and development | 10,400 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 7,297 | 1,609 | ||||||
Prepaid expenses and other assets | 429 | (509 | ) | |||||
Accounts payable | (270 | ) | 656 | |||||
Income taxes payable | (4,496 | ) | (3,986 | ) | ||||
Accrued expenses | (173 | ) | (1,873 | ) | ||||
Deferred revenue | (308 | ) | 878 | |||||
Net cash provided by operating activities | 23,391 | 12,593 | ||||||
Cash flows provided by investing activities: | ||||||||
Purchases of property and equipment | (822 | ) | (351 | ) | ||||
Sales of short-term and long-term investments | 58,382 | 10,803 | ||||||
Cash paid in acquisition of TeamShare, Inc., net of cash received | — | (19,425 | ) | |||||
Cash paid in acquisition of Merant Plc, net of cash received | (169,749 | ) | — | |||||
Acquisition related costs paid | (24,159 | ) | — | |||||
Cash paid in acquisition of selected net assets of Integrated Chipware, Inc. | (3,780 | ) | — | |||||
Net cash used in investing activities | (140,128 | ) | (8,973 | ) | ||||
Cash flows from financing activities: | ||||||||
Exercise of stock options under the employee stock option plan | 3,598 | 2,852 | ||||||
Sale of common stock under the employee stock purchase plan | 1,644 | 779 | ||||||
Payment of principal on notes receivable from stockholders | — | 5,794 | ||||||
Common stock repurchased under the stock repurchase plan | (4,231 | ) | (20,541 | ) | ||||
Net cash provided by (used in) financing activities | 1,011 | (11,116 | ) | |||||
Effect of exchange rate changes on cash | (1,025 | ) | 45 | |||||
Net decrease in cash and cash equivalents | 116,751 | (7,451 | ) | |||||
Cash and cash equivalents at beginning of period | 257,281 | 105,402 | ||||||
Cash and cash equivalents at end of period | $ | 140,530 | $ | 97,951 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Income taxes paid | $ | 6,754 | $ | 10,494 | ||||
Non-cash investing and financing activity: | ||||||||
Unrealized loss on marketable securities | $ | (385 | ) | $ | (517 | ) | ||
Common stock issued in the acquisition of Merant Plc., including estimated fair value of options assumed | $ | 127,683 | $ | — | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SERENA Software, Inc. (“SERENA” or the “Company”) is an Enterprise Change Management (“ECM”) industry leader providing solutions that help companies automate change to the applications that run their businesses. The Company’s solutions take a cross-platform and cross-organizational view of enterprise applications, allowing customers to define, enforce and automate application lifecycle processes. Its principal markets are North America, and to a lesser extent, Europe and Asia.
The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, necessary for their fair presentation. These unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America and Regulation S-X for annual financial statements. For these additional disclosures, readers should refer to the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2004. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2005.
Reclassifications
Certain reclassifications have been made to the January 31, 2004 balances and the balances for the three months and six months ended July 31, 2003 in order to conform to the July 31, 2004 presentations.
(1) Acquisition of Merant Plc.
On March 3, 2004, the Company’s Board of Directors, together with the Board of Directors of Merant plc, a leading provider of software and services for managing code, content and other business-critical assets, announced that they had reached agreement on the terms of a recommended cash and share offer (the “Offer”) to be made by the Company and by Lehman Brothers on its behalf (outside of the United States) for the entire issued and to be issued share capital of Merant, including Merant shares represented by Merant American Depository Shares (“ADSs”). The Offer was made on March 18, 2004.
Merant designs, develops and markets software products and services for Enterprise Change Management (“ECM”), software configuration management and web content management. Its solutions help companies improve their ability to manage change of software applications, code and web content. Prior to the completion of the Offer, Merant’s ordinary shares were traded on the London Stock Exchange and its ADSs were traded on the NASDAQ National Market.
On April 23, 2004, valid acceptances of the Offer had been received in respect of a total of approximately 85.7 million Merant shares (including valid acceptances in respect to Merant ADSs), representing approximately 79.3% of the issued share capital of Merant. Accordingly, all conditions related to the Offer were deemed to have been satisfied or waived as of April 23, 2004 and the Offer was declared unconditional in all respects. By April 29, 2004, acceptances in respect of more than 90% of the issued share capital had been received, as a result of which the Company was entitled to acquire any outstanding Merant shares and Merant ADSs through compulsory acquisition procedures under UK law. Such procedures were substantially completed on or about June 30, 2004. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Merant are included in the Company’s consolidated financial statements from April 23, 2004.
6
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company’s acquisition of Merant has created the second largest provider of ECM software solutions, serving the complex change management needs of at least 46 of the fortune 50 largest companies worldwide, with a resulting combined installed base of over 15,000 customers. The primary reasons for the acquisition were that this larger installed base would provide the combined companies with distribution leverage to cross sell products, expansion opportunities into new geographies, new opportunities in channel development and a profitable and steady maintenance stream.
Upon completion of the compulsory acquisition procedure, the Company acquired 100% of Merant’s outstanding common stock in acquiring all of its assets and assuming all of its liabilities. The total purchase price was $418.7 million and consisted of a combination of cash and stock as follows (in thousands):
Fair market value of SERENA common stock issued (approximately 5.9 million shares) | $ | 120,481 | |
Cash paid | 266,957 | ||
Estimated fair value of options assumed | 7,201 | ||
Estimated employee severance and other costs | 13,381 | ||
Estimated acquisition-related costs | 10,712 | ||
Total estimated purchase price of acquisition | $ | 418,732 | |
The total purchase price was preliminarily allocated as follows (in thousands):
Fair value of assets acquired | $ | 131,071 | ||
Acquired technology | 45,000 | |||
Acquired in-process research and development | 10,400 | |||
Trademark / Trade name portfolio | 2,400 | |||
Customer contracts | 47,600 | |||
Non-compete agreements | 9,300 | |||
Intrinsic value of options assumed | 1,822 | |||
Fair value of liabilities assumed | (68,059 | ) | ||
Deferred tax liability | (41,720 | ) | ||
Goodwill | 280,918 | |||
Total estimated purchase price of acquisition | $ | 418,732 | ||
The estimated purchase price of the acquisition totaling $418.7 million includes an adjustment of approximately $7.7 million from the $426.4 million which was previously reported in the Company’s prior fiscal quarter ended April 30, 2004. The adjustment was almost entirely due to finalizing the cash paid in the acquisition. The Company does not expect future adjustments to the purchase price to be material. Acquired technology, consisting of current completed technologies at the date of acquisition and valued on the premise of fair market value in continued use under the discounted cash flow approach, is amortized on a straight-line basis over a six-year period, the period of time the Company estimates as its economic useful life. Pre-existing non-compete agreements maintained by Merant and nine key employees were transferred to SERENA by way of the acquisition and were valued based on the estimated amount of business that might be lost if these nine key employees were competing against the Company and are being amortized on a straight-line basis over a five-year period. Maintenance service contracts, consisting of existing annual renewable maintenance contracts at the date of acquisition are valued on the premise of fair market value of the total future cash flows that would be generated from the renewal of such contracts under the discounted cash flow approach and are amortized on a
7
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
straight-line basis over a seven-year period. Trademark/Trade name portfolio, consisting of four existing trademarks at the date of acquisition, “Merant”, “Merant Professional”, “Merant Dimensions” and “Merant Collage”, is valued on the premise of fair market value of royalties avoided on developed technology revenues under the discounted cash flow approach and is amortized on a straight-line basis over one-year to three-year periods, the periods of time the Company estimates as its economic useful life. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is no longer subject to amortization but instead will be measured for impairment, at least, annually pursuant to SFAS No. 142.
The fair value of the Company’s common stock issued was determined using an average price of $20.62, which was the average trading price from March 1, 2004 through March 5, 2004, the five trading days surrounding the date the Offer was announced. The fair value of the Company’s stock options assumed was determined using the Black-Scholes option pricing model and the following assumptions: estimated contractual life of 4.5 years, risk-free interest rate of 3.7%, expected volatility of 100% and no expected dividend yield. The fair value of stock options assumed is net of $1.8 million which represents the portion of the intrinsic value of Merant’s unvested options applicable to the remaining vesting period.
With respect to acquired Merant intangibles, the weighted average remaining amortization period for acquired technology is 69 months, trademark/trade name portfolio and non-compete agreements is 21 months, and customer contracts is 81 months. The total weighted average remaining amortization period for all acquired Merant intangible assets is 69 months. All identified intangible assets will be amortized on a straight-line basis over their estimated useful lives. Amortization of acquired technology and amortization of other intangibles for the current fiscal quarter ended July 31, 2004 was $3.9 million and $3.0 million, respectively, and for the current fiscal six months ended July 31, 2004 was $6.0 million and $3.9 million, respectively. The estimated total amortization expense for both acquired technologies and other intangible assets associated with Merant is $8.8 million for the remaining six months of fiscal 2005, $17.0 million for fiscal 2006, $16.5 million for fiscal 2007, and $16.2 million for each of fiscal 2008 and fiscal 2009.
In accordance with generally accepted accounting principles of the United States of America, we recorded a deferred tax liability of $41.7 million for the difference between the assigned values and the tax bases of the intellectual property assets acquired in the transaction.
The transaction was accounted for as a purchase and, accordingly, the operating results of Merant have been included in our accompanying condensed consolidated statements of (loss) income from April 23, 2004, the date of acquisition. The following unaudited pro forma information presents the combined results of SERENA and Merant as if the acquisition had occurred as of February 1, 2003, the beginning of the first quarter of fiscal 2004, after applying certain adjustments, including amortization of acquired technology and other intangible assets, amortization of stock-based compensation, amortization of debt issuance costs and interest expense, all net of related tax effects. In-process research and development of $10.4 million has been excluded from the following presentation as it is a non-recurring charge (in thousands, except per share amounts):
Three Months July 31, 2003 | Six Months July 31, 2003 | Six Months Ended July 31, 2004 | |||||||
Total revenue | $ | 54,733 | $ | 112,111 | $ | 115,363 | |||
Net income | $ | 414 | $ | 3,528 | $ | 388 | |||
Net income per share (basic) | $ | 0.01 | $ | 0.08 | $ | 0.01 | |||
Net income per share (diluted) | $ | 0.01 | $ | 0.08 | $ | 0.01 |
8
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Acquired In-process Research and Development
As a result of the Company’s acquisition of Merant on April 23, 2004, the Company recorded acquired in-process research and development totaling $10.4 million. In valuing acquired in-process research and development and acquired intangible assets in the Merant acquisition, the Company obtained an independent third party appraisal. For this transaction, the premise of value was fair market value in continued use.
Among the assets that were valued by the Company were Professional version 8.1, Professional version 8.2, Dimension version 9.0 and Formula 1, all of which were under development at the acquisition date. These technologies currently under development were valued on the premise of fair market value in continued use employing a version of the income approach referred to as the discounted cash flow approach. This methodology is based on discounting to present value, at an appropriate risk-adjusted discount rate, both the expenditures to be made to complete the development efforts (excluding the efforts to be completed on the development efforts underway) and the operating cash flows which the applications are projected to generate, less a return on the assets necessary to generate the operating cash flows.
From these projected revenues, the Company deducted costs of sales, operating costs (excluding costs associated with the efforts to be completed on the development efforts underway), royalties and taxes to determine net cash flows. The Company estimated the percentage of completion of the development efforts for each application by comparing the estimated costs incurred and portions of the development accomplished through the acquisition date by the total estimated cost and total development effort of developing these same applications. This percentage was calculated for each application and was then applied to the net cash flows for which each application was projected to generate. These net cash flows were then discounted to present values using appropriate risk-adjusted discount rates in order to arrive at discounted fair values for each application.
