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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
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
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SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2669809
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 AIRPORT BOULEVARD, 2ND FLOOR, BURLINGAME, CALIFORNIA 94010-1904
(Address of principal executive offices, including zip code)
650-696-1800
(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 / /
The number of shares of the registrant's Common Stock, par value $0.001,
outstanding as of August 31, 2000 was 39,350,860.
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INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of July 31, 2000
and January 31, 2000...................................... 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and Six Months
Ended July 31, 2000 and 1999.............................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 11
Item 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 27
Item 2 Change in Securities and Use of Proceeds.................... 27
Item 4 Submission of Matters to a Vote of Security Holders......... 27
Item 5 Other Information........................................... 28
Item 6 Exhibits and Reports on Form 8-K............................ 28
Signatures.................................................. 29
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, JANUARY 31,
2000 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 88,419,842 $ 80,930,648
Short-term investments.................................... 28,244,677 20,213,259
Accounts receivable, net of allowance of $1,309,797 and
$983,367, respectively.................................. 16,874,408 15,380,341
Deferred taxes............................................ 1,818,313 1,818,313
Prepaid expenses and other current assets................. 1,073,084 595,040
------------ ------------
Total current assets.................................... 136,430,324 118,937,601
Long-term investments....................................... -- 3,041,650
Property and equipment, net................................. 2,584,882 2,419,871
Deferred taxes.............................................. 1,927,822 1,927,822
Intangible assets, net...................................... 25,203,359 22,612,525
Other assets................................................ 168,635 119,327
------------ ------------
TOTAL ASSETS............................................ $166,315,022 $149,058,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 477,372 $ 365,771
Income taxes payable...................................... 2,714,866 3,000,485
Accrued expenses.......................................... 12,129,211 11,307,366
Deferred revenue.......................................... 15,688,688 14,632,947
------------ ------------
Total current liabilities............................... 31,010,137 29,306,569
Deferred revenue, net of current portion.................... 5,584,154 4,391,827
Deferred taxes.............................................. 1,691,276 836,093
------------ ------------
Total liabilities........................................... 38,285,567 34,534,489
------------ ------------
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; 60,000,000 shares
authorized; 39,207,038 and 38,285,612 shares issued and
outstanding, respectively............................... 39,207 38,286
Additional paid-in capital................................ 101,777,132 89,280,527
Deferred stock-based compensation......................... (240,672) (380,790)
Notes receivable from stockholders........................ (12,920,012) (3,181,875)
Accumulated other comprehensive loss...................... (60,145) (40,014)
Retained earnings......................................... 39,433,945 28,808,173
------------ ------------
Total stockholders' equity.............................. 128,029,455 114,524,307
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $166,315,022 $149,058,796
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenue:
Software licenses....................... $14,253,439 $ 9,549,330 $25,866,459 $16,457,937
Maintenance............................. 9,064,782 6,185,737 17,427,156 11,479,816
Professional services................... 1,890,657 2,026,538 3,070,554 4,044,608
----------- ----------- ----------- -----------
Total revenue......................... 25,208,878 17,761,605 46,364,169 31,982,361
----------- ----------- ----------- -----------
Cost of revenue:
Software licenses....................... 441,272 736,665 904,876 1,425,524
Maintenance............................. 1,523,554 1,398,056 3,173,311 2,733,139
Professional services................... 1,591,340 1,642,950 2,656,439 3,199,991
----------- ----------- ----------- -----------
Total cost of revenue................. 3,556,166 3,777,671 6,734,626 7,358,654
----------- ----------- ----------- -----------
Gross profit.......................... 21,652,712 13,983,934 39,629,543 24,623,707
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing..................... 7,019,148 5,344,766 13,360,634 9,607,581
Research and development................ 2,372,974 1,770,237 4,380,784 3,136,594
General and administrative.............. 2,497,701 1,534,068 5,063,611 2,634,869
Stock-based compensation................ 56,259 112,351 140,118 427,165
Amortization of intangible assets....... 723,748 475,895 1,260,190 978,336
Acquired in-process research and
development........................... 490,576 992,341 490,576 992,341
----------- ----------- ----------- -----------
Total operating expenses.............. 13,160,406 10,229,658 24,695,913 17,776,886
----------- ----------- ----------- -----------
Operating income.......................... 8,492,306 3,754,276 14,933,630 6,846,821
Interest and other income, net............ 2,071,901 1,059,792 3,852,925 1,895,020
----------- ----------- ----------- -----------
Income before income taxes.............. 10,564,207 4,814,068 18,786,555 8,741,841
Income taxes.............................. 4,650,074 2,433,918 8,160,783 4,167,469
----------- ----------- ----------- -----------
Net income.............................. 5,914,133 2,380,150 10,625,772 4,574,372
Other comprehensive income (loss)......... 85,693 (5,646) (20,131) 17,097
----------- ----------- ----------- -----------
Comprehensive income.................... $ 5,999,826 $ 2,374,504 $10,605,641 $ 4,591,469
=========== =========== =========== ===========
Net income per share:
Basic................................... $ 0.15 $ 0.06 $ 0.28 $ 0.13
=========== =========== =========== ===========
Diluted................................. $ 0.15 $ 0.06 $ 0.27 $ 0.12
=========== =========== =========== ===========
Weighted average shares used in per share
calculations:
Basic................................... 38,390,009 36,898,372 38,181,078 36,051,011
=========== =========== =========== ===========
Diluted................................. 40,360,865 38,891,652 40,072,234 38,113,887
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
(UNAUDITED)
SIX MONTHS ENDED JULY 31,
--------------------------
2000 1999
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $10,625,772 $ 4,574,372
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 556,484 638,176
Increase in allowance for bad debts................... 326,430 278,568
Accrued interest on notes receivable.................. (613,519) (78,640)
Amortization of deferred stock-based compensation..... 140,118 427,165
Amortization of intangible assets..................... 1,260,190 978,336
Acquired in-process research and development.......... 490,576 992,341
Changes in operating assets and liabilities:
Accounts receivable................................. (1,799,504) 665,300
Prepaid expenses and other assets................... (527,685) (91,027)
Accounts payable.................................... 111,211 (328,599)
Income taxes payable................................ (285,887) (850,736)
Accrued expenses.................................... 765,241 783,889
Deferred revenue.................................... 2,232,598 2,559,523
----------- ------------
Net cash provided by operating activities........... 13,282,025 10,548,668
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (718,675) (638,393)
Purchases of short-term and long-term investments......... (4,989,768) (17,729,760)
Unrealized gains on marketable equity securities.......... 5,607 --
Payment of accrued interest and principal on notes
receivable.............................................. 169,383 --
Payment of notes due from stockholder..................... -- 599,659
Issuance of notes due from other parties.................. -- (150,000)
Payment of notes due from other parties................... -- 150,000
Cash paid for acquisitions, net of cash acquired.......... (1,602,104) (1,462,031)
----------- ------------
Net cash used in investing activities............... (7,135,557) (19,230,525)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. -- 57,902,226
Exercise of stock options under the employee stock option
plan.................................................... 616,869 --
Purchase of stock under the employee stock purchase
plan.................................................... 751,595 --
----------- ------------
Net cash provided by financing activities........... 1,368,464 57,902,226
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (25,738) 17,097
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,489,194 49,237,466
Cash and cash equivalents at beginning of period............ 80,930,648 21,468,740
----------- ------------
Cash and cash equivalents at end of period.................. $88,419,842 $ 70,706,206
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 8,325,275 $ 4,915,592
=========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in business acquisitions.............. $ 1,836,617 $ 2,234,375
=========== ============
Restricted stock issued (cancelled) for notes receivable
from stockholders....................................... $ 9,294,001 $ (107,625)
=========== ============
See accompanying notes to condensed consolidated financial statements.
5
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SERENA Software, Inc. (the "Company") is an industry-leading supplier of
eBusiness infrastructure change management solutions. Its principal markets are
North America and Europe.
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 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 generally accepted accounting principles
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, 2000. The interim results presented are
not necessarily indicative of results for any subsequent quarter or for the
fiscal year ending January 31, 2001.
(1) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of
shares of unrestricted common stock outstanding. Diluted net income 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 per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Basic net income per share--weighted average
number of unrestricted common shares
outstanding................................. 38,390,009 36,898,372 38,181,078 36,051,011
Effect of potentially dilutive securities
outstanding--restricted stock and options... 1,970,856 1,993,280 1,891,156 2,062,876
---------- ---------- ---------- ----------
Shares used in diluted net income per share
computation................................. 40,360,865 38,891,652 40,072,234 38,113,887
========== ========== ========== ==========
(2) STOCKHOLDERS' EQUITY
On March 13, 2000, the Company announced that its Board of Directors
approved a three-for-two split of the Company's outstanding shares of Common
Stock. The stock split was effected in the form of a stock dividend that
entitled each stockholder of record, at the close of business on March 21, 2000,
to receive one additional share of Common Stock for every two shares of Common
Stock held. The stock dividends resulting from the stock split were distributed
by the transfer agent on March 29, 2000. The accompanying financial statements
have been retroactively restated to reflect the effect of this stock split.
6
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS--DEFERRAL OF THE EFFECTIVE DATE OF SFAS STATEMENT
NO. 133" and SFAS No. 138 "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES, AMENDMENT OF SFAS NO. 133." The Company will be
required to adopt SFAS No. 133 in fiscal 2002. The Company does not expect the
adoption of SFAS No. 133 to have a material affect on the financial statements.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-9, "MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION WITH RESPECT TO CERTAIN TRANSACTIONS." SOP 98-9 amends SOP
97-2 to require the entity to recognize revenue for multiple element
arrangements by means of the "residual method" when: (1) there is
vendor-specific evidence of the fair values of all of the undelivered elements;
(2) vendor-specific evidence of fair value does not exist for one or more of the
delivered elements; and (3) the revenue recognition criteria of SOP 97-2 are
satisfied. SOP 98-9 became effective February 1, 2000. The Company adopted SOP
98-9 on February 1, 2000 without any material effect on its results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101 "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS," as amended by SAB No. 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company will adopt SAB No. 101 in the fourth quarter
of fiscal 2001. The Company does not expect the adoption of SAB No. 101 to have
a material effect on the financial statements, although implementation guidance
is expected to be released by the SEC in the near term.
In March 2000, the FASB issued Interpretation No. 44 "ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION
NO. 25." This interpretation clarifies the application of Opinion 25 for certain
issues including: (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or warrant, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. In general, the interpretation is effective July 1, 2000. The
adoption of Interpretation No. 44 did not have a material effect on the
Company's financial statements.
(4) RESTRICTED STOCK AGREEMENTS
On February 16, 2000 and under the Company's 1997 Stock Option and Incentive
Plan, SERENA issued 817,500 shares of restricted common stock to certain
officers of the Company at $19.33 per share in exchange for full-recourse
promissory notes. Restrictions lapse over four years based on the individual's
continued employment. In the event an employee is terminated, the Company has
the right to repurchase, for a price equal to the individual's original purchase
price, any remaining restricted
7
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) RESTRICTED STOCK AGREEMENTS (CONTINUED)
shares held by the individual. There was no deferred stock-based compensation
recorded in connection with this restricted stock issuance.
On June 1, 2000 and in connection with a certain officer's resignation from
the Company, the Company exercised in full its repurchase rights with respect to
the restricted common stock originally issued to the officer on February 16,
2000 under the Company's 1997 Stock Option and Incentive Plan. The Company
repurchased 337,500 shares of restricted common stock at the original purchase
price of $19.33 per share. There had been no deferred stock-based compensation
recorded in connection with the original restricted common stock issuance.
(5) ACQUISITION OF HIGH POWER SOFTWARE, INC.