The percentage complete and the appropriate risk-adjusted discount rate for each application were as follows:
Application Under Development | Percentage Complete | Discount Rate | ||||
Professional version 8.1 | 95 | % | 18 | % | ||
Professional version 8.2 | 95 | % | 18 | % | ||
Dimension version 9.0 | 85 | % | 18 | % | ||
Formula 1 | 0 | % | 23 | % |
The rates used to discount the net cash flows to present value were initially based on the weighted average cost of capital (“WACC”). The Company used discount rates of 18% and 23% for valuing the acquired in-process research and development and 13% for the core technologies. These discount rates are higher than the implied WACC due to the inherent uncertainties surrounding the successful development of the acquired in-process research and development, the useful life of such in-process research and development, the profitability levels of such in-process research and development, and the uncertainty of technological advances that were unknown at the time.
(3) Stock-Based Compensation
The Company uses the intrinsic value method to account for stock-based compensation. The Company amortizes deferred stock-based compensation on an accelerated basis in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 28,“Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”
9
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees”and related interpretations. Since the exercise price of options granted under such plans is equal to the market value on the date of grant, no compensation cost has been recognized for grants under its stock option plans and stock purchase plans. In accordance with APB No. 25, the Company does not recognize compensation cost related to its employee stock purchase plan. If compensation cost for the Company’s stock-based compensation plans had been determined consistent with SFAS No. 123,“Accounting for Stock-Based Compensation”and SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure,”the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net income (loss), as reported | $ | 258 | $ | 4,720 | $ | (4,018 | ) | $ | 10,534 | |||||||
Add: stock-based employee compensation expense included in reported net income, net of tax | 147 | — | 158 | — | ||||||||||||
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of tax | (2,826 | ) | (2,783 | ) | (6,014 | ) | (5,337 | ) | ||||||||
Pro forma net (loss) income | $ | (2,421 | ) | $ | 1,937 | $ | (9,874 | ) | $ | 5,197 | ||||||
Basic net income (loss) per share: | ||||||||||||||||
As reported | $ | 0.01 | $ | 0.12 | $ | (0.10 | ) | $ | 0.26 | |||||||
Pro forma | $ | (0.06 | ) | $ | 0.05 | $ | (0.24 | ) | $ | 0.13 | ||||||
Diluted net income (loss) per share: | ||||||||||||||||
As reported | $ | 0.01 | $ | 0.12 | $ | (0.10 | ) | $ | 0.26 | |||||||
Pro forma | $ | (0.05 | ) | $ | 0.05 | $ | (0.24 | ) | $ | 0.13 | ||||||
For the pro forma amounts determined under SFAS No. 123, as set forth above, the fair value of each stock option grant under the stock option plans and the fair value of the employees’ purchase rights under the employee stock purchase plan (“ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months and six months ended July 31, 2004 and 2003.
Stock Option Plans | ESPP | Stock Option Plans | ESPP | |||||||||||||
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||
Expected life (in years) | 4.5 | 4.5 | 0.5 | 0.5 | 4.5 | 4.5 | 0.5 | 0.5 | ||||||||
Risk-free interest rate | 3.5% | 2.8% | 1.6% | 1.1% | 3.5% | 2.8% | 1.6% | 1.1% | ||||||||
Volatility | 98% | 106% | 45% | 54% | 98% | 106% | 45% | 54% | ||||||||
Dividend yield | none | none | none | none | none | none | none | none |
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of
10
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
highly subjective assumptions including the expected stock price volatility. We used historical volatility rates. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our options.
(4) Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potentially dilutive common shares from restricted stock and options to purchase common stock using the treasury stock method.
The following is a reconciliation of the shares used in the computation of basic and diluted net income (loss) per share (in thousands):
Three Months July 31, | Six Months Ended July 31, | |||||||
2004 | 2003 | 2004 | 2003 | |||||
Basic net income (loss) per share—weighted average number of common shares outstanding | 43,955 | 40,102 | 41,413 | 40,276 | ||||
Effect of potentially dilutive securities outstanding—stock options | 671 | 926 | — | 697 | ||||
Shares used in diluted net income (loss) per share computation | 44,626 | 41,028 | 41,413 | 40,973 | ||||
Options to purchase shares of common stock at a share price which is greater than the average closing market price of the shares for the three and six months are not included in the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive. For the three month period ended July 31, 2004, 2,364,202 options to purchase shares of common stock at an average share price of $23.68 were excluded from the computation of diluted EPS. For both the three and six month periods ended July 31, 2003, 1,108,391 options to purchase shares of common stock at an average share price of $26.50 were excluded from the computation of diluted EPS.
For the six month period ended July 31, 2004, all options to purchase shares of common stock were excluded from the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive given the Company’s net loss for that six month period. Accordingly, 5,920,058 options to purchase shares of common stock at an average share price of $18.32 were excluded from the computation of diluted EPS.
11
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Acquisition-Related and Restructuring Charges and Accruals
The Company’s total acquisition-related and restructuring accrual is predominantly associated with the Company’s acquisition of Merant in April 2004, and to a lesser extent, it’s RTM (“Requirements and Traceability Management”) technology acquisition from Integrated Chipware, Inc. in June 2004. With respect to the Company’s acquisition of Merant in April 2004, the Company recorded acquisition-related costs totaling $10.7 million, and employee severance and other restructuring costs totaling $13.4 million accrued through purchase accounting. With respect to the Company’s RTM acquisition from Integrated Chipware, Inc. in June 2004, the Company recorded $0.2 million in legal and other acquisition-related costs. The nature of the acquisition-related and restructuring charges and the amounts paid through and accrued as of July 31, 2004 are summarized as follows (in thousands):
As of April 30, 2004 | As of July 31, 2004 | ||||||||||||
Total | Accrued | Paid | Accrued Balance | ||||||||||
Severance, payroll taxes and other employee benefits | $ | 10,071 | $ | — | $ | (2,061 | ) | $ | 8,010 | ||||
Legal and other acquisition-related costs | 12,717 | 231 | (8,600 | ) | 4,348 | ||||||||
Facilities closures | 1,300 | — | (99 | ) | 1,201 | ||||||||
Total acquisition-related and restructuring accrual | $ | 24,088 | $ | 231 | $ | (10,760 | ) | $ | 13,559 | ||||
(6) Goodwill and Other Intangibles Assets
The Company accounts for goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. As such, goodwill and other indefinite life intangible assets are not amortized but instead are periodically tested for impairment. The annual impairment test required by SFAS No. 142 will be performed in the fourth fiscal quarter each year and has been performed in each of the fourth quarters of fiscal 2003 and 2004. The Company has concluded that there was no impairment of goodwill as of January 31, 2004.
Goodwill and other intangible assets consisted of the following (in thousands):
July 31, 2004 | January 31, 2004 | |||||
Goodwill | $ | 321,389 | $ | 40,471 | ||
Non-compete agreement | $ | 10,933 | $ | 1,633 | ||
Acquired technology | 86,741 | 37,476 | ||||
Customer contracts | 49,400 | 1,800 | ||||
Trademark / Trade name portfolio | 2,600 | 200 | ||||
Customer relationships | 2,510 | 2,510 | ||||
152,184 | 43,619 | |||||
Less: accumulated amortization | 30,548 | 20,632 | ||||
$ | 121,636 | $ | 22,987 | |||
12
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Goodwill and other intangible assets consist of amortized intangible assets and intangible assets no longer subject to amortization under SFAS No. 142 as follows (in thousands):
As of July 31, 2004 | ||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Amortizing intangible assets: | ||||||||||
Non-compete agreements | $ | 10,933 | $ | (1,847 | ) | $ | 9,086 | |||
Acquired technology | 86,741 | (23,632 | ) | 63,109 | ||||||
Customer contracts | 49,400 | (3,630 | ) | 45,770 | ||||||
Trademark / Trade name portfolio | 2,600 | (463 | ) | 2,137 | ||||||
Customer relationships | 2,510 | (976 | ) | 1,534 | ||||||
Total | $ | 152,184 | $ | (30,548 | ) | $ | 121,636 | |||
Aggregate amortization expense: | |||||||
For the remaining six months of year ended | $ | 13,745 | |||||
Estimated amortization expense: | |||||||
For year ended January 31, 2006 | 26,195 | ||||||
For year ended January 31, 2007 | 22,354 | ||||||
For year ended January 31, 2008 | 18,358 | ||||||
For year ended January 31, 2009 | 16,160 | ||||||
Thereafter | 24,824 | ||||||
Total | $ | 121,636 | |||||
The weighted average remaining amortization period for acquired technology is 50 months; trademark/trade name portfolio and customer relationships is 21 months; non-compete agreements is 20 months; and customer contracts is 78 months. The total weighted average remaining amortization period for all identifiable intangible assets is 56 months. The aggregate amortization expense of acquired technology and other intangible assets was $6.9 million and $2.1 million in the three months ended July 31, 2004 and 2003, respectively. For the six month periods ended July 31, 2004 and 2003, the aggregate amortization expense of acquired technology and other intangible assets was $9.9 million and $3.2 million, respectively. There were no impairment charges in the three or six month periods ended July 31, 2004 and 2003.
The change in the carrying amount of goodwill for the six months ended July 31, 2004 is as follows (in thousands):
Balance as of January 31, 2004 | $ | 40,471 | |
Activity during the year: | |||
Merant goodwill acquired | 280,918 | ||
Impairment losses recognized | — | ||
Balance as of July 31, 2004 | $ | 321,389 | |
(7) RTM Acquisition from Integrated Chipware, Inc.
In June 2004, the Company acquired the technology, assets, associated expertise and customer base for Integrated Chipware’s RTM product, one of the industry’s leading requirements management solutions. In
13
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
connection with the acquisition, which has been accounted for as an acquisition of a business, the Company has capitalized $4.3 million of acquired technology associated with the RTM product and has recorded $0.2 million in acquisition-related charges. There was no goodwill recorded in the business acquisition. The acquired technology will be amortized over its economic useful life of three years. Also in connection with the acquisition, the Company acquired certain selected assets and assumed certain liabilities including selected trade receivables and deferred maintenance contracts; all of which have been recorded at their fair values.
(8) Recent Accounting Pronouncements
In November 2003, the EITF reached a consensus on disclosure guidance previously discussed under EITF Issue No. 03-01,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”The Consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during the year ended January 31, 2004.
In March 2004, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01. The consensus clarified the meaning of other-than-temporary impairment and its application to debt and equity investments accounted for under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities,”and other investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in March 2004 is applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The consensus reached in March 2004 also provided for certain disclosure requirements associated with cost method investments that were effective for fiscal years ending after June 15, 2004. We do not believe that the consensus on the recognition and measurement guidance will have a significant impact on our financial position or results of operations.
The EITF has tentatively concluded that the conversion spread on convertible debt instruments with a market price contingency would be included in diluted earnings per share as described in EITF 90-19, regardless of whether or not the market price trigger has been met. The Company does hold certain subordinated debt containing a contingent market price trigger. However, since such triggers have not yet been met, the Company has not included its subordinated debt in the calculation of diluted earnings per share. Should the EITF’s tentative conclusion become a consensus, the Company would be required to include its subordinated debt in the calculation of diluted earnings per share.
(9) Stock Repurchase Programs and Repurchase of Common Stock
In February 2004, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes.
In May 2004, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program, the Company repurchased in aggregate a total of 222,500 shares of its common stock for cash at an average price of $18.99 per share.
14
Table of Contents
SERENA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In August 2004, the Board of Directors authorized the repurchase of up to 2.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program, and at various times from August 26, 2004 through September 7, 2004, the Company repurchased in aggregate a total of 738,000 shares of its common stock for cash at an average price of $15.74 per share. The timing and size of any future stock repurchases are subject to market conditions, stock prices, our cash position and other requirements going forward.
15
Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are “forward-looking statements.” These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under “Factors That May Affect Future Results” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Factors that could cause or contribute to such differences include but are not limited to, our ability to successfully integrate our recent acquisition of Merant plc; the percentage of license revenue typically closed at the end of each quarter, making estimation of operating results prior to the end of the quarter extremely uncertain; weak economic conditions worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates; changes in revenue mix and seasonality; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; expansion of our international organizations; and our ability to manage our growth. We assume no obligation to update the forward-looking information contained in this report. It is important that the discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Factors Affecting Future Results” contained in the Company’s Form 10-K for fiscal 2004.
Overview
SERENA Software, Inc. is an industry leading supplier of software that automates change to enterprise applications. SERENA’s Enterprise Change Management (“ECM”) products manage the Software Change Management (“SCM”) process throughout the entire application development lifecycle across multiple platforms—from the mainframe to the Web. SERENA was founded in 1980 and we introduced our first SCM product,Comparex, in 1981. Since then, SERENA has developed a full suite of mainframe products, includingChangeMan ZMF which was introduced in 1988. In June 1999, SERENA introducedChangeMan DS, a distributed systems product providing an end-to-end solution to SCM across the enterprise from the mainframe to the desktop to the Web. IT managers use our products to track software changes during the software application design and development process, manage separate programming teams that are concurrently developing and enhancing applications, and oversee the deployment of the software applications across both the mainframe and distributed systems environments. In June 2003, we introducedTeamTrack, a distributed systems product from our TeamShare acquisition providing leading-edge issue and request management technology; in September 2003, we announced the next-generation advanced framework for Application Life Cycle Management, the SAFE Framework (Serena Application Framework for Enterprises) which will significantly affect enterprise operations by facilitating cross-process integration; and in November 2003, we introducedTeamTrack version 6, our first product to deliver on the Next-Generation SAFE Framework.
On March 3, 2004, the Company’s Board of Directors, together with the Board of Directors of Merant, announced that they had reached agreement on the terms of a recommended cash and share offer (the “Offer”) to be made by the Company and by Lehman Brothers on its behalf (outside of the United States) for the entire issue and to be issued share capital of Merant, including Merant Shares represented by Merant American Depository Shares (“ADSs”). The Offer was made on March 18, 2004.
On April 23, 2004, valid acceptances of the Offer had been received in respect of a total of approximately 85.7 million Merant shares (including valid acceptances in respect to Merant ADSs), representing approximately
16
Table of Contents
79.3% of the issued share capital of Merant. Accordingly, all conditions related to the Offer were deemed to have been satisfied or waived as of April 23, 2004 and the Offer was declared unconditional in all respects. By April 29, 2004, acceptances in respect of more than 90% of the issued share capital had been received, as a result of which the Company was entitled to acquire any outstanding Merant shares and Merant ADSs through compulsory acquisition procedures under UK law. These procedures were substantially completed on or about June 30, 2004. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Merant are included in the Company’s consolidated financial statements from April 23, 2004.
Upon completion of the compulsory acquisition procedure, the Company acquired 100% of Merant’s outstanding common stock, thereby acquiring all of its assets and liabilities. The total purchase price was $418.7 million and consisted of a combination of cash totaling $267.0 million, approximately 5.9 million shares of SERENA common stock valued at $120.5 million, and acquisition related costs including employee severance and other costs and the fair value of options assumed totaling $31.2 million.
The Company’s acquisition of Merant has created the second largest provider of ECM software solutions, serving the complex change management needs of at least 46 of the fortune 50 largest companies worldwide, with a resulting combined installed base of over 15,000 customers. The Company believes that this installed base will provide the combined companies with distribution leverage to cross sell products, expand into new geographies, create new opportunities in channel development and generate a profitable and steady maintenance stream.
In June 2004, the Company acquired the technology, assets, associated expertise and customer base for Integrated Chipware’s RTM product, one of the industry’s leading requirements management solutions. In connection with the acquisition, which has been accounted for as an acquisition of a business, the Company has capitalized $4.3 million of acquired technology associated with the RTM product and has recorded $0.2 million in acquisition-related charges. There was no goodwill recorded in the business acquisition. The acquired technology will be amortized over its economic useful life of three years. Also in connection with the acquisition, the Company acquired certain selected assets and assumed certain liabilities including selected trade receivables and deferred maintenance contracts; all of which have been recorded at their fair realizable values.
The Company’s acquisition of RTM, which is a powerful and elegant solution for requirements engineering and design traceability that delivers the flexibility, scalability and ease of use necessary to address a broad range of enterprise projects, will expand its application lifecycle solution. This new offering is key to the Company’s SAFE strategic vision to meet critical customer need for comprehensive lifecycle management.
In the current fiscal quarter and fiscal six months ended July 31, 2004, SERENA experienced increases in total revenues of 109% and 74%, respectively, as total revenues for the quarter and six months were $52.0 million and $85.7 million, respectively, versus $24.9 million and $49.3 million in the same quarter and six month periods from a year ago. The increases were primarily the result of the Company’s acquisition of Merant in April 2004, and to a lesser extent, its acquisition of TeamShare in June 2003.
SERENA’s total revenues increased from $95.8 million in fiscal 2003 to $105.6 million in fiscal 2004. In the two fiscal years ended January 31, 2003 and 2002, SERENA had experienced decreases in total revenue as total revenues went from $103.6 million in fiscal 2001 to $98.6 million and $95.8 million in fiscal 2002 and fiscal 2003, respectively. The overall demand for the Company’s software depends in large part on general and economic business conditions. The general weakening of the worldwide economy and resulting slowdown in IT spending contributed to the overall decrease in total revenues.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to
17
Table of Contents
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations could be affected.
On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, and accounting for income taxes, among other things. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as critical accounting policies, which are discussed further below.
In addition to these estimates and assumptions that are utilized in the preparation of historical financial statements, the inability to properly estimate the timing and amount of future revenues could significantly affect our future operations. We must make assumptions and estimates as to the timing and amount of future revenue. Specifically, our sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transactions. We aggregate these estimates periodically to generate a sales pipeline and then evaluate the pipeline to identify trends in our business. This pipeline analysis and related estimates of revenue may differ significantly from actual revenues in a particular reporting period as the estimates and assumptions were made using the best available data at the time, which is subject to change. Specifically, the slowdown in the global economy and information technology spending has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or the conversion rate of the pipeline into contracts could cause us to plan or budget inaccurately and thereby could adversely affect our business, financial condition or results of operations. In addition, because a substantial portion of our software license contracts close in the latter part of a quarter, we may not be able to adjust our cost structure to respond to a variation in the conversion of the pipeline in a timely manner, and thereby the delays may adversely and materially affect our business, financial condition or results of operations.
We believe the following are critical accounting policies and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. SERENA recognizes revenues in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, and recognizes revenues when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable.
For contracts with multiple elements (e.g., license and maintenance), revenue is allocated to each component of the contract based on vendor specific objective evidence (“VSOE”) of its fair value, which is the price charged when the elements are sold separately. Since VSOE has not been established for license transactions, the residual method is used to allocate revenue to the license portion of multiple-element transactions.
The Company sells its products to its end users and distributors under license agreements. Each new mainframe license includes maintenance, which includes the right to receive telephone support, “bug fixes” and unspecified upgrades and enhancements, for a specified duration of time, usually one year. The fee associated with such agreements is allocated between software license revenue and maintenance revenue based on the residual method. Software license revenue from these agreements is recognized upon receipt and acceptance of a signed contract and delivery of the software, provided the related fee is fixed and determinable, collectibility of
18
Table of Contents
the revenue is probable and the arrangement does not involve significant customization of the software. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period, as defined in the applicable software license agreement.
The Company recognizes maintenance revenue ratably over the life of the related maintenance contract. Maintenance contracts on perpetual licenses generally renew annually. The Company typically invoices and collects maintenance fees on an annual basis at the anniversary date of the license. Deferred revenue represents amounts received by the Company in advance of performance of the maintenance obligation. Professional services revenue includes fees derived from the delivery of training, installation, and consulting services. Revenue from training, installation, and consulting services is recognized on a time and materials basis as the related services are performed. These services do not involve significant production, modification or customization of the software and the services are not essential to the functionality of the software.
Trade Accounts Receivable and Allowance for Doubtful Accounts. Trade accounts receivable are recorded net of allowance for doubtful accounts. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where we expect that payment will likely not be received, and we have established a general reserve policy that is applied to all amounts that are not specifically identified. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may make us reassess the collectibility of amounts and at which time we may need to provide additional allowances in excess of that currently provided.
Impairment or Disposal of Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
To date, there has been no significant impairment of long-lived assets and the Company does not expect to record an impairment loss on its long-lived assets in the near future.
In accordance with SFAS No. 142, goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.
The Company completed this test during the fourth quarters of fiscal 2003 and fiscal 2004, and the Company has not recorded an impairment loss on goodwill.
Accounting for Income Taxes. Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company assesses the
19
Table of Contents
likelihood that deferred tax assets will be recoverable from future taxable income and a valuation allowance is provided if it is determined more likely than not that some portion of the deferred tax assets will not be realized.
Recent Accounting Pronouncements
In November 2003, the EITF reached a consensus on disclosure guidance previously discussed under EITF Issue No. 03-01,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”The Consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during the year ended January 31, 2004.
In March 2004, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01. The consensus clarified the meaning of other-than-temporary impairment and its application to debt and equity investments accounted for under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities,”and other investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in March 2004 is applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The consensus reached in March 2004 also provided for certain disclosure requirements associated with cost method investments that were effective for fiscal years ending after June 15, 2004. We do not believe that the consensus on the recognition and measurement guidance will have a significant impact on our financial position or results of operations.
The EITF has tentatively concluded that the conversion spread on convertible debt instruments with a market price contingency would be included in diluted earnings per share as described in EITF 90-19, regardless of whether or not the market price trigger has been met. The Company does hold certain subordinated debt containing a contingent market price trigger. However, since such triggers have not yet been met, the Company has not included its subordinated debt in the calculation of diluted earnings per share. Should the EITF’s tentative conclusion become a consensus, the Company would be required to include its subordinated debt in the calculation of diluted earnings per share.
Results of Operations
References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENA’s results of operations are derived from comparisons between SERENA’s condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and six month periods ended July 31, 2004 to the condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and six month periods ended July 31, 2003. Historical results include the post-acquisition results of TeamShare from June 5, 2003 and Merant from April 23, 2004.
20
Table of Contents
The following table sets forth our results of operations expressed as a percentage of total revenue. These operating results for the periods presented are not necessarily indicative of the results for the full fiscal year or any other period.
Percentage of Revenue Three Months Ended July 31, | Percentage of Revenue Six Months Ended July 31, | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Revenue: | ||||||||||||
Software licenses | 37 | % | 40 | % | 41 | % | 42 | % | ||||
Maintenance | 50 | % | 50 | % | 47 | % | 50 | % | ||||
Professional services | 13 | % | 10 | % | 12 | % | 8 | % | ||||
Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Cost of revenue: | ||||||||||||
Software licenses | 2 | % | 1 | % | 2 | % | 1 | % | ||||
Maintenance | 6 | % | 6 | % | 5 | % | 6 | % | ||||
Professional services | 12 | % | 9 | % | 11 | % | 8 | % | ||||
Amortization of acquired technology | 8 | % | 7 | % | 7 | % | 6 | % | ||||
Total cost of revenue | 28 | % | 23 | % | 25 | % | 21 | % | ||||
Gross profit | 72 | % | 77 | % | 75 | % | 79 | % | ||||
Operating expenses: | ||||||||||||
Sales and marketing | 35 | % | 28 | % | 32 | % | 28 | % | ||||
Research and development | 17 | % | 14 | % | 16 | % | 13 | % | ||||
General and administrative | 9 | % | 7 | % | 8 | % | 7 | % | ||||
Stock-based compensation | — | — | — | — | ||||||||
Amortization of intangible assets | 6 | % | 2 | % | 5 | % | 1 | % | ||||
Acquired in-process research and development | — | — | 12 | % | — | |||||||
Restructuring, acquisition and other charges | 3 | % | — | 2 | % | — | ||||||
Total operating expenses | 70 | % | 51 | % | 75 | % | 49 | % | ||||
Operating (loss) income | 2 | % | 26 | % | — | 30 | % | |||||
Interest income | 1 | % | 4 | % | 2 | % | 4 | % | ||||
Interest expense | (2 | )% | — | (2 | )% | — | ||||||
Amortization of debt issuance costs | (1 | )% | — | (1 | )% | — | ||||||
(Loss) income before income taxes | — | 30 | % | (1 | )% | 34 | % | |||||
Income taxes | — | 11 | % | 4 | % | 13 | % | |||||
Net (loss) income | — | 19 | % | (5 | )% | 21 | % | |||||
Revenue
We derive revenue from software licenses, maintenance and professional services. Our total revenue increased $27.0 million, or 109%, to $52.0 million in the current fiscal quarter ended July 31, 2004 from $24.9 million in the same quarter a year ago. For the six months ended July 31, 2004, total revenue increased $36.4 million, or 74%, to $85.7 million from $49.3 million in the same six month period year ago. International sales represented approximately 32% of our total revenue in the current fiscal quarter ended July 31, 2004, as compared to 36% in the same quarter a year ago. No single customer accounted for 10% or more of total revenue in either the current fiscal quarter and fiscal six months ended July 31, 2004, or the same quarter and six months a year ago.