On May 1, 2000, the Company acquired High Power Software, Inc. ("HPS"). HPS
shared ownership rights in the Company's DETECT+RESOLVE MAINFRAME technology.
The acquisition was accounted for using the purchase method of accounting, and
accordingly, the results of operations of HPS are included in the Company's
consolidated financial statements from May 1, 2000. The Company acquired all the
assets and assumed all the liabilities of HPS in exchange for cash of
approximately $1.4 million and the issuance of 91,954 shares of the Company's
common stock valued at $19.97 per share. The transaction was valued at
approximately $3.3 million with the allocation of the total consideration as
follows:
Tangible assets............................................. $ 6,156
Assumed liabilities......................................... (173,300)
Acquired technology......................................... 1,894,695
Acquired in-process research and development................ 490,576
Work-force-in-place......................................... 48,900
Deferred tax liability...................................... (855,182)
Goodwill.................................................... 1,907,429
----------
Total consideration....................................... $3,319,274
==========
Acquired technology, consisting of current completed technologies at the
date of acquisition valued on the premise of fair market value in continued use
under the discounted cash flow approach, will be amortized over a 5 year period,
the period of time the Company estimates as its economic useful life. Acquired
in-process research and development, consisting of current technologies under
development at the date of acquisition and valued on the premise of fair market
value in continued use under the discounted cash flow approach, will be expensed
immediately in accordance with generally accepted accounting principles. See
Note 6 for further discussion of Acquired In-Process Research and Development.
Work-force-in-place, consisting principally of the HPS development team, was
valued on a replacement cost basis and will be amortized over a six-month
period, the period of time the Company estimates would be required to hire,
train, and achieve full productivity for a replacement work force. Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired and will be amortized over 7 years.
8
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) ACQUISITION OF HIGH POWER SOFTWARE, INC. (CONTINUED)
Pro forma financial information giving effect to the acquisition as if it
had occurred at the beginning of the periods presented would not have been
materially different than the Company's operating results.
(6) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
As a result of the Company's acquisition of HPS on May 1, 2000, the Company
recorded acquired in-process research and development totaling $490,576. The
premise of value was fair market value in continued use.
Among the assets that were valued by the Company were the Change Transfer
and the Softwatch products which were currently under development at the date of
acquisition. 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:
PERCENTAGE
APPLICATION UNDER DEVELOPMENT COMPLETE DISCOUNT RATE
- ----------------------------- ---------- -------------
Change Transfer............................................. 80.00% 24.00%
Softwatch................................................... 60.00% 26.50%
The rates used to discount the net cash flows to present value was initially
based on the weighted average cost of capital ("WACC"). The Company used
discount rates of 24.0% and 26.5% for valuing the acquired in-process research
and development and 21.5% 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.
9
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) SUBSEQUENT EVENTS
(a) SETTLEMENT OF LAWSUIT
On August 7, 2000, the Company and Compuware Corporation settled the lawsuit
outstanding which was pending in the United States District Court for the
Eastern District of Michigan. The lawsuit was dismissed with prejudice and the
settlement will have no material adverse effect on the Company's results of
operations or financial condition.
(b) STARTOOL ASSET PURCHASE
On August 18, 2000, the Company acquired the StarTool technology from its
principal developer, an employee, pursuant to the STARTOOL-Registered Trademark-
ASSET PURCHASE AGREEMENT dated August 18, 2000. Prior to the acquisition, the
developer had granted the Company an exclusive, worldwide and non-transferable
license to copy, market and distribute the StarTool Program technology and all
options thereto. The Company paid an aggregate amount of $20.9 million in a
combination of $16 million in cash and 130,612 shares of common stock valued at
$37.625 per share to the developer in exchange for all rights, title and
interests in and to the StarTool technology. The per share value of the common
stock was determined based on the closing market price of the common stock on
August 18, 2000. The common stock received by the developer was placed in a
hold-back escrow account at the closing of the transaction to cover any losses
that the developer has agreed to indemnify the Company for in connection with
the acquisition. Technology acquired will be capitalized and amortized over its
estimated useful life of seven years.
The purchase price and the terms of the transaction were determined in
arms-length negotiations.
Also pursuant to the Agreement, the developer entered into an Employment
Agreement, on August 18, 2000, with the Company for a term of five years, to
serve as a software architect.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. 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, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND 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 RESULTS OF OPERATIONS AND FINANCIAL
CONDITION," CONTAINED IN THE COMPANY'S FORM 10-K FOR FISCAL 2000.
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 of SERENA's condensed consolidated statements of income
and comprehensive income for the three and six month periods ended July 31, 2000
to the condensed consolidated statements of income and comprehensive income for
the three and six month periods ended July 31, 1999. These results include the
results of Diamond Optimum Systems, Inc. ("Diamond") from June 14, 1999, the
date our acquisition of Diamond was completed, and of High Power Software, Inc.
("HPS") from May 1, 2000, the date our acquisition of HPS was completed.