21
Table of Contents
The following table summarizes software licenses, maintenance and professional services revenues for the periods indicated (in thousands, except percentages):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
2004 | 2003 | In Dollars | In % | 2004 | 2003 | In Dollars | In % | |||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Software licenses | $ | 19,416 | $ | 10,047 | $ | 9,369 | 93 | % | $ | 35,256 | $ | 20,899 | $ | 14,357 | 69 | % | ||||||||
Maintenance | 25,732 | 12,449 | 13,283 | 107 | % | 40,497 | 24,360 | 16,137 | 66 | % | ||||||||||||||
Professional services | 6,812 | 2,417 | 4,395 | 182 | % | 9,949 | 4,021 | 5,928 | 147 | % | ||||||||||||||
Total revenue | $ | 51,960 | $ | 24,913 | $ | 27,047 | 109 | % | $ | 85,702 | $ | 49,280 | $ | 36,422 | 74 | % | ||||||||
Software Licenses. Software licenses revenue as a percentage of total revenue was 37% and 41% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 40% and 42% in the same quarter and six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, the increase in total software licenses revenue is predominantly due to increases in our distributed systems license revenue, for the most part coming from sales of Merant products after the Merant acquisition late in the first fiscal quarter ended April 30, 2004 and, to a lesser extent, sales ofTeamTrackcoming from our TeamShare acquisition in the second quarter of fiscal 2004; all partially offset by a decrease in theChangeManfamily of products license revenue from the mainframe side. Sales of our distributed systems products, predominantlyChangeMan DSprior to fiscal 2004, bothChangeMan DSandTeamTrackbeginning in fiscal 2004 andChangeMan DS, TeamTrackand our newly acquired product line from Merant beginning in the first quarter of fiscal 2005, make up an increasing proportion of total software licenses revenue. Distributed systems products accounted for $13.6 million or 70% and $22.1 million or 63% of total software licenses revenue in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to $3.6 million or 35% and $6.0 million or 29% in the same quarter and six months a year ago. The Company expects that its distributed systems revenues in total and as a percentage of software licenses revenue will increase over time, and that core software change management will continue to account for a substantial portion of software licenses revenue in the future.
Maintenance. Maintenance revenue as a percentage of total revenue was 50% and 47% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 50% in both the same quarter and six months a year ago. For the current fiscal quarter and six months ended July 31, 2004, when compared to the same periods a year ago, the increase in maintenance revenue is predominantly due to the Company’s acquisition of Merant late in the first fiscal quarter ended April 30, 2004, and to a lesser extent, growth in installed software licenses base, as new licenses generally include one year of maintenance, renewals of maintenance agreements by existing customers, and maintenance price increases; all partially offset by some cancellations inComparex maintenance contracts particularly beginning in fiscal 2002 when the general weakening of the economy in the U.S. and abroad caused some customers to reevaluate and restrict IT spending. Accordingly, we expect maintenance revenue to grow in absolute dollars in the near term as maintenance contracts renew and as the deferred maintenance revenue accrued, which was written down as a result of the purchase accounting, is replaced with renewed “full valued” maintenance contracts.
Professional Services. Professional services revenue as a percentage of total revenue was 13% and 12% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 10% and 8% in the same quarter and six months a year ago. For both the quarter and six months, the dollar increase is predominantly due to an improvement in our consulting business, which began in the second quarter of fiscal 2004 fueled in part by a few large engagements and the acquisition of Merant. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our expanded consulting service capabilities, all partially offset by the continued weak U.S. economy, price pressures on consulting rates, and the deferral of existing consulting projects.
22
Table of Contents
Cost of Revenue
Cost of revenue, which consists of cost of software licenses, cost of maintenance, cost of professional services and amortization of acquired technology, was 28% and 25% of total revenue in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 23% and 21% in the same quarter and six months a year ago.
The following table summarizes cost of revenue for the periods indicated (in thousands, except percentages):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||
2004 | 2003 | In Dollars | In % | 2004 | 2003 | In Dollars | In % | |||||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||||||
Software licenses | $ | 1,025 | $ | 171 | $ | 854 | 500 | % | $ | 1,351 | $ | 383 | $ | 968 | 252 | % | ||||||||||||
Maintenance | 3,151 | 1,605 | 1,546 | 96 | % | 4,714 | 3,109 | 1,605 | 52 | % | ||||||||||||||||||
Professional services | 6,258 | 2,278 | 3,980 | 175 | % | 9,048 | 4,044 | 5,004 | 124 | % | ||||||||||||||||||
Amortization of acquired technology | 3,932 | 1,628 | 2,304 | 141 | % | 5,977 | 2,709 | 3,268 | 121 | % | ||||||||||||||||||
Total revenue | $ | 14,366 | $ | 5,682 | $ | 8,684 | 153 | % | $ | 21,090 | $ | 10,245 | $ | 10,845 | 106 | % | ||||||||||||
Percentage of total revenue | 28 | % | 23 | % | 25 | % | 21 | % | ||||||||||||||||||||
Software Licenses. Cost of software licenses consists principally of fees associated with ourStarTool FDM products through the second quarter of fiscal 2004 and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization, and fees associated with integrating third party technology into ourChangeMan DSdistributed systems products and our newly acquired Merant distributed systems products. Cost of software licenses as a percentage of total software licenses revenue was 5% and 4% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 2% for both the same quarter and six months year ago. The increase in absolute dollars and as a percentage of total software licenses revenue is primarily due to increases in fees associated with sales of Merant products beginning with the acquisition of Merant late in the first fiscal quarter ended April 30, 2004; offset by decreases in fees associated with ourStarTool FDM product as a result of lower revenues, and particularly, the elimination of such fees beginning in the third quarter of fiscal 2004.
Maintenance. Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organizations. Cost of maintenance as a percentage of total maintenance revenue was 12% in both the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 13% in both the same quarter and six months a year ago. In absolute dollar terms, the increase in cost of maintenance for both the quarter and six months is primarily attributable to increases in expenses associated with our customer support organizations as a result of the growth in both maintenance revenue and our installed customer base with our acquisition of Merant late in the first fiscal quarter, and to a lesser extent, the increase in our installed customer base resulting from the RTM technology acquisition in the current fiscal quarter. As a percentage of total maintenance revenue, the margin improvement in the quarter and six months reflects economies of scale achieved as the rate of growth in maintenance revenue was greater than the rate of growth in costs associated with our customer support organizations, again in part due to our acquisitions in the first and second quarters of fiscal 2005.
23
Table of Contents
Professional Services. Cost of professional services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional services revenue was 92% and 91% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 94% and 101% in the same quarter and six months a year ago. For both the current quarter and six months, the increase in cost of professional services in absolute dollars is predominantly due to increases in expenses associated with our professional services organization to support higher professional services revenue, and increases in third party contractor costs. As a percentage of total professional services revenue, the margin improvement in both the quarter and six months reflects economies of scale achieved as the rate of growth in professional services revenue was greater than the rate of growth in costs associated with our professional services organizations.
Amortization of Acquired Technology. In connection with various prior acquisitions and most recently TeamShare in June 2003, Merant in April 2004 and the RTM technology in June 2004, the Company has recorded $86.7 million in acquired technologies, offset by amortization totaling $23.6 million as of July 31, 2004. For both the quarter and six months, the increase in amortization expense was predominantly due to the acquired technology recorded in connection with the Company’s acquisition of Merant in April 2004, and to a lesser extent, the acquired technology recorded in connection with the Company’s acquisitions of TeamShare in June 2003 and the RTM product in June 2004. The Company expects to record $4.0 million per quarter in amortization expense over the next three quarters, then between $3.9 million and $3.0 million per quarter over the next eight quarters following thereon through the end of the first quarter of fiscal 2008. See Notes 1, 6 and 7 of Notes to Condensed Consolidated Financial Statements for additional information related to amortization of acquired technology and the acquisitions of Merant and the RTM technology from Integrated Chipware.
Operating Expenses
The following table summarizes operating expenses for the periods indicated (in thousands, except percentages):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||
2004 | 2003 | In Dollars | In % | 2004 | 2003 | In Dollars | In % | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Sales and marketing | $ | 18,131 | $ | 7,014 | $ | 11,117 | 159 | % | $ | 27,488 | $ | 13,667 | $ | 13,821 | 101 | % | ||||||||||||
Research and development | 8,875 | 3,420 | 5,455 | 160 | % | 13,824 | 6,459 | 7,365 | 114 | % | ||||||||||||||||||
General and administrative | 4,963 | 1,728 | 3,235 | 187 | % | 7,011 | 3,468 | 3,543 | 102 | % | ||||||||||||||||||
Stock-based compensation | 237 | — | 237 | (*) | 255 | — | 255 | (*) | ||||||||||||||||||||
Amortization of intangible assets | 2,985 | 508 | 2,477 | 488 | % | 3,936 | 508 | 3,428 | 675 | % | ||||||||||||||||||
Acquired in-process R&D | — | — | — | — | 10,400 | — | 10,400 | (*) | ||||||||||||||||||||
Restructuring, acquisition & other charges | 1,556 | — | 1,556 | (*) | 1,766 | — | 1,766 | (*) | ||||||||||||||||||||
Total operating expenses | $ | 36,747 | $ | 12,670 | $ | 24,077 | 190 | % | $ | 64,680 | $ | 24,102 | $ | 40,578 | 168 | % | ||||||||||||
Percentage of total revenue | 70 | % | 51 | % | 75 | % | 49 | % | ||||||||||||||||||||
(*) | Percentage is not meaningful. |
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses, payroll taxes, and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue were 35% and 32% in the current fiscal quarter and fiscal six
24
Table of Contents
months ended July 31, 2004, respectively, as compared to 28% in both the same quarter and six months a year ago. For both the quarter and six months, the dollar increase is due primarily to the expansion of our direct sales and marketing organizations to support license revenue growth, salary, benefits and other employee related cost increases associated with our Merant acquisition in the first quarter of fiscal 2005, and to a lesser extent, our TeamShare acquisition in the second quarter of fiscal 2004. In absolute dollar terms, we expect sales and marketing expenses to increase as we continue to hire additional sales and marketing personnel, market our distributed systems products and undertake additional marketing programs.
Research and Development. Research and development expenses consist primarily of salaries, bonuses, payroll taxes, and employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 17% and 16% in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to 14% and 13% in the same quarter and six months a year ago. For both the quarter and six months, the increase in research and development expenses in both absolute dollars and as a percentage of total revenue is primarily attributable to salary, benefits and other employee related cost increases as a result of our acquisition of Merant in the first quarter of fiscal 2005, and to a lesser extent, our acquisition of Teamshare in the second quarter of fiscal 2004, and continued expansion of our research and development efforts to enhance existing products and develop our distributed systems products. We expect research and development expenses to increase, both in absolute dollar terms and as a percentage of total revenue, as we continue to hire additional research and development personnel primarily to develop our distributed systems product suite.
General and Administrative. General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, and benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of total revenue were 9% and 8% in the current fiscal quarter and fiscal six months ended July 31, 2004, as compared to 7% in both the same quarter and six months a year ago. For both the quarter and six months, the increase in general and administrative expenses in both absolute dollars and as a percentage of total revenue is primarily due to our Merant acquisition late in the first fiscal quarter ended April 30, 2004, and to a lesser extent, general increases in infrastructure and insurance costs. We expect general and administrative expenses to increase in absolute dollar terms as we expand our infrastructure and our operations in the future.
Stock-Based Compensation. In connection with the Company’s acquisition of Merant late in the first fiscal quarter ended April 30, 2004, the Company recorded $1.8 million in deferred stock-based compensation reflecting the intrinsic value of the stock options assumed in the acquisition. The deferred stock-based compensation is being amortized over four years under an accelerated method whereby approximately $0.9 million, $0.5 million, $0.3 million and $0.1 million will be amortized to expense in the first, second, third and fourth years, respectively.
Amortization of Intangible Assets. In connection with various prior acquisitions and most recently TeamShare in June 2003 and Merant in April 2004, the Company has recorded $65.4 million in identifiable intangible assets, offset by amortization totaling $6.9 million as of July 31, 2004. Amortization expense in the current fiscal quarter and fiscal six months is exclusively due to the Merant acquisition in the first quarter of fiscal 2005, which added $59.3 million in amortizable intangible assets and, to a lesser extent, the TeamShare acquisition in the second quarter of fiscal 2004, which added $5.2 million in amortizable intangible assets, Amortization of intangible assets will be approximately $2.8 million per quarter over the next three quarters, $2.6 million per quarter over the following four quarters thereafter, and $2.2 million per quarter thereafter through the end of fiscal 2009. See Notes 1 and 6 of Notes to Condensed Consolidated Financial Statements for additional information related to amortization of intangible assets and the Merant acquisition.
Acquired In-Process Research and Development. In connection with the Company’s acquisition of Merant in April 2004, the Company recognized a charge in the first quarter of fiscal 2005 of $10.4 million for acquired in-process research and development. See Note 2 of Notes to Condensed Consolidated Financial Statements for additional information related to the acquired in-process research and development charge.
25
Table of Contents
Restructuring, acquisition and other charges. In connection with the Company’s acquisition of Merant in April 2004, the Company has incurred and expects to continue to incur restructuring, acquisition and other charges related to the acquisition that are not part of the Company’s ongoing operations. Such charges have included and will include certain employee payroll, severance and other employee related costs associated with transitional activities that are not part of ongoing operations, and travel and other direct costs associated with integrating the two companies. The Company incurred $1.6 million of these charges in the current fiscal quarter ended July 31, 2004, and expects that similar charges will be incurred going forward.
Interest Income, Interest Expense and Amortization of Debt Issuance Costs
The following table summarizes other (expense) income for the periods indicated (in thousands, except percentages):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||
2004 | 2003 | In Dollars | In % | 2004 | 2003 | In Dollars | In % | |||||||||||||||||||||||
Other (expense) income | ||||||||||||||||||||||||||||||
Interest income | $ | 728 | $ | 814 | $ | (86 | ) | (11 | )% | $ | 2,043 | $ | 1,819 | $ | 224 | 12 | % | |||||||||||||
Interest expense | (825 | ) | — | (825 | ) | (*) | (1,650 | ) | — | (1,650 | ) | (*) | ||||||||||||||||||
Amortization of debt issuance costs | (335 | ) | — | (335 | ) | (*) | (796 | ) | — | (796 | ) | (*) | ||||||||||||||||||
Total other (expense) income | $ | (432 | ) | $ | 814 | $ | (1,246 | ) | (153 | )% | $ | (403 | ) | $ | 1,819 | $ | (2,222 | ) | (122 | )% | ||||||||||
Percentage of total revenue | (2 | )% | 4 | % | (1 | )% | 4 | % | ||||||||||||||||||||||
(*) | Percentage is not meaningful. |
Interest Income. For the current fiscal quarter ended July 31, 2004, when compared to the same quarter a year ago, the dollar decrease in interest income is predominantly due to decreases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from our acquisition of Merant in which the Company paid approximately $267 million, in the current fiscal quarter ended July 31, 2004 for the acquisition itself and an additional $24 million in acquisition related costs, and to a lesser extent, reduced market interest rates and decreases in cash balances of $34.2 million due to the Company’s stock repurchase program implemented in the third and fourth quarters of fiscal 2004; all partially offset by increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from our debt offering in December 2003, in which the Company raised approximately $213.3 million, net of costs, and to a lesser extent, the accumulation of earnings. For the current six months ended July 31, 2004, when compared to the same six months a year ago, the dollar increase is predominantly due increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from our debt offering in December 2003, and to a lesser extent, the accumulation of earnings: all partially offset by decreases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from the TeamShare and Merant acquisitions, and to a lesser extent, reduced market interest rates and decreases in cash balances due to the Company’s stock repurchase program.
Interest Expense. The Company records interest expense in connection with the Company’s subordinated notes.
On December 15, 2003, the Company issued 1.5% Convertible Subordinated Notes due 2023 (the “notes”) in a private placement. The Company will pay interest on the notes on June 15 and December 15 of each year.
26
Table of Contents
The first interest payment was made on June 15, 2004. Under certain conditions, the notes are convertible into shares of the Company’s common stock at an initial conversion rate of 45.0577 shares per $1,000 principal (representing an initial conversion price of approximately $22.194 per share), subject to certain adjustments. Upon conversion of 100% of the notes, the Company’s common stock issued would be 9,912,588.
The Company has pledged a portfolio of U.S. government securities to secure the first six scheduled interest payments on the notes. Accordingly, as of July 31, 2004, the Company has approximately $8.0 million in restricted cash against this pledge. Other than this pledge of U.S. government securities, the notes are subordinated unsecured obligations and rank junior in right of payment to the Company’s existing and future senior indebtedness and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries. The notes are not listed on any securities exchange.
Amortization of Debt Issuance Costs. The Company records amortization of debt issuance costs in connection with the Company’s Notes, which will be amortized over 5 years, the term of the initial put option by the Note holders. Amortization of debt issuance costs will be $1.34 million annually going forward through December 15, 2008, when the initial put option expires, or earlier, upon conversion of the notes.
Income Taxes
Income Taxes. Income taxes were $0.2 million and $3.5 million in the current fiscal quarter and fiscal six months ended July 31, 2004, respectively, as compared to $2.7 million and $6.2 million in the same quarter and six months a year ago. The Company’s projected effective income tax rate for fiscal 2005 is 86%, or 37%, excluding the impact of the one-time in-process research and development charge of $10.4 million taken in the first fiscal quarter ended April 30, 2004, versus 37% for fiscal 2004. The projected effective income tax rate for fiscal 2005, when compared to fiscal 2004, benefited in part due to increases in research and experimentation tax credits as a result of the Company’s recent Merant acquisition and changes in pre-tax income projections; all offset entirely by a limitation in the research and experimentation tax credit in fiscal 2005 pending the extension or renewal of certain tax legislation. SERENA’s effective income tax rate has historically benefited from the United States research and experimentation tax credit and tax benefits generated from export sales made from the United States.
Liquidity and Capital Resources
Cash, cash equivalents and investments. Since SERENA’s inception, we have financed our operations and met our capital expenditure requirements through cash flows from operations. As of July 31, 2004 and excluding the $8.0 million in restricted cash, SERENA had $140.5 million in cash and cash equivalents, and an additional $41.5 million and $9.6 million in short and long-term investments, respectively, consisting principally of high grade commercial paper, certificates of deposit and short and long-term corporate notes and bonds. A portion of our cash and cash equivalents is the proceeds from our debt offering in December 2003.
Net cash provided by operating activities. Cash flows provided by operating activities were $23.4 million and $12.6 million in the current fiscal six months ended July 31, 2004 and the same six months a year ago, respectively. In the current fiscal six months ended July 31, 2004, the Company’s cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss and a decrease in accounts receivable; all partially offset by an decrease in income taxes payable. In the same six months a year ago, the Company’s cash flows provided by operating activities exceeded net income principally due to the inclusion of non-cash expenses in net income and a decrease in accounts receivable; all partially offset by decreases in income taxes payable and accrued expenses.
Net cash used in investing activities. In the current fiscal six months ended July 31, 2004, net cash used in investing activities predominantly related to cash paid in the Merant acquisition, net of cash received, totaling $169.7 million, acquisition related costs paid in connection with the Merant acquisition totaling $24.2 million,
27
Table of Contents
cash paid to acquire the RTM technology totaling $3.8 million, and the purchase of computer equipment and office furniture and equipment totaling $0.8 million; all partially offset by net sales of short and long-term investments totaling $58.4 million. In the same six months a year ago, net cash used in investing activities predominantly related to cash paid in the TeamShare acquisition, net of cash received, totaling $19.4 million, and the purchase of computer equipment and office furniture and equipment totaling $0.4 million; all partially offset by net sales of short and long-term investments totaling $10.8 million.
Net cash provided by (used in) financing activities. In the current fiscal six months ended July 31, 2004, net cash provided by financing activities was due to the exercise of stock options under the Company’s employee stock option plan totaling $3.6 million, and the sale of the Company’s common stock under the employee stock purchase plan totaling $1.6 million; all partially offset by repurchases of the Company’s common stock under a stock repurchase plan totaling $4.2 million. In the same six months a year ago, net cash used in financing activities was related to repurchases of the Company’s common stock under a stock repurchase plan totaling $20.5 million; partially offset by the payment of principal on notes receivable from stockholders totaling $5.8 million, the exercise of stock options under the Company’s employee stock option plan totaling $2.9 million, and the sale of the Company’s common stock under the employee stock purchase plan totaling $0.8 million.
Contractual obligations and commitments. At July 31, 2004, the Company did not have any material commitments for capital expenditures and has no revolving credit agreement or other term loan agreements with any bank or other financial institution.
At July 31, 2004, the Company had notes outstanding totaling $220 million. The Notes bear interest at 1.5% per annum and are due in 2023. Accrued and unpaid interest on the notes totaled $0.4 million as of July 31, 2004 with restricted cash balances on hand totaling $8.0 million to cover the next five semi-annual interest payments.
The Company has noncancelable operating lease agreements for office space that expire between calendar 2004 and 2016. Minimum lease payments are as follows (in thousands):
Fiscal Year Ending January 31, | |||
2005 (remaining six months) | $ | 2,885 | |
2006 | 5,906 | ||
2007 | 5,262 | ||
2008 | 4,060 | ||
2009 | 2,508 | ||
Thereafter | 10,501 | ||
$ | 31,122 | ||
Working capital, accounts receivable and deferred revenue. At July 31, 2004, the Company had working capital of $129.4 million and accounts receivable, net of allowances, of $32.8 million. Total deferred revenue increased to $71.0 million at July 31, 2004 from $39.2 million at January 31, 2004 primarily as a result of the Merant acquisition in April 2004, and to a lesser extent, increased billings of maintenance fees and the RTM technology asset purchase from Integrated Chipware in June 2004.
Off-balance sheet arrangements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of July 31, 2004, we are not involved in any unconsolidated SPE transactions.
We believe that current cash and short-term investments, and cash flows from operations will satisfy our working capital and capital expenditure requirements for at least the next twelve months. At some point in the
28
Table of Contents
future we may require additional funds for either operating or strategic purposes and may seek to raise the additional funds through public or private debt or equity financing. If we ever need to seek additional financing, there is no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders.