11
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 PERCENTAGE OF
REVENUE REVENUE
THREE MONTHS SIX MONTHS
ENDED ENDED
JULY 31, JULY 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
Software licenses......................................... 56.5% 53.8% 55.8% 51.5%
Maintenance............................................... 36.0% 34.8% 37.6% 35.9%
Professional services..................................... 7.5% 11.4% 6.6% 12.6%
----- ----- ----- -----
TOTAL REVENUE........................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenue:
Software licenses......................................... 1.8% 4.1% 2.0% 4.5%
Maintenance............................................... 6.0% 7.9% 6.8% 8.5%
Professional services..................................... 6.3% 9.3% 5.7% 10.0%
----- ----- ----- -----
TOTAL COST OF REVENUE................................... 14.1% 21.3% 14.5% 23.0%
----- ----- ----- -----
GROSS PROFIT............................................ 85.9% 78.7% 85.5% 77.0%
----- ----- ----- -----
Operating expenses:
Sales and marketing....................................... 27.9% 30.1% 28.8% 30.1%
Research and development.................................. 9.4% 10.0% 9.5% 9.8%
General and administrative................................ 9.9% 8.6% 10.9% 8.2%
Stock-based compensation.................................. 0.2% 0.6% 0.3% 1.3%
Amortization of intangible assets......................... 2.9% 2.7% 2.7% 3.1%
Acquired in-process research and development.............. 1.9% 5.6% 1.1% 3.1%
----- ----- ----- -----
TOTAL OPERATING EXPENSES................................ 52.2% 57.6% 53.3% 55.6%
----- ----- ----- -----
OPERATING INCOME............................................ 33.7% 21.1% 32.2% 21.4%
Interest and other income, net.............................. 8.2% 6.0% 8.3% 5.9%
----- ----- ----- -----
Income before income taxes................................ 41.9% 27.1% 40.5% 27.3%
Income taxes................................................ 18.4% 13.7% 17.6% 13.0%
----- ----- ----- -----
NET INCOME................................................ 23.5% 13.4% 22.9% 14.3%
===== ===== ===== =====
REVENUE
We derive revenue from software licenses, maintenance and professional
services. Our total revenue increased $7.4 million or 42% to $25.2 million in
the current fiscal quarter ended July 31, 2000 from $17.8 million in the same
quarter a year ago. For the six month period ended July 31, 2000, total revenue
increased $14.4 million or 45% to $46.4 million from $32.0 million in the same
six month period a year ago.
SOFTWARE LICENSES. Software licenses revenue as a percentage of total
revenue was 57% and 56% in the current fiscal quarter and current fiscal six
months ended July 31, 2000, respectively, as compared to 54% and 52% in the same
quarter and six months a year ago. Software licenses revenue increased
$4.7 million or 49% to $14.3 million in the current fiscal quarter from
$9.6 million in the same quarter a year ago. For the six month period ended
July 31, 2000, software licenses revenue increased $9.4 million or 57% to
$25.9 million from $16.5 million in the same six months a year ago.
12
For both the quarter and six months, the dollar increase is generally attributed
to increased demand for new licenses of our products as a result of greater
customer awareness of and need for third party software change management
("SCM") solutions, fueled by new IT initiatives around the internet, eCommerce
and the webification of legacy systems. The introduction of our distributed
system product, ECHANGE MAN in the second half of fiscal 2000, has contributed
significantly to the dollar increase when comparing the current quarter and six
month period to the same periods a year ago. CHANGE MAN, COMPAREX and more
recently ECHANGE MAN together make up a significant portion of total licenses
revenue. These products accounted for $11.0 million or 77% and $21.2 million or
82% of total software licenses revenue in the current fiscal quarter and current
fiscal six months, respectively, as compared to $7.4 million or 77% and
$12.1 million or 73% in the same quarter and six months a year ago.
MAINTENANCE. Maintenance revenue as a percentage of total revenue was 36%
and 38% in the current fiscal quarter and current fiscal six months,
respectively, ended July 31, 2000 as compared to 35% and 36% in the same quarter
and six months a year ago. Maintenance revenue increased $2.9 million or 47% to
$9.1 million in the current fiscal quarter from $6.2 million in the same quarter
a year ago. For the six month period ended July 31, 2000, maintenance revenue
increased $5.9 million or 52% to $17.4 million from $11.5 million in the same
six months a year ago. For both the quarter and six months, the dollar increase
reflects both growth in installed software licenses base, as new licenses
generally include one year of maintenance, renewals of maintenance agreements by
existing customers and, to a lesser extent, maintenance price increases.
PROFESSIONAL SERVICES. Professional services revenue was 8% and 7% of total
revenue in the current fiscal quarter and current fiscal six months,
respectively, ended July 31, 2000 as compared to 11% and 12% in the same quarter
and six months, respectively, a year ago. Professional services revenue
decreased $0.1 million or 7% to $1.9 million in the current fiscal quarter from
$2.0 million in the same quarter a year ago. For the six month period ended
July 31, 2000, professional services revenue decreased $1.0 million or 24% to
$3.1 million from $4.1 million in the same six months a year ago. For the six
months the dollar decrease is attributable to certain of our customers putting
projects on hold in order to address their remediation, testing and other
activities associated with becoming Year 2000 compliant. The decrease in
professional services revenue as a percentage of total revenue was also
attributable to strong revenue growth in software licenses and maintenance.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $3.6 million or 14% and
$6.7 million or 15% of total revenue in the current fiscal quarter and fiscal
six months, respectively, as compared to $3.8 million or 21% and $7.4 million or
23% in the same quarter and six months a year ago. For both the quarter and six
months, the decreases in both absolute dollar terms and as a percentage of total
revenue are predominantly the result of growth in higher margin software
licenses revenue exceeding the growth in other categories of lower margin
revenue. Margin improvements in both software licenses and maintenance offset a
margin decline in professional services.
SOFTWARE LICENSES. Cost of software licenses consists principally of
sublicense fees associated with our STARTOOL and STARWARP products and through
the first fiscal quarter ended April 30, 2000, only, the DETECT+RESOLVE
MAINFRAME product. Cost of software licenses as a percentage of total software
licenses revenue was 3% and 4% in the current fiscal quarter and current fiscal
six months, respectively, ended July 31, 2000 as compared to 8% and 9% in the
same quarter and six months a year ago. Cost of software licenses decreased
$0.3 million or 40% to $0.4 million and $0.5 million or 37% to $0.9 million in
the current fiscal quarter and fiscal six months, respectively, from
$0.7 million and $1.4 million in the same quarter and six months a year ago. For
both the quarter and six months, the decreases in absolute dollar terms and as a
percentage of total software licenses revenue, is attributable to decreases in
13
royalty bearing software licenses, predominantly STARTOOL, as a percentage of
total software licenses revenue, and the elimination of royalty fees associated
with our DETECT+RESOLVE MAINFRAME product due to our purchase of High Power
Software, Inc.