Factors That May Affect Future Results
This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements under the Private Securities Reform Act of 1995 and other prospective information relating to future events. These forward-looking statements and other prospective information are subject to certain risks and uncertainties that could cause results to differ materially from historical results or anticipated results, including but are not limited to, our ability to successfully integrate our recent acquisition of Merant plc; the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to the end of the quarter extremely uncertain; weak economic conditions worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates; changes in revenue mix and seasonality; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; expansion of our international organizations; our ability to manage our growth; and the following:
There Are Many Factors, Including Some Beyond Our Control, That May Cause Fluctuations in Our Quarterly Operating Results
Our quarterly operating results have varied greatly in the past and may vary greatly in the future depending upon a number of factors described below and elsewhere in this “Factors That May Affect Future Results” section of this report, including many that are beyond our control. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful, and you should not rely on them as an indication of our future performance.
Our software license revenue in any quarter depends on orders booked and shipped in the last month, weeks or days of that quarter. At the end of each quarter, we typically have either minimal or no backlog of orders for the subsequent quarter. If a large number of orders or several large orders do not occur or are deferred, our revenue in that quarter could be substantially reduced. This would materially adversely affect our operating results and could impair our business in future periods.
Because we do not know when, or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters. In addition, as a result of the economic slowdown worldwide, a number of customers have delayed discretionary spending for software and hardware, which has reduced our revenue. Additionally, sales cycles beginning in fiscal 2002 lengthened as customers delayed decisions to purchase our products and increase capacity on mainframe computers. Historically, a majority of our revenue has been attributable to the licenses of our mainframe software products. Changes in the mix of software products and services sold by us, including the mix between higher margin software products and lower margin maintenance and services, could materially affect our operating results for future quarters.
Economic Conditions Worldwide Could Adversely Affect Our Revenue Growth and Ability to Forecast Revenue
The revenue growth and profitability of our business depends on the overall demand for application software and services. Because our sales are primarily to major corporate customers, our business also depends on general economic and business conditions. The general weakening of the worldwide economy has caused the Company to experience a decrease in revenues and revenue growth rates of its software licenses. A softening of
29
Table of Contents
demand for computer software caused by a continued weakening of the economy, domestically or internationally, may result in a continued decrease in revenues and revenue growth rates. Our license revenues have fluctuated in recent years and we may not experience any license revenue growth in the future and our license revenues could in fact decline.
Management personnel identify, track and forecast future revenues, backlog and trends in our business. Our sales personnel monitor the status of all proposals, such as the estimated date when a transaction will close and the potential dollar amount of such sale. We aggregate these estimates periodically in order to generate a sales pipeline and then evaluate the pipeline at various times to look for trends in our business. While this pipeline analysis provides visibility to our potential customers and the associated revenues for budgeting and planning purposes, these pipeline estimates may not consistently correlate to revenues in a particular quarter or ever. A slowdown in the economy, domestically and internationally, has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion of the pipeline into contracts could cause us to plan or budget improperly and thereby could adversely affect our business or results of operations. In addition, primarily due to a substantial portion of our software licenses revenue contracts closing in the latter part of a quarter, management may not be able to adjust the Company’s cost structure in response to a variation in the conversion of the pipeline into contracts in a timely manner, and thereby adversely affect our business or results of operations.
If SERENA Encounters Difficulties Integrating the Business Operations of SERENA and Merant, It Could Adversely Affect the Business of the Combined Company
We intend, to the extent possible, to integrate our operations with those of Merant. Our goal in integrating these operations is to increase earnings and achieve cost savings by taking advantage of the significant anticipated synergies of consolidation and enhanced growth opportunities. We have incurred and expect to continue to incur, severance payments and other employee related costs, costs for lease terminations, meetings, trainings, rebranding, integration of information technology systems, and other costs in connection with the integration of SERENA and Merant. We cannot be sure that we will not encounter substantial difficulties integrating our operations with Merant’s operations, resulting in a delay or the failure to achieve the anticipated synergies and, therefore, the expected increases in earnings and cost savings. The difficulties of combining the operations of the two companies include, among other things:
• | Possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between SERENA and Merant; |
• | Coordinating and consolidating ongoing and future research and development efforts; |
• | Consolidating corporate and administrative infrastructure, particularly in light of Merant’s complex corporate structure; |
• | Integrating and managing the technologies and products of the two companies, including consolidating and integrating computer information systems; |
• | Consolidating sales and marketing operations; |
• | Retaining existing customers and attracting new customers; |
• | Retaining strategic partners and attracting new strategic partners; |
• | Retaining key employees; |
• | Retaining and integrating distributors and key sales representatives; |
• | Identifying and eliminating redundant and underperforming operations and assets; |
• | Using capital assets efficiently to develop the business of the combined company; |
30
Table of Contents
• | Minimizing the diversion of management’s attention from ongoing business concerns; |
• | Coordinating geographically separate organizations; |
• | Possible tax costs or inefficiencies associated with integrating the operations of the combined company; |
• | International rules and regulations that may limit or complicate restructuring plans; |
• | Possible modification of operating control standards in order to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; and |
• | Retaining and attracting new employees to support existing and new products and new technology development. |
For these reasons, we may fail to complete successfully the necessary integration of SERENA and Merant, or to realize any of the anticipated benefits of the integration of the two companies. Actual cost savings and synergies may be lower than we currently expect and may take a longer time to achieve than we currently anticipate.
The Acquisition of Merant May Cause Disruptions, Including Potential Loss of Customers, Suppliers and Other Business Partners, in the Business of SERENA or Merant, Which Could Have Material Adverse Effects on the Combined Company’s Business and Operations
SERENA’s and Merant’s customers, suppliers, distributors, licensors and other business partners, in response to the acquisition, may adversely change or terminate their relationships with either company or the combined company, which could have a material adverse effect on our business. Certain of SERENA’s or Merant’s current or potential customers may cancel or defer orders for our products. In addition, customers may expect re-negotiated pricing as a result of the acquisition. The acquisition may also adversely affect our ability to attract new customers.
Some of the contracts with suppliers, distributors, system integrators, customers, licensors, facility owners and other business partners require SERENA or Merant to obtain consent from these other parties in connection with the acquisition. If their consent cannot be obtained on favorable terms, the combined company may incur higher costs related to replacing suppliers, may suffer a loss of potential future revenue and may lose rights to facilities or intellectual property that are material to the business of the combined company.
Charges to Earnings Resulting From Our Acquisition of Merant, Including the Application of the Purchase Method of Accounting, and Restructuring and Integration Costs May Materially Adversely Affect the Market Value of SERENA Shares
In accordance with US GAAP, the combined company has accounted for the acquisition using the purchase method of accounting. The combined company has allocated the total estimated purchase price to Merant’s net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as at the date of the acquisition, and record the excess of the purchase price over those fair values as goodwill. The combined company’s financial results, including earnings per share, could be adversely affected by a number of financial adjustments required by US GAAP including the following:
• | The portion of the existing deferred revenues on Merant’s balance sheet at the closing of the acquisition which represents maintenance revenue has been adjusted, based on estimated cost to deliver plus an appropriate gross margin; |
• | The portion of the estimated purchase price allocated to in-process research and development was expensed by the combined company in the first quarter of fiscal 2005; |
• | The combined company will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with the acquisition during such estimated useful lives; and |
31
Table of Contents
• | To the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, the combined company may be required to incur material charges relating to the impairment of those assets. |
We have incurred and expect to incur costs associated with combining the operations of the two companies, including advisors’ fees and other costs related to the acquisition. These costs may be substantial and include those related to the severance and stock option acceleration provisions of Merant’s employee benefit plans, which were triggered by the acquisition. We also face potential costs related to employee redeployment or relocation, employee retention which could include salary increases, bonuses or option grants, reorganization or closure of facilities, relocation and disposal of excess equipment, termination of contracts with third parties that provide redundant or conflicting services and other integration costs. We have accounted for these costs as purchase related adjustments in the acquisition, and such costs have decreased our net income and have impacted cash balances. Each of these charges has negatively impacted earnings, which could have a material adverse effect on the price of SERENA shares.
Our Future Revenue Is Substantially Dependent Upon Our Installed Customers Renewing Maintenance Agreements for Our Products and Licensing or Upgrading Additional SERENA ECM Products; Our Future Professional Service and Maintenance Revenue Is Dependent on Future Sales of Our Software Products
We depend on our installed customer base for future revenues from maintenance renewal fees and licenses or upgrades of additional ECM products. If our customers do not purchase additional products, upgrade existing products or cancel or fail to renew their maintenance agreements, this could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. The maintenance agreements are renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenue in future periods. In addition, our customers may not necessarily purchase additional products, upgrades or professional services. Our professional service revenue and maintenance revenue are also dependent upon the continued use of these services by our installed customer base. Any downturn in our software license revenue would have a negative impact on the growth of our professional service revenue and maintenance revenue in future quarters.
We Expect That Our Operating Expenses Will Increase in the Future and These Increased Expenses May Adversely Affect Our Future Operating Results and Financial Condition
Although SERENA has been profitable in recent years, we may not remain profitable on a quarterly or annual basis in the future. We anticipate that our expenses will increase in the foreseeable future as we:
• | Incur additional restructuring and acquisition charges relative to the integration of Merant; |
• | Include a full quarter of Merant expenses in the combined financial statements, as we did for the first time in the second quarter of fiscal 2005; |
• | Increase our sales and marketing activities, including expanding our United States and international direct sales forces and extending our telesales efforts; |
• | Develop our technology, including our distributed systems products; |
• | Invest in penetrating the systems integrator and federal government marketplaces; |
• | Include expenses associated with our TeamShare and Merant acquisitions; |
• | Expand our distribution channels; and |
• | Pursue strategic relationships and acquisitions. |
32
Table of Contents
With these additional expenses, in order to maintain our current levels of profitability, we will be required to increase our revenue correspondingly. Any failure to increase our revenue as we implement our product, service and distribution strategies would materially adversely affect our business, quarterly and annual operating results and financial condition. Our revenue has fluctuated in recent years and we may not experience any revenue growth in the future and our revenue could in fact decline. Our efforts to expand our software product suites, sales and marketing activities, direct and indirect distribution channels and professional service offerings and to pursue strategic relationships or acquisitions may not succeed or may prove more expensive than we currently anticipate. As a result, we cannot predict our future operating results with any degree of certainty.
If the Market for IBM and IBM-Compatible Mainframes Decreases, It Could Adversely Affect Our Business
Our mainframe revenues are dependent upon the continued use and acceptance of IBM Corporation (“IBM”) and IBM-compatible mainframes and the growth of this market. If the role of the mainframe does not increase as we anticipate, or if it in any way decreases, this would materially adversely affect our business, future quarterly and annual operating results and financial condition. Additionally, if there is a wide acceptance of other platforms or if new platforms emerge that provide enhanced enterprise server capabilities, our business and future operating results may be materially adversely affected. Prior to the Company’s acquisition of Merant in April 2004, the majority of our software license revenue had been attributable to sales of our mainframe products. We expect that, for the foreseeable future, a significant portion of our software license revenue will continue to come from sales of our mainframe products. As a result, future sales of our existing products and associated maintenance revenue and professional service revenue will depend on continued use of mainframes.
Our License Revenues from Products for Distributed Systems May Fluctuate
We introduced our ChangeMan DS product in fiscal 2000, our ChangeMan ALM and ChangeMan ECP products in fiscal 2001, our ChangeMan WCM product in the first quarter of fiscal 2002 and our ChangeMan ZDD product in the first quarter of fiscal 2003. In the second quarter of fiscal 2004, we acquired the TeamTrack product with our acquisition of TeamShare effective June 5, 2003. In the first quarter of fiscal 2005, we acquired the Merant product line with our acquisition of Merant effective April 23, 2004. In the second quarter of fiscal 2005, we acquired the RTM product with our asset purchase from Integrated Chipware, Inc. While license revenues from our distributed systems products increased to 29% of total license revenues in fiscal 2004, they may fluctuate materially from quarter to quarter and could in fact decline. We are currently developing new products and enhancing our product suite to support additional distributed systems products. If we do not successfully develop, market, sell and support our distributed systems products, this would materially adversely affect our business and our future quarterly and annual operating results. Prior to our acquisition of Merant in the first quarter of fiscal 2005, the majority of our products had been designed for the mainframe platform, and the majority of our software license revenue, maintenance revenue and professional services revenue had been attributable to licenses for these mainframe products. Our competitors may have substantially greater experience providing distributed systems compatible software products than we do, and many also may have significantly greater financial and organizational resources.
33
Table of Contents
The License Revenues from our IBM OEM Relationship May Fluctuate
In January 2002, we entered into an OEM Agreement with IBM whereby IBM acquired the rights to resell our StarTool APM technology. IBM provides SERENA a quarterly royalty report one month after each of IBM’s calendar quarters detailing licenses and maintenance sold through to end users during the quarter. While license revenues from our IBM OEM relationship were less than 10% of total license revenues in both the current fiscal quarter ended July 31, 2004 and fiscal year ended January 31, 2004, they may fluctuate materially from quarter to quarter and could in fact decline. We recognized our first revenue from this arrangement in the second quarter of fiscal 2003. Because we have little or no visibility during the quarter on pipelines, sales forecasts, sales volumes or the amount of license revenue that will be reported, we cannot accurately predict the IBM revenue or our operating results for the quarter or any future quarter. Because the IBM OEM license revenue may be significant to our total license revenue in any fiscal quarter, any decline in revenue could materially adversely affect our business and our future quarterly and annual operating results.
Acquisitions May be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert the Attention of Our Management
In June 2003, we acquired TeamShare, Inc.; in April 2004, we acquired Merant plc.; in June 2004, we acquired the RTM product with our asset purchase from Integrated Chipware, Inc.; and we may acquire or make investments in other companies and technologies. In the event of any acquisitions or investments, we could:
• | Issue stock that would dilute the ownership of our then-existing stockholders; |
• | Incur debt; |
• | Assume liabilities; |
• | Incur charges for the impairment of the value of investments or acquired assets; or |
• | Incur amortization expense related to intangibles assets. |
If we fail to achieve the financial and strategic benefits of past and future acquisitions or investments, our operating results will suffer. Acquisitions and investments involve numerous other risks, including:
• | Difficulties integrating the acquired operations, technologies or products with ours; |
• | Failure to achieve targeted synergies; |
• | Unanticipated costs and liabilities; |
• | Diversion of management’s attention from our core business; |
• | Adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization; |
• | Difficulties entering markets in which we have no or limited prior experience; and |
• | Potential loss of key employees, particularly those of the acquired organizations. |
Any Delays in Our Normally Lengthy Sales Cycles Could Result in Significant Fluctuations in Our Quarterly Operating Results
Our sales cycle typically takes six to eighteen months to complete and varies from product to product. Any delay in the sales cycle of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction and the level of competition that we encounter in our selling activities. Beginning in fiscal 2002, we have experienced an overall lengthening of sales cycles as customers delayed purchases or customers reduced budgets as a result of
34
Table of Contents
economic conditions. Additionally, the emerging market for ECM products and services contributes to the lengthy sales process in that during the sales cycle we often have to teach potential customers about the use and benefits of our products. In certain circumstances, we license our software to customers on a trial basis to assist the customers in their evaluation of our products. Our sales cycle can be further extended for product sales made through third party distributors.
Seasonal Trends in Sales of Our Software Products May Affect Our Quarterly Operating Results
We have experienced and expect to continue to experience seasonality in sales of our software products. These seasonal trends materially affect our quarter-to-quarter operating results. Revenue and operating results in our quarter ending January 31 are typically higher relative to our other quarters, because many customers make purchase decisions based on their calendar year-end budgeting requirements. In addition, our January quarter tends to reflect the effect of the incentive compensation structure for our sales organization, which is based on satisfaction of fiscal year-end quotas. As a result, we have historically experienced a substantial decline in revenue in the first quarter of each fiscal year relative to the preceding quarter. We expect our quarter ending October 31 to reflect the effects of summer slowing of international business activity and spending activity generally associated with that time of year.
If the SCM Market Does Not Evolve as We Anticipate, Our Business Will Be Adversely Affected
If we fail to properly assess and address the SCM market or if our products and services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. The SCM market is in an early stage of development. IT organizations have traditionally addressed SCM needs internally and have only recently become aware of the benefits of third-party SCM solutions as their SCM requirements have become more complex. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party SCM products and the expansion of their use on a company-wide basis. The SCM market for third-party products may grow more slowly than we anticipate. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our products as rapidly as existing technologies, customer requirements and industry standards evolve; our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our products less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.
We May Experience Delays in Developing Our Products Which Could Adversely Affect Our Business
If we are unable, for technological or other reasons, to develop and introduce new and improved products in a timely manner, this could materially adversely affect our business and future quarterly and annual operating results. We have experienced product development delays in new version and update releases in the past and may experience similar or more significant product delays in the future. To date, none of these delays has materially affected our business. Difficulties in product development could delay or prevent the successful introduction or marketing of new or improved products or the delivery of new versions of our products to our customers. Any delay in releasing our new distributed systems products, for whatever reason, would impair our revenue growth.
We Intend to Expand Our International Operations and May Encounter a Number of Problems in Doing So; There Are Also a Number of Factors Associated With International Operations that Could Adversely Affect Our Business
Expansion of International Operations. With the acquisition of Merant we expanded the scope of our international operations. We currently have sales subsidiaries in the United Kingdom, Germany, Sweden, France, Belgium, Spain, the Netherlands, Australia and Singapore. If we are unable to expand our international
35
Table of Contents
operations successfully and in a timely manner, or if these operations experience declining revenue growth, this could materially adversely affect our business and quarterly and annual operating results. We have only limited experience in marketing, selling and supporting our products internationally. Additionally, we do not have any experience in developing foreign language versions of our products. Such development may be more difficult or take longer than we anticipate. We may not be able to successfully market, sell, deliver and support our products internationally.
Risks of International Operations. International sales represented 32% of our total revenue in the current fiscal quarter ended July 31, 2004, as compared to 36% in the same quarter a year ago. Our international revenue is attributable principally to our European operations. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could materially adversely affect our business and future quarterly and annual operating results, including the following:
• | Difficulties in staffing and managing international operations; |
• | Problems in collecting accounts receivable; |
• | Longer payment cycles; |
• | Fluctuations in currency exchange rates; |
• | Inability to control or predict the levels of revenue produced by our international distributors; |
• | Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world; |
• | Limitations on repatriation of earnings; |
• | Reduced protection of intellectual property rights and less favorable contract interpretation rules in some countries; |
• | Political and economic instability; |
• | Recessionary environments in foreign economies; or |
• | Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries. |
Substantial Leverage and Debt Service Obligations May Adversely Affect Our Cash Flow
As a result of the sale of the notes, we incurred $220 million of indebtedness. There is a possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. We are not restricted under the indenture governing the notes from incurring additional debt in the future.
Our substantial leverage could have significant negative consequences, including:
• | Increasing our vulnerability to general adverse economic and industry conditions; |
• | Limiting our ability to obtain additional financing; |
• | Requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; |
• | Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and |
• | Placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources. |
36
Table of Contents
We May Not Have the Ability to Purchase the Notes
Upon the occurrence of a change in control, we would be required under the indenture governing the notes to purchase all outstanding notes tendered to us by the holders of such notes. In addition, holders may require us to purchase their notes on December 15, 2008, December 15, 2013 or December 15, 2018. While we have the right, subject to certain conditions, to pay common stock for the purchase price in the event of a change in control, we cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to pay the purchase price in cash for all notes tendered by the holders and future credit facilities may restrict our ability to make such payments. A change in control may also constitute an event of default under any other agreement governing then-existing indebtedness and could prevent us from purchasing the notes. Any failure to purchase the notes when required will result in an event of default under the indenture.
Our Reported Earnings Per Share May Be More Volatile Because of the Contingent Conversion Provision of the Notes
Holders of the notes are entitled to convert the notes into our common stock if (1) the price of our common stock over a specified period exceeds a specified threshold, (2) the trading price of the notes falls below a specified threshold, (3) the notes have been called for redemption and (4) specified corporate transactions occur. Until one of these contingencies is met, the shares of common stock underlying the notes are not included in the calculation of our basic or fully diluted earnings per share. Should a contingency be met, fully diluted earnings per share would be expected to decrease as a result of the inclusion of the underlying shares of common stock in the fully diluted earnings per share calculation. Volatility in our common stock price could cause this condition to be met in one fiscal quarter and not in a subsequent fiscal quarter, increasing the volatility of our fully diluted earnings per share.
If We Are Required to Account for Stock Options Under Our Employee Stock Plans as Compensation Expense, Our Net Income and Our Earnings Per Share Would be Significantly Reduced or May Reflect a Loss
There has been an increasing public debate about the proper accounting treatment for equity-based compensation, such as employee stock options and employee stock purchase plan shares, and whether they should be treated as compensation expense and, if so, how to properly value such charges. On March 31, 2004, the Financial Accounting Standards Board issued an exposure draft on a proposed standard for the accounting of stock options. The proposed standard requires public companies to value employee stock options and stock issued under employee stock purchase plans using the fair value based method on the grant date and record stock-based compensation expense. If we elected or were required to record an expense for our employee stock plans using the fair value based method, we would be required to recognize significant stock-based compensation charges. We currently calculate stock-based compensation expense using the Black-Scholes option-pricing module and disclose the proforma impact on net income (loss) and net income (loss) per share in Note 3 to our Notes to Condensed Consolidated Financial Statements for the three and six months ended July 31, 2004 and 2003. Although we are not currently required to record any stock-based compensation expense using the fair value based model in connection with employee option grants that have an exercised price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future accounting standards will require us to treat all stock-based compensation expense in our consolidated statements of operations using the fair value based method.
Changes in Accounting Regulations and Related Interpretations and Policies Regarding Revenue Recognition Could Cause Us to Defer Recognition of Revenue or Recognize Lower Revenue and Profits
Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-product or multi-year transactions. As our transactions increase in complexity with the sale of larger, multi-product, multi-year licenses, negotiation of mutually acceptable terms
37
Table of Contents
and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with Statement of Position 97-2,“Software Revenue Recognition”as amended, however these future, more complex, multi-product, multi-year license transactions may require additional accounting analysis to account for them accurately, could lead to unanticipated changes in our current revenue accounting practices and may contain terms affecting the timing of revenue recognition.
We May Incur Future Impairment Losses Related to Intangible Assets From Prior Acquisitions That Could Harm Our Future Operating Results
In the recent past, we have acquired significant assets and businesses. If the assets and businesses do not perform as expected, we may be required to take impairment charges related to the intangible assets from these acquisitions. Such charges could harm our operating results.
Fluctuations in the Value of Foreign Currencies Could Result in Currency Transaction Losses for SERENA
A majority of our international business is conducted in foreign currencies, principally the British pound and euro. Fluctuations in the value of foreign currencies relative to the U.S. dollar will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future. To date, we have not adopted a hedging program to protect SERENA from risks associated with foreign currency fluctuations.
SERENA is Subject to Intense Competition in the SCM Industry and We Expect to Face Increased Competition in the Future, Including Competition in the SCM Distributed Systems Market
We may not be able to compete successfully against current or future competitors and such inability would materially adversely affect our business, quarterly and annual operating results and financial condition. The market for our products is highly competitive and diverse. Moreover, the technology for SCM products may change rapidly. New products are frequently introduced, and existing products are continually enhanced. Competition may also result in changes in pricing policies by SERENA or our competitors, which could materially adversely affect our business and future quarterly and annual operating results. Competitors vary in size and in the scope and breadth of the products and services that they offer. Many of our current and potential competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can.