MAINTENANCE. Cost of maintenance consists primarily of salaries, bonuses
and other costs associated with our customer support organizations, and to a
lesser extent, sublicense fees associated with our STARTOOL and STARWARP
products and through the first fiscal quarter ended April 30, 2000, only, the
DETECT+RESOLVE MAINFRAME product. Cost of maintenance as a percentage of total
maintenance revenue was 17% and 18% in the current fiscal quarter and current
fiscal six months, respectively, as compared to 23% and 24% in the same quarter
and six months a year ago. Cost of maintenance increased $0.1 million or 9% to
$1.5 million and $0.4 million or 16% to $3.2 million in the current fiscal
quarter and fiscal six months, respectively, from $1.4 million and $2.8 million
in the same quarter and six months a year ago. For both the quarter and six
months, the dollar increases are predominantly due to increased expenses
associated with our customer support organization, including personnel additions
needed to support the maintenance revenue growth, offset in part by decreases in
sublicense fees associated with the STARTOOL and STARWARP products, and the
removal of royalty fees on DETECT+RESOLVE MAINFRAME beginning in the current
fiscal quarter. Sublicense fees are paid to owners of third party products for
providing maintenance enhancements and code fixes. For both the quarter and six
months, cost of maintenance as a percentage of total maintenance revenue
decreased as the rate of increase in maintenance revenue was greater than the
rate of increase in costs associated with our customer support organization, and
to a lesser extent, the decrease in sublicense fees.
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 84% and 87% in the current fiscal quarter and
current fiscal six months, respectively, as compared to 81% and 79% in the same
quarter and six months a year ago. Cost of professional services decreased
$0.1 million or 3% to $1.6 million and $0.5 million or 17% to $2.7 million in
the current fiscal quarter and current fiscal six months, respectively, from
$1.7 million and $3.2 million in the same quarter and six months a year ago. For
both the quarter and six months, the absolute dollar decrease is due to reducing
the use of independent contractors and reallocating professional services
resources to other parts of our organization as a result of our customers
putting projects on hold to address issues associated with becoming Year 2000
compliant. For both the quarter and six months, cost of professional services as
a percentage of total professional services revenue increased as the rate of
decrease in professional services revenue was greater than the rate of decrease
in costs associated with our professional services organization.
OPERATING EXPENSES
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 was 28% and 29% in the current fiscal quarter and
current fiscal six months ended July 31, 2000, respectively, as compared to 30%
for both the quarter and six month periods a year ago. Sales and marketing
expenses increased $1.7 million or 31% to $7.0 million and $3.8 million or 39%
to $13.4 million in the current fiscal quarter and current fiscal six months,
respectively, from $5.3 million and $9.6 million in the same quarter and six
months a year ago. For both the quarter and six months, the dollar increase is
due primarily to our expansion of our direct sales and marketing organization,
and to a lesser extent, our marketing initiatives surrounding our distributed
systems capabilities and the development of our international sales and
telesales efforts. As a percentage of total revenue, sales and marketing
expenses decreased slightly when comparing the current fiscal quarter and six
months to the same quarter and six months a year ago, as the rate of increase in
total revenue was greater than the rate of increase in sales and
14
marketing expenses. 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 was 9% in the current fiscal quarter
ended July 31, 2000, as compared to 10% in the same quarter a year ago and 10%
in both the current fiscal six months and the same six months a year ago.
Research and development expenses increased $0.6 million or 34% to $2.4 million
and $1.2 million or 40% to $4.4 million in the current fiscal quarter and
current fiscal six months, respectively, from $1.8 million and $3.2 million in
the same quarter and six months a year ago. For the current fiscal six months
and, to a lesser extent, the current fiscal quarter when compared to the same
periods a year ago, the dollar increase is primarily due to salary, bonus,
payroll tax, employee benefits and other headcount related costs which resulted
from the Company's acquisition of Diamond in June 1999, and to a lesser extent,
increases in expanding our research and development efforts to enhance existing
products and develop our distributed systems and SERNET products. We expect
research and development expenses to increase, both as a percentage of total
revenue and in absolute dollar terms, as we continue to hire additional research
and development personnel 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
10% and 11% in the current fiscal quarter and current fiscal six months,
respectively, as compared to 9% and 8% in the same quarter and six months a year
ago. General and administrative expenses increased $1.0 million or 63% to
$2.5 million and $2.4 million or 92% to $5.1 million in the current fiscal
quarter and current fiscal six months, respectively, from $1.5 million and
$2.7 million in the same quarter and six months a year ago. For both the current
quarter and six months, when compared to the same periods a year ago, the dollar
increase is primarily due to increases in salary, bonus, payroll tax and
employee benefit costs associated with the expansion of our administrative
infrastructure in order to support our increased sales, marketing, professional
services and maintenance activities, and to a lesser extent, increases in legal
fees. We expect general and administrative expenses to increase in absolute
dollar terms as we expand our infrastructure and our operations.
AMORTIZATION OF INTANGIBLE ASSETS. In connection with the acquisitions of
Optima Software, Inc. in September, 1998, Diamond in June, 1999 and HPS in
May 2000, the Company has recorded $29.5 million in intangible assets, of which
$25.2 million is unamortized as of July 31, 2000. Combined, intangible assets
are being amortized over periods of one year or less on $0.7 million, two to
seven years on $7.7 million and fifteen years on the remaining $21.1 million. Of
the total intangible assets, $0.7 million and $1.3 were amortized in the current
fiscal quarter and current fiscal six months, respectively, as compared to
$0.5 million and $1.0 million in the same quarter and six months a year ago. We
expect to amortize an additional $1.4 million in the remaining two quarters of
fiscal 2001 and $2.7 million in fiscal 2002. The intangible assets will be fully
amortized by the end of fiscal 2014.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with SERENA's
acquisition of HPS in the current fiscal quarter, the Company took a one-time
charge of $0.5 million in recording acquired in-process research and
development. See notes 5 and 6 in the Notes to Condensed Consolidated Financial
Statements. In connection with SERENA's acquisition of Diamond in the same
fiscal quarter a year ago, the Company took a one-time charge of $1.0 million in
recording acquired in-process research and development.
15
INTEREST AND OTHER INCOME, NET
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$1.0 million or 96% to $2.1 million and $2.0 million or 103% to $3.9 million in
the current fiscal quarter and current fiscal six months, respectively, from
$1.1 million and $1.9 million in the same quarter and six months a year ago. For
both the quarter and six months, the dollar increase in interest and other
income, net is generally due to increases in balances on interest bearing
accounts, such as cash and cash equivalents, and both short and long-term
investments, resulting from accumulation of earnings. The increase in the
current fiscal six months ended July 31, 2000 when compared to the same six
months a year ago was also the direct result of the Company's initial public
offering in February 1999 which generated net proceeds to the Company totaling
$48.4 million and $10.9 million in February 1999 and March 1999, respectively.
INCOME TAXES
INCOME TAXES. Income taxes in absolute dollar terms and effective income
tax rates were $4.7 million or 44% and $8.2 million or 43% in the current fiscal
quarter and current fiscal six months, respectively, ended July 31, 2000 as
compared to $2.4 million or 51% and $4.2 million or 48% in the same quarter and
six months a year ago. The Company's effective income tax rate has decreased in
the current fiscal quarter and current fiscal six months, when compared to the
same quarter and six months a year ago, predominantly due to decreases of
$0.3 million and $0.5 million in nondeductible charges. These decreases were
predominantly the result of acquired in-process research and development charges
being recorded in the current quarter and same quarter last year in connection
with the Company's acquisitions of Diamond, which generated $1.0 million in
acquired in-process research and development in the fiscal quarter ended
July 31, 1999, and HPS, which generated $0.5 million in acquired in-process
research and development in the current fiscal quarter ended July 31, 2000. To a
lesser extent, decreases in stock-based compensation charges recorded in the
current fiscal quarter and fiscal six months, when compared to the same quarter
and six months a year ago, offset by increases in amortization of intangible
assets when comparing the same periods, also contributed to the Company's
effective income tax rate decreases. 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
Since SERENA's inception, we have financed our operations and met our
capital requirements through cash flows from operations. As of July 31, 2000,
SERENA had $88.4 million in cash and cash equivalents, and an additional
$28.2 million in short-term investments consisting principally of high grade
commercial paper, certificates of deposit and short-term bonds. Cash flows
provided by operating activities were $13.3 million and $10.6 million in the
current fiscal six months ended July 31, 2000 and the same six months a year
ago, respectively. SERENA's cash flows provided by operating activities exceeded
net income during each of these periods principally due to cash collections in
advance of revenue recognition for maintenance contracts, the inclusion of
non-cash expenses in net income, and in last fiscal year's six month period
ended July 31, 1999 only, a decrease in trade accounts receivable. Cash used in
investing activities were predominantly related to the purchase of short and
long-term investments totaling $5.0 million and $17.7 million in the current
fiscal six months and the same six months from a year ago, respectively, and
also the Company's acquisitions of Diamond and HPS in last fiscal year's second
quarter and this fiscal year's second quarter, respectively, which accounted for
$1.5 million and $1.6 million, respectively. To a lesser extent, cash used in
investing activities also came from purchases of computer equipment and office
furniture and equipment in both six month periods; all partially offset by
payments of accrued interest and principal received on notes receivable in the
current fiscal six months and payments received on stockholder notes in the same
six months from a year ago. In the current fiscal six months ended July 31,
2000, cash flows from financing activities came entirely from the purchase of
common stock under the Company's employee stock purchase plan
16
totaling $0.8 million and the exercise of stock options under the Company's
employee stock option plan totaling $0.6 million. In the same six months from a
year ago, cash flows from financing activities came entirely from the Company's
initial public offering of common stock in February 1999 resulting in net
proceeds to SERENA of $57.9 million.
At July 31, 2000, SERENA 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, 2000, SERENA had working capital of $105.4 million and accounts
receivable, net of allowances, of $16.9 million. Total deferred revenue
increased to $21.3 million at July 31, 2000 from $19.0 million at January 31,
2000 primarily as a result of increased billings of maintenance fees.
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.
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 AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR ANTICIPATED RESULTS, INCLUDING BUT NOT LIMITED TO, OUR RELIANCE ON
OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR
ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE
ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND
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.
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 as could the percentage of
software products sold which require us to pay a sublicense fee to a third
party.
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
17
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 are also currently attempting to
expand our presence in international markets, particularly in Europe. 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.
WE EXPECT THAT OUR OPERATING EXPENSES WILL INCREASE SUBSTANTIALLY 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 substantially in the foreseeable future as we:
- 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
- Broaden our professional services offerings and delivery capabilities
- Expand our distribution channels
- Pursue strategic relationships and acquisitions
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 significantly 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.
Although our revenue has grown in recent years, we do not believe that we will
maintain this rate of revenue growth. In addition, 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.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL
SERENA SCM 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 of additional SCM products. If our
customers do not purchase additional 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.
18
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR MAINFRAME PRODUCTS
FOR OUR REVENUE
Historically, the majority of our software license revenue has resulted from
the sale of our mainframe products. Any factors adversely affecting the pricing
of, demand for or market acceptance of our mainframe products, such as
competition or technological change, could materially adversely affect our
business and quarterly and annual operating results. In particular, CHANGE MAN
and COMPAREX, two of our mainframe products, have been responsible for a
substantial majority of our revenue. In the current fiscal quarter ended
July 31, 2000 and the same quarter from a year ago, sales of CHANGE MAN and
COMPAREX together accounted for approximately 65% and 74% of our software
licenses revenue, respectively. We expect that these products will continue to
account for a large portion of our software licenses revenue for the foreseeable
future. Our future operating results depend on the continued market acceptance
of our mainframe products, including future enhancements.
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR DISTRIBUTED SYSTEMS MAY NOT BE
SUCCESSFUL
We introduced our ECHANGE MAN product in fiscal 2000 and are currently
developing new products and enhancing our product suite to support additional
distributed systems platforms. 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.
Historically, the majority of our products have been designed for the mainframe
platform, and the majority of our software license revenue, maintenance revenue
and professional services revenue to date have been attributable to licenses for
these mainframe products. We do not have experience developing, marketing,
selling or supporting distributed systems products. Developing, marketing and
selling our distributed systems products will require significant resources that
we may not have. Our sales and marketing organizations have historically focused
exclusively on sales of our products for the mainframe and have limited
experience marketing and selling distributed systems products. Additionally, we
do not have any experience in providing support services for distributed systems
products. Competition for experienced software engineers, sales personnel and
support staff is intense and if we fail to attract qualified personnel this
would impair our ability to support our distributed systems products. Many of
our competitors have substantially greater experience providing distributed
systems compatible software products than we do, and many also have
significantly greater financial and organizational resources.
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.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED MARKET FOR IBM AND IBM-COMPATIBLE
MAINFRAMES
We are substantially dependent upon the continued use and acceptance of IBM
and IBM-compatible mainframes and the growth of this market. If the role of the
mainframe does not
19
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. The majority of our software license revenue to date has
been attributable to sales of our mainframe products. We expect that, for the
foreseeable future, the majority 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.
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. In particular, we may
experience delays in introducing our distributed systems product suite. Any
delay in releasing our new distributed systems products, for whatever reason,
would impair our revenue growth.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR BUSINESS
Our ability to compete effectively and to manage our recent growth, any
future growth and our future quarterly and annual operating results will depend
in part on our ability to implement and expand operational, customer support and
financial control systems and to hire, train and manage our employees. We may
not be able to augment or improve existing systems and controls or implement new
systems and controls in response to future growth, if any. Any failure to manage
growth could materially adversely affect our business. Our business has grown
substantially in recent years, with total revenue increasing from $32.1 million
in fiscal 1998 to $48.3 million in fiscal 1999 and to $75.4 million in fiscal
2000. In connection with this revenue growth, we continue to expand our sales,
marketing and professional service activities and organizations. Additionally,
our June 1999 acquisition of Diamond expanded our research and development
organization. This growth has resulted, and any future growth will result, in
new and increased responsibilities for management personnel.
WE MAY BE UNABLE TO SUCCESSFULLY COMPLETE STRATEGIC RELATIONSHIPS OR
ACQUISITIONS
We may be unable to successfully complete strategic relationships or
acquisitions in pursuit of our growth strategy. One component of our growth
strategy, entering into strategic relationships or the strategic acquisition of
businesses, involves certain risks, including, among others, the following:
- Difficulty of assimilating the acquired operations and personnel
- Disruption to our ongoing business
- Inability of our management to successfully incorporate acquired
technology and rights into our product offerings
- Inability to maintain uniform standards, controls, procedures and policies
- Impairment of relationships with employees as a result of changes in
management
20
In addition, any such acquisition could materially adversely affect our
financial results due to dilutive issuances of equity securities, the incurrence
of additional debt and the amortization of expenses related to goodwill and
other intangible assets, if any.
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.
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. We intend to expand the scope of our
international operations and currently have subsidiaries in the United Kingdom,
Germany and France. If we are unable to expand our international operations
successfully and in a timely manner, this could materially adversely affect our
business and quarterly and annual operating results. Our continued growth and
profitability will require continued expansion of our international operations,
particularly in Europe. We intend to open additional international offices over
the next twelve months. 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
approximately 17% of our total licenses revenue in the current fiscal quarter
ended July 31, 2000, up from 16% 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
- Seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
- Recessionary environments in foreign economies
- Increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries
21
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 the German deutsche mark. Fluctuations in the
value of foreign currencies relative to the U.S. dollar have caused and 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 and/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 CHANGE MAN and
COMPAREX such as Computer Associates, MERANT, IBM and smaller private
companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe 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 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 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.
22
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.
COMPETITION IN THE DISTRIBUTED SYSTEMS SCM MARKET. We also face significant
competition as we develop, market and sell our distributed systems products,
including ECHANGE MAN. 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 Rational Software, Computer Associates,
Continuus, MERANT, Microsoft, Novell, and other smaller private companies.
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 infringe their
proprietary rights. Any claims of this type could affect our relationships with
existing customers and may prevent future customers from licensing our products.
Because we are dependent upon a limited number of products, any such claims,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or license agreements may not be available on acceptable
terms or at all. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and 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.
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 18 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 of a
potential transaction and the level of competition that we encounter in our
selling activities. Additionally, the emerging market for SCM 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.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED
Our future success will likely depend in large part on our ability to
attract and retain additional experienced sales, technical, marketing and
management personnel. In addition, we will need to attract and retain sufficient
numbers of qualified software engineers, as well as sales and marketing and
support personnel, and successfully develop, market and support our distributed
systems product suite. Competition for such personnel in the computer software
industry is intense, and in the past we have experienced difficulty in
recruiting qualified personnel, especially developers and sales personnel. We
expect competition for qualified personnel to remain intense, and we may not
succeed in attracting or
23
retaining such personnel. If we do not, this could materially adversely affect
our business and future quarterly and annual operating results. In addition, new
employees generally require substantial training in the use of our products.
This training will require substantial resources and management attention.
INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and these plans will require us to attract experienced
management, service, marketing, sales and support personnel for our
international offices. Competition for such personnel is intense, and we may not
be able to attract or retain such experienced personnel.
NON-U.S. CITIZENS WORKING IN THE UNITED STATES. To achieve our business
objectives, we may recruit and employ skilled technical professionals from other
countries to work in the United States, particularly the Ukraine. Limitations
imposed by federal immigration laws and the availability of visas could
materially adversely affect our ability to attract necessary qualified
personnel. This may have a material adverse effect on our business and future
quarterly and annual operating results.
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO EXPAND OUR BUSINESS
AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS GOAL
If we fail to significantly expand our direct sales and telesales force, our
ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired. Failure to expand our
distribution channels through any of these means could materially adversely
affect our business and our future quarterly and annual operating results. In
addition, our ability to achieve revenue growth in future periods will be
heavily dependent on our success in recruiting and training sufficient direct
sales personnel. We are planning to significantly expand our direct sales
efforts in North America and Europe and while we are investing, and plan to
continue to invest, substantial resources on this expansion, we have at times
experienced, and expect to continue to experience, difficulty in recruiting and
retaining qualified direct sales personnel. In addition to expanding our direct
sales efforts, we are also currently investing, and we intend to continue to
invest, substantial resources in selling our products through telesales
personnel. We also intend to extend our distribution channels by partnering with
leading helpdesk management, software distribution application and system
framework providers and may also attempt to develop additional sales and
marketing channels through system integrators, original equipment manufacturers
and other partners.
WE WILL NEED TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION IN ORDER TO EXPAND
OUR BUSINESS AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS
GOAL
Our existing professional services and customer support organizations may
not be sufficient to manage the future growth in our business. The failure to
expand our professional services and customer support organizations could
materially adversely affect our business. While we intend to significantly
expand our professional services and customer support organizations, including
providing these services for both distributed systems and mainframe applications
and systems, we may not be able to do so. Competition for additional qualified
technical personnel to perform these services is intense.
We believe that providing high quality consulting, training, customer
support and education is essential to maintaining our competitive position. If
we are unable to provide comprehensive consulting and support services to our
existing and prospective customers, this may materially adversely affect our
business and ability to sell our products. Consulting services and customer
support are critical to our future success because the market for third party
SCM solutions is still evolving, and many organizations have limited experience
using third party SCM solutions. Customers have only recently begun to look to
third party providers for SCM solutions as the complexity of computer networks
and number of applications has increased.
24
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. 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.
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
25
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 DISCLOSURE 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 and contracts 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, 2000.
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, fluctuations in interest rates would not have a material impact on the
fair value of these securities.
Sales to foreign countries accounted for approximately 15% and 14% of the
total revenue during the quarter and six months, respectively, ended July 31,
2000. Because the Company invoices certain of its foreign sales in currencies
other than the United States dollar, predominantly the British pound sterling
and German deutsche mark, 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 fluctuation
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, 2000 and net cash flows for
the most recent fiscal quarter and six months then ended, the Company believes
that such foreign denominated balances and activity are not material.
26
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 2000, the Company and Compuware Corporation settled the lawsuit
outstanding which was pending in the United States District Court for the
Eastern District of Michigan. The lawsuit was dismissed with prejudice and the
settlement will have no material adverse effect on the Company's results of
operations or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
In February 1999, SERENA completed the sale of 9 million shares of its
Common Stock, including 3 million shares on behalf of selling stockholders, at a
per share price of $8.67 in a firm commitment underwritten public offering
pursuant to a Registration Statement on Form S-1 (File No. 333-67761) which the
Securities and Exchange Commission declared effective on February 11, 1999. The
offering was underwritten by Chase H&Q LLC, SG Cowen Securities Corporation and
Soundview Technology Group Inc. In March 1999, an over-allotment option granted
by SERENA to the underwriters for the purchase of up to 1,350,000 additional
shares of SERENA Common Stock was exercised in full by the underwriters.
SERENA received aggregate gross proceeds of $63.7 million in connection with
its initial public offering. Of such amount, approximately $4.4 million was paid
to the underwriters in connection with underwriting discounts, and approximately
$1.4 million was paid by SERENA in connection with offering expenses, including
legal, accounting, printing, filing and other fees. There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. None of the offering proceeds have been used for the construction of
plant, buildings or facilities or other purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses. The Company is currently investing the net offering proceeds for
future use as additional working capital. Such remaining net proceeds may be
used for potential strategic investments or acquisitions that complement
SERENA's products, services, technologies or distribution channels.
On June 14, 1999, SERENA acquired Diamond Optimum Systems, Inc. ("Diamond"),
a provider of enterprise software change management solutions for NT and UNIX
environments, in a transaction valued at approximately $4.0 million. The Company
acquired all the assets and assumed all the liabilities of Diamond in exchange
for cash totaling $1.75 million and the issuance of 262,500 shares of the
Company's common stock valued at $8.51 per share.
On May 1, 2000, the Company acquired High Power Software, Inc. ("HPS"), a
company to which we shared ownership rights in our DETECT+RESOLVE MAINFRAME
technology for mainframe platforms. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of HPS
will be included in the Company's consolidated financial statements from May 1,
2000. The Company acquired all the assets and assumed all the liabilities of HPS
in exchange for cash of approximately $1.4 million and the issuance of 91,954
shares of the Company's common stock valued at $19.97 per share. The transaction
was valued at approximately $3.3 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The fiscal 2000 Annual Meeting of the Stockholders of SERENA
Software, Inc. was held at the Company's offices at 500 Airport
Boulevard, Burlingame, California 94010 on June 30, 2000 at 2:00 p.m.
27
(b) At the Annual Meeting, the following six 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................................ 36,715,156 94,212
Richard A. Doerr................................. 36,715,038 94,330
Alan H. Hunt..................................... 36,729,756 79,612
Jerry T. Ungerman................................ 36,730,506 78,862
Mark E. Woodward................................. 36,713,878 95,490
Robert I. Pender, Jr............................. 36,710,128 99,240
(c) The following additional proposal was considered at the Annual Meeting
with its results according to the respective vote of the stockholders:
PROPOSAL 2--Ratification and approval of the appointment of KPMG LLP as
independent accountants of the Company for the fiscal year ending
January 31, 2001.
COMMON FOR COMMON AGAINST ABSTAINED
- ---------- -------------- ---------
36,752,968 9,430 46,970
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended July 31, 2000.
28
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERENA SOFTWARE, INC.
By: /s/ ROBERT I. PENDER, JR.
-----------------------------------------
Robert I. Pender, Jr.
VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER) AND SECRETARY
Date: September 12, 2000
29