Mainframe Competition. We currently face competition from a number of sources, including:
• | Customers’ internal IT departments; |
• | Providers of SCM products that compete directly with ChangeMan ZMF and Comparex such as Computer Associates, IBM and smaller private companies; and |
• | Providers of application development programmer productivity and system management products such as Compuware, IBM and smaller private companies. |
Competition in the Distributed Systems SCM Market. We also face significant competition as we develop, market and sell our distributed systems products, including ChangeMan DS, TeamTrack and our newly acquired Merant product line. If we are unable to successfully penetrate the distributed systems SCM market, our business and future quarterly and annual operating results will be materially adversely affected. Penetrating the existing distributed systems SCM market will be difficult. Competitors in the distributed systems market include IBM, Computer Associates, Microsoft, Telelogic and other smaller private companies.
38
Table of Contents
Future Competition. We may face competition in the future from established companies who have not previously entered the mainframe or distributed systems SCM market, or from emerging software companies. Barriers to entry in the software market are relatively low. Increased competition may materially adversely affect our business and future quarterly and annual operating results due to price reductions, reduced gross margins and reduction in market share. Established companies may not only develop their own mainframe or distributed systems SCM solutions, but they may also acquire or establish cooperative relationships with our current competitors, including cooperative relationships between large, established companies and smaller private companies. Because larger companies have significant financial and organizational resources available, they may be able to quickly penetrate the mainframe or distributed systems SCM market through acquisitions or strategic relationships and may be able to leverage the technology and expertise of smaller companies and develop successful SCM products for the mainframe. We expect that the software industry, in general, and providers of SCM solutions, in particular, will continue to consolidate. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.
Bundling or Compatibility Risks. Our ability to sell our products also depends, in part, on the compatibility of our products with other third party products, particularly those provided by IBM. Developers of these third party products may change their products so that they will no longer be compatible with our products. These third party developers may also decide to bundle their products with other SCM products for promotional purposes. If that were to happen, our business and future quarterly and annual operating results may be materially adversely affected as we may be priced out of the market or no longer be able to offer commercially viable products.
Our Executive Officers and Certain Key Personnel Are Critical to Our Business and Such Officers and Key Personnel May Not Remain with SERENA in the Future
Our success will depend to a significant extent on the continued service of our senior executives and certain other key employees, including certain sales, consulting, technical and marketing personnel. If we lost the services of one or more of our executives or key employees, including if one or more of our executives or key employees decided to join a competitor or otherwise compete directly or indirectly with SERENA, this could materially adversely affect our business. In particular, we have historically relied on the experience and dedication of our product authors. With the exception of Douglas D. Troxel, SERENA’s founder, Chief Technology Officer and chairman of SERENA’s board of directors, the employment of all of our senior and key employees, including key product authors, is at will. Mr. Troxel’s employment is on a year-to-year basis. In addition, we do not maintain key man life insurance on our employees and have no plans to do so.
Our Industry Changes Rapidly Due to Evolving Technology Standards and Our Future Success Will Depend on Our Ability to Continue to Meet the Sophisticated Needs of Our Customers
Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms particularly for our distributed systems products. We will have to develop and introduce enhancements to our existing products and new products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by product advances. The life cycles of our products are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our product development efforts will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.
39
Table of Contents
Our Share Price Has Been, and Will Likely Continue to Be, Volatile
The market price of our common shares has fluctuated significantly in recent months, and we expect that the market price of our common shares may fluctuate substantially as a result of variations in our quarterly operating results and market conditions. These fluctuations may be exaggerated if the trading volume of our common shares is low. In addition, the market price of our common shares may fluctuate dramatically in response to a variety of factors, including:
• | Changes in estimates of our financial performance; |
• | Changes in our ability to integrate the acquisition of Merant; |
• | Shortfalls in revenues or net income expected by securities analysts; |
• | Announcements of new products by the Company or its competitors; |
• | Quarterly fluctuations in the Company’s financial results or the results of other software companies, including those of direct competitors of the Company; |
• | Changes in analysts’ estimates of the Company’s financial performance, the financial performance of competitors, or the financial performance of software companies in general; |
• | General conditions in the software industry; |
• | Changes in the amount the Company receives in royalties from IBM; |
• | Changes in the Company’s license revenue mix among the various platforms; |
• | Changes in prices for the Company’s products or competitors’ products; |
• | Changes in revenue growth rates for the Company or its competitors; |
• | Conditions in the financial markets; |
• | General market or economic conditions; |
• | The gain or loss of a significant customer or strategic relationship; |
• | Changes in recommendations from securities analysts regarding our industry, our customers’ industries; or us |
• | Announcements of technological or competitive developments; and |
• | Acquisitions or entry into strategic alliances by our competitors or us. |
Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts at some time in the future and the trading prices of our securities could decline as a result.
In addition, equity securities of many technology companies have recently experienced significant price and volume fluctuations. These price and volume fluctuations are sometimes unrelated to the operating performance of the affected companies. Volatility in the market price of our common shares could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs to us and a diversion of our management’s attention and resources.
Third Parties in the Future Could Assert That Our Products Infringe Their Intellectual Property Rights, Which Could Adversely Affect Our Business
Third parties may claim that our current or future products competitors in the software industry segment grows and the functionality of products in different industry segments overlaps. As a result of these factors, infringement claims could materially adversely affect our business.
40
Table of Contents
Errors in Our Products or the Failure of Our Products to Conform to Specifications Could Result in Our Customers Demanding Refunds from Us or Asserting Claims for Damages Against Us
Because our software products are complex, they often contain errors or “bugs” that can be detected at any point in a product’s life cycle. While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs in our software, we expect that errors in our products will continue to be found in the future. Although many of these errors may prove to be immaterial, certain of these errors could be significant. Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. These problems could materially adversely affect our business and future quarterly and annual operating results. In the past we have discovered errors in certain of our products and have experienced delays in the shipment of our products during the period required to correct these errors. These delays have principally related to new version and product update releases. To date none of these delays have materially affected our business. However, product errors or delays in the future, including any product errors or delays associated with the introduction of our distributed systems products, could be material. In addition, in certain cases we have warranted that our products will operate in accordance with specified customer requirements. If our products fail to conform to such specifications, customers could demand a refund for the software license fee paid to us or assert claims for damages.
Product Liability Claims Asserted Against Us in the Future Could Adversely Affect Our Business
We may be subject to claims for damages related to product errors in the future. A material product liability claim could materially adversely affect our business. Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. SERENA’s standard software licenses provide that if our products fail to perform, we will correct or replace such products. If these corrective measures fail, we may be required to refund the license fee for such non-performing product. However, our standard license agreement limits our liability for non-performing products to the amount of license fee paid, if the license has been in effect for less than one year, or to the amount of the licensee’s current annual maintenance fee, if the license is more than one year old. Our standard license also provides that SERENA shall not be liable for indirect or consequential damages caused by the failure of our products. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions to the extent local laws treat certain warranty exclusions as unenforceable. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of such claims.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not use derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments consist of cash and cash equivalents, short and long-term investments, trade accounts receivable and accounts payable. The Company considers investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash equivalents. All of the Company’s cash equivalents and short and long-term investments principally consist of commercial paper and debt securities, and are classified as available-for-sale as of July 31, 2004. The Company’s exposure to market risk for changes in interest rates relates primarily to its short and long-term investments and short-term obligations, thus, a hypothetical 10% fluctuation in interest rates would not have a material impact on the fair value of these securities.
Sales to foreign countries accounted for approximately 32% of the total sales during the current fiscal quarter ended July 31, 2004. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and euro, and does not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Company’s foreign subsidiaries. Therefore, foreign exchange fluctuations could create a risk of significant balance sheet gains or losses on the Company’s consolidated financial statements. However, given the Company’s foreign subsidiaries’ net book values as of July 31, 2004 and net cash flows for the most recent fiscal
41
Table of Contents
quarter then ended and fiscal year ended January 31, 2004, the Company does not believe that a hypothetical 10% fluctuation in foreign currency exchange rates would have a material impact on our financial position or results of operations.
ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include components of our internal control over our financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of financial reporting and permitting the preparation of our financial statements in conformity with generally accepted accounting principles. To the extent that components of our internal control over our financial reporting are included within our disclosure controls and procedures, they are included in the scope of our quarterly controls evaluation.
The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Quarterly Report. In the course of this evaluation, we sought to identify any significant deficiencies or material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have significant roles in internal controls and to confirm that any necessary corrective action, including process improvements, were being undertaken. This type of evaluation is done every fiscal quarter so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluations activities are to monitor our disclosure controls and procedures and to make modifications as necessary.
Based on this evaluation, and subject to the limitations described below, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Our management, including the Chief Executive Officer and the Chief Financial Officer, do not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurances that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our senior management has timely access to all material financial and non-financial
42
Table of Contents
information concerning our business. While we believe the present design of our disclosure controls and procedures is effective, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
43
Table of Contents
PART II—OTHER INFORMATION
Not applicable.
ITEM 2. Change in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities
In February 2004, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes.
In May 2004, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from June 29, 2004 through July 1, 2004, the Company repurchased in aggregate a total of 222,500 shares of its common stock for cash at an average price of $18.99 per share.
In August 2004, the Board of Directors authorized the repurchase of up to 2.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from August 26, 2004 through September 7, 2004, the Company repurchased in aggregate a total of 738,000 shares of its common stock for cash at an average price of $15.74 per share. The timing and size of any future stock repurchases are subject to market conditions, stock prices, our cash position and other requirements going forward.
A summary of the Company’s repurchases in fiscal 2005 is as follows:
Month | Repurchased Shares | Average Price Per Share | |||
June 2004 | 82,500 | $ | 18.89 | ||
July 2004 | 140,000 | $ | 19.05 | ||
August 2004 | 409,000 | $ | 15.76 | ||
September 2004 (through 9/7/04) | 329,000 | $ | 15.72 |
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The fiscal 2004 Annual Meeting of the Stockholders of SERENA Software, Inc. was held at the Company’s offices 2755 Campus Drive, 3rd Floor, San Mateo, California 94403 on June 25, 2004 at 2:00 p.m.
(b) PROPOSAL 1—At the Annual Meeting, the following seven persons were elected to the Company’s Board of Directors, constituting all members of the Board of Directors.
Board Nominees | Common For | Common Withheld | ||
Douglas D. Troxel | 36,880,126 | 795,759 | ||
Mark E. Woodward | 32,932,611 | 4,743,274 | ||
Robert I. Pender, Jr. | 36,730,704 | 945,181 | ||
Carl Bass | 36,671,585 | 1,004,300 | ||
J. Hallam Dawson | 36,395,640 | 1,280,245 | ||
Gregory J. Owens | 36,854,576 | 821,309 | ||
David G. DeWalt | 36,783,722 | 892,163 |
44
Table of Contents
(c) The following additional proposal was considered at the Annual Meeting with its results according to the respective votes of the stockholders:
PROPOSAL 2—Ratification and approval of the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ending January 31, 2005.
Common For | Common Against | Abstained | ||
37,178,477 | 491,766 | 5,642 |
Section 10A(i)(2) of the Securities Exchange Act of 1934, as added in Section 202 of the Sarbanes-Oxley Act of 2002, requires us to disclose the approval by our Audit Committee of any non-audit services to be performed by KPMG LLP, our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or review of the financial statements of a company. The Audit Committee of the Board of Directors of SERENA has approved the engagement of KPMG LLP for non-audit services relating to, the performance of certain tax-related services.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number | Exhibit Title | |
31.1 (a) | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 (a) | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 (a) | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 (a) | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(a) | filed herewith. |
(b) | Reports on Form 8-K |
The Registrant filed or furnished the following Current Report on Form 8-K during the quarter ended July 31, 2004:
We furnished a Current Report on Form 8-K dated May 20, 2004, announcing financial results for the quarter ended April 30, 2004 and attached a press release related thereto. Such report was “furnished” but not “filed” with the SEC.
45
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant, SERENA Software, Inc., a corporation organized and existing under the laws of the State of Delaware, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SERENA SOFTWARE, INC. (Registrant) | ||
By: | /s/ ROBERT I. PENDER, JR. | |
Robert I. Pender, Jr. Senior Vice President, Finance And Administration, Chief Financial Officer (Principal Financial And Accounting Officer) And Director |
Date: September 9, 2004
46
Table of Contents
EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |