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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 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
------------------------
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 December 1, 2000 was 39,638,703.
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INDEX
PAGE
--------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of October 31, 2000
and January 31, 2000...................................... 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months and Nine Months
Ended October 31, 2000 and 1999........................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 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........................ 12
Item 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 28
Item 2 Change in Securities and Use of Proceeds.................... 28
Item 4 Submission of Matters to a Vote of Security Holders......... 29
Item 5 Other Information........................................... 29
Item 6 Exhibits and Reports on Form 8-K............................ 29
Signatures.................................................. 30
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
OCTOBER 31, JANUARY 31,
2000 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 81,227,099 $ 80,930,648
Short-term investments 18,675,840 20,213,259
Accounts receivable, net of allowance of $1,172,273 and
$983,367 at October 31 and January 31, 2000,
respectively............................................ 18,148,527 15,380,341
Deferred taxes............................................ 1,818,313 1,818,313
Prepaid expenses and other current assets................. 1,768,948 595,040
------------ ------------
Total current assets.................................... 121,638,727 118,937,601
Long-term investments....................................... -- 3,041,650
Property and equipment, net................................. 2,683,973 2,419,871
Deferred taxes.............................................. 1,927,822 1,927,822
Intangible assets, net...................................... 59,646,567 22,612,525
Other assets................................................ 140,522 119,327
------------ ------------
TOTAL ASSETS............................................ $186,037,611 $149,058,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 473,912 $ 365,771
Income taxes payable...................................... 1,736,868 3,000,485
Accrued expenses.......................................... 12,434,041 11,307,366
Deferred revenue.......................................... 16,207,714 14,632,947
------------ ------------
Total current liabilities............................... 30,852,535 29,306,569
Deferred revenue, net of current portion.................... 5,505,796 4,391,827
Deferred taxes.............................................. 3,243,142 836,093
------------ ------------
Total liabilities....................................... 39,601,473 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; 39,551,974 and 38,285,612 shares issued and
outstanding at October 31 and January 31, 2000,
respectively............................................ 39,552 38,286
Additional paid-in capital................................ 114,417,271 89,280,527
Deferred stock-based compensation......................... (194,507) (380,790)
Notes receivable from stockholders........................ (12,531,345) (3,181,875)
Accumulated other comprehensive loss...................... (47,647) (40,014)
Unrealized gains (losses) on marketable equity
securities.............................................. 82,603 --
Retained earnings......................................... 44,670,211 28,808,173
------------ ------------
Total stockholders' equity.............................. 146,436,138 114,524,307
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $186,037,611 $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 NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenue:
Software licenses....................... $14,326,429 $10,233,150 $40,192,888 $26,691,087
Maintenance............................. 9,724,133 7,305,429 27,151,289 18,785,245
Professional services................... 2,568,694 1,512,087 5,639,248 5,556,695
----------- ----------- ----------- -----------
Total revenue......................... 26,619,256 19,050,666 72,983,425 51,033,027
----------- ----------- ----------- -----------
Cost of revenue:
Software licenses....................... 344,711 645,570 1,249,587 2,071,094
Maintenance............................. 1,262,878 1,614,986 4,436,189 4,348,125
Professional services................... 2,052,474 1,243,906 4,708,913 4,443,897
----------- ----------- ----------- -----------
Total cost of revenue................. 3,660,063 3,504,462 10,394,689 10,863,116
----------- ----------- ----------- -----------
Gross profit.......................... 22,959,193 15,546,204 62,588,736 40,169,911
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing..................... 6,844,718 5,594,569 20,205,352 15,202,150
Research and development................ 2,703,278 1,757,660 7,084,062 4,894,254
General and administrative.............. 1,803,753 1,553,831 6,867,364 4,188,700
Stock-based compensation................ 46,165 180,999 186,283 608,164
Amortization of intangible assets....... 1,711,550 627,993 2,971,740 1,606,329
Acquired in-process research and
development........................... 2,481,111 -- 2,971,687 992,341
----------- ----------- ----------- -----------
Total operating expenses.............. 15,590,575 9,715,052 40,286,488 27,491,938
----------- ----------- ----------- -----------
Operating income.......................... 7,368,618 5,831,152 22,302,248 12,677,973
Interest and other income, net............ 1,817,812 1,356,992 5,670,737 3,252,012
----------- ----------- ----------- -----------
Income before income taxes.............. 9,186,430 7,188,144 27,972,985 15,929,985
Income taxes.............................. 3,950,164 3,129,115 12,110,947 7,296,584
----------- ----------- ----------- -----------
Net income.............................. 5,236,266 4,059,029 15,862,038 8,633,401
Other comprehensive income (loss)......... 95,101 (21,876) 74,970 (4,779)
----------- ----------- ----------- -----------
Comprehensive income.................... $ 5,331,367 $ 4,037,153 $15,937,008 $ 8,628,622
=========== =========== =========== ===========
Net income per share:
Basic................................... $ 0.14 $ 0.11 $ 0.41 $ 0.24
=========== =========== =========== ===========
Diluted................................. $ 0.13 $ 0.10 $ 0.39 $ 0.22
=========== =========== =========== ===========
Weighted average shares used in per share
calculations:
Basic................................... 38,726,489 37,300,387 38,362,882 36,467,470
=========== =========== =========== ===========
Diluted................................. 41,443,547 39,387,330 40,529,338 38,538,368
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
SERENA SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $15,862,038 $ 8,633,401
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 838,161 656,006
Increase in allowance for bad debts................... 188,906 528,568
(Gain) loss on disposal of fixed assets............... (1,271) 13,037
Accrued interest on notes receivable from
stockholders, net of cash received.................. (721,392) (123,401)
Amortization of deferred stock-based compensation..... 186,283 608,164
Amortization of intangible assets..................... 2,971,740 1,606,329
Acquired in-process research and development.......... 2,971,687 992,341
Changes in operating assets and liabilities:
Accounts receivable................................. (2,614,678) (1,382,515)
Prepaid expenses and other assets................... (1,191,490) (117,533)
Accounts payable.................................... 108,699 (355,422)
Income taxes payable................................ (1,263,374) (1,564,042)
Accrued expenses.................................... 897,290 2,224,818
Deferred revenue.................................... 1,411,811 2,279,987
----------- -----------
Net cash provided by operating activities........... 19,644,410 13,999,738
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,102,144) (1,009,932)
Sales (purchases) of short-term and long-term
investments............................................. 4,579,069 (26,741,261)
Unrealized gains on marketable equity securities.......... 82,603 --
Common stock repurchased under the common stock repurchase
program................................................. -- (363,770)
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 in the acquisition of Diamond Optimum Systems
Inc., net of cash acquired.............................. -- (1,462,031)
Cash paid in the acquisition of High Power Software, Inc.,
net of cash acquired.................................... (1,602,104) --
Cash paid in acquisition of StarTool...................... (16,000,000) --
Cash paid in the acquisition of UltiMIS Corporation, net
of cash acquired........................................ (7,525,858) --
----------- -----------
Net cash used in investing activities................. (21,568,434) (28,977,335)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. -- 57,902,226
Exercise of stock options under the employee stock option
plan.................................................... 810,590 101,739
Sale of common stock under the employee stock purchase
plan.................................................... 751,595 514,909
Payment of principal on notes receivable from
stockholders............................................ 665,923 86,875
----------- -----------
Net cash provided by financing activities............. 2,228,108 58,605,749
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (7,633) (4,779)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 296,451 43,623,373
Cash and cash equivalents at beginning of period............ 80,930,648 21,468,740
----------- -----------
Cash and cash equivalents at end of period.................. $81,227,099 $65,092,113
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $13,147,870 $ 8,731,314
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in acquisition of Diamond Optimum
Systems, Inc............................................ $ -- $ 2,234,375
=========== ===========
Common stock issued in acquisition of High Power Software,
Inc..................................................... $ 1,836,617 $ --
=========== ===========
Common stock issued in acquisition of StarTool............ $ 4,914,277 $ --
=========== ===========
Common stock issued in acquisition of UltiMIS
Corporation............................................. $ 7,532,486 $ --
=========== ===========
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 condensed consolidated
financial statements and the notes thereto have been prepared in accordance with
the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all disclosures required by generally accepted accounting
principles in the United States of America and Regulation S-X for annual
financial statements. For these additional disclosures, readers should refer to
the Company's annual report on Form 10-K for the fiscal year ended January 31,
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 NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Basic net income per share--weighted average
number of unrestricted common shares
outstanding................................. 38,726,489 37,300,387 38,362,882 36,467,470
Effect of potentially dilutive securities
outstanding--restricted stock and options... 2,717,058 2,086,943 2,166,456 2,070,898
---------- ---------- ---------- ----------
Shares used in diluted net income per share
computation................................. 41,443,547 39,387,330 40,529,338 38,538,368
========== ========== ========== ==========
(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. Although the Company does not expect the adoption of SAB
No. 101 to have a material effect on the financial statements, the SEC recently
released implementation guidance and the Company is in the process of analyzing
the effect.
(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 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.
7
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 and valued on the premise of fair market value in continued
use under the discounted cash flow approach, will be amortized over a five-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, was
expensed immediately in accordance with generally accepted accounting
principles. See Note 7 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.
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 historical operating results.
(6) ACQUISITION OF ULTIMIS CORPORATION
On September 18, 2000, the Company acquired UltiMIS Corporation ("UltiMIS"),
a provider of data center performance and programmer productivity software
products which allowed the Company to accelerate the time to market for
StarSuite, an integrated suite of products for file and data management, fault
diagnostics, application performance monitoring, testing and debugging. The
acquisition was accounted for using the purchase method of accounting, and
accordingly, the results of operations of UltiMIS are included in the Company's
consolidated financial statements from
8
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) ACQUISITION OF ULTIMIS CORPORATION (CONTINUED)
September 18, 2000. The Company acquired all the assets and assumed all the
liabilities of UltiMIS in exchange for cash of approximately $7.7 million and
the issuance of 173,758 shares of the Company's common stock valued at $43.35
per share. The transaction was valued at approximately $15.3 million with the
allocation of the total consideration as follows:
Tangible assets............................................. $ 572,788
Assumed liabilities......................................... (1,310,028)
Acquired technology......................................... 2,799,635
Acquired in-process research and development................ 2,481,111
Work-force-in-place......................................... 210,900
Non-compete agreements...................................... 516,433
Deferred tax liability...................................... (1,551,866)
Goodwill.................................................... 11,613,514
-----------
Total consideration....................................... $15,332,487
===========
Acquired technology, consisting of current completed technologies at the
date of acquisition and valued on the premise of fair market value in continued
use under the discounted cash flow approach, will be amortized over a five-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 7 for further discussion of acquired in-process research
and development. Work-force-in-place, consisting principally of the UltiMIS
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. The non-compete agreements were entered into with the two UltiMIS
officers and founders. The non-compete agreements were valued based on the
estimated amount of business that might be lost if these two principals were
competing against the Company over the period of the agreements, and they are
being amortized over the two-year term of the agreements. Goodwill represents
the excess of the purchase price over the fair value of the net assets acquired
and will be amortized over 7 years.
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 historical operating results.
(7) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
As a result of the Company's acquisitions of HPS on May 1, 2000 and UltiMIS
on September 18, 2000, the Company recorded acquired in-process research and
development totaling $490,576 and $2,481,111, respectively. For both
transactions, 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 from the HPS acquisition, and the StarProbe and
StarTest products from the UltiMIS
9
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
acquisition, all of which were currently under development at their respective
dates 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 their respective acquisition
dates 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
- ----------------------------- ---------- -------------
HPS Acquisition--
Change Transfer.................................... 80.00% 24.00%
Softwatch.......................................... 60.00% 26.50%
UltiMIS Acquisition--
StarProbe.......................................... 90.00% 30.00%
StarTest........................................... 70.00% 32.50%
The rates used to discount the net cash flows to present value were
initially based on the weighted average cost of capital ("WACC"). With respect
to the HPS acquisition, 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. With respect to the UltiMIS acquisition, the Company used discount
rates of 30.0% and 32.5% for valuing the acquired in-process research and
development and 25.0% for the core technologies. In all cases, 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.
(8) 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
10
SERENA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) SETTLEMENT OF LAWSUIT (CONTINUED)
was dismissed with prejudice and the settlement had no material adverse effect
on the Company's results of operations or financial condition.
(9) 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 has been capitalized and is being 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN THIS
REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND
OTHER FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN, 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, THE PERCENTAGE
OF LICENSE REVENUE TYPICALLY CLOSED AT THE END OF EACH QUARTER MAKING ESTIMATION
OF OPERATING RESULTS PRIOR TO THE END OF THE QUARTER EXTREMELY UNCERTAIN,
CHANGES IN REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON
THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED
BASE, CONTINUED DEMAND FOR ADDITIONAL MAINFRAME MIPS CAPACITY, 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 nine month periods ended October 31,
2000 to the condensed consolidated statements of income and comprehensive income
for the three and nine month periods ended October 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, of High Power
Software, Inc. ("HPS") from May 1, 2000, the date our acquisition of HPS was
completed, and of UltiMIS Corporation ("UltiMIS") from September 18, 2000, the
date our acquisition of UlitMIS was completed.
12
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 NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
Software licenses......................................... 53.8% 53.7% 55.1% 52.3%
Maintenance............................................... 36.5% 38.4% 37.2% 36.8%
Professional services..................................... 9.7% 7.9% 7.7% 10.9%
------- ------- ------- -------
TOTAL REVENUE........................................... 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Cost of revenue:
Software licenses......................................... 1.3% 3.4% 1.7% 4.1%
Maintenance............................................... 4.7% 8.5% 6.1% 8.5%
Professional services..................................... 7.7% 6.5% 6.4% 8.7%
------- ------- ------- -------
TOTAL COST OF REVENUE................................... 13.7% 18.4% 14.2% 21.3%
------- ------- ------- -------
GROSS PROFIT............................................ 86.3% 81.6% 85.8% 78.7%
------- ------- ------- -------
Operating expenses:
Sales and marketing....................................... 25.7% 29.4% 27.7% 29.9%
Research and development.................................. 10.2% 9.2% 9.7% 9.6%
General and administrative................................ 6.8% 8.1% 9.4% 8.2%
Stock-based compensation.................................. 0.2% 1.0% 0.2% 1.2%
Amortization of intangible assets......................... 6.4% 3.3% 4.1% 3.1%
Acquired in-process research and development.............. 9.3% -- 4.1% 1.9%
------- ------- ------- -------
TOTAL OPERATING EXPENSES................................ 58.6% 51.0% 55.2% 53.9%
------- ------- ------- -------
OPERATING INCOME............................................ 27.7% 30.6% 30.6% 24.8%
Interest and other income, net.............................. 6.8% 7.1% 7.7% 6.4%
------- ------- ------- -------
Income before income taxes................................ 34.5% 37.7% 38.3% 31.2%
Income taxes................................................ 14.8% 16.4% 16.6% 14.3%
------- ------- ------- -------
NET INCOME................................................ 19.7% 21.3% 21.7% 16.9%
======= ======= ======= =======
REVENUE
We derive revenue from software licenses, maintenance and professional
services. Our total revenue increased $7.6 million or 40% to $26.6 million in
the current fiscal quarter ended October 31, 2000 from $19.0 million in the same
quarter a year ago. For the nine month period ended October 31, 2000, total
revenue increased $22.0 million or 43% to $73.0 million from $51.0 million in
the same nine-month period a year ago.
SOFTWARE LICENSES. Software licenses revenue as a percentage of total
revenue was 54% and 55% in the current fiscal quarter and current fiscal nine
months ended October 31, 2000, respectively, as compared to 54% and 52% in the
same quarter and nine months a year ago. Software licenses revenue increased
$4.1 million or 40% to $14.3 million in the current fiscal quarter from
$10.2 million in the same quarter a year ago. For the nine month period ended
October 31, 2000, software licenses revenue increased $13.5 million or 51% to
$40.2 million from $26.7 million in the same nine months a year ago.
13
For both the quarter and nine 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 products, primarily ECHANGE MAN in the second half of fiscal
2000, has contributed significantly to the dollar increase when comparing the
current quarter and nine month period to the same periods a year ago. CHANGE MAN
and ECHANGE MAN together make up a significant portion of total software
licenses revenue. These products accounted for $9.0 million or 63% and
$21.8 million or 54% of total software licenses revenue in the current fiscal
quarter and current fiscal nine months, respectively, as compared to
$3.8 million or 37% and $10.4 million or 39% in the same quarter and nine months
a year ago.
MAINTENANCE. Maintenance revenue as a percentage of total revenue was 37%
in both the current fiscal quarter and current fiscal nine months ended
October 31, 2000 as compared to 38% and 37% in the same quarter and nine months,
respectively, a year ago. Maintenance revenue increased $2.4 million or 33% to
$9.7 million in the current fiscal quarter from $7.3 million in the same quarter
a year ago. For the nine-month period ended October 31, 2000, maintenance
revenue increased $8.4 million or 45% to $27.2 million from $18.8 million in the
same nine months a year ago. For both the quarter and nine 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 10% and 8% of
total revenue in the current fiscal quarter and current fiscal nine months,
respectively, ended October 31, 2000 as compared to 8% and 11% in the same
quarter and nine months, respectively, a year ago. Professional services revenue
increased $1.1 million or 70% to $2.6 million in the current fiscal quarter from
$1.5 million in the same quarter a year ago. For the nine-month period ended
October 31, 2000, professional services revenue increased $0.1 million or 1% to
$5.6 million from $5.5 million in the same nine months a year ago. The
significant dollar increase in the most recent quarter reflects an increase in
demand for professional services as certain of our customers who had previously
put projects on hold in order to address their remediation, testing and other
activities associated with becoming Year 2000 compliant, are now completing old
projects and initiating new contracts to implement SCM. Professional services
revenue for the first nine months through October 31, 2000 is predominantly
unchanged when compared to the same nine month period a year ago as the decrease
in revenues in the first half of the current fiscal year has been offset by the
strong increase in the current fiscal quarter.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $3.7 million and
$10.4 million in the current fiscal quarter and fiscal nine months,
respectively, or 14% of total revenue as compared to $3.5 million or 18% and
$10.9 million or 21% in the same quarter and nine months a year ago. For both
the quarter and nine months, the decreases 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, and more
recently, the removal of sublicense fees associated with our DETECT+RESOLVE
MAINFRAME, STARTOOL and STARWARP products. For the nine months ended
October 31, 2000, when compared to the same nine month period a year ago, a
margin decline in professional services was more than offset by significant
margin improvements in both software licenses and maintenance. For the most
recent quarter, when compared to the same quarter a year ago, margins
improvements were across all revenue categories as a result of increased demand
for automated SCM solutions.
SOFTWARE LICENSES. Cost of software licenses consists principally of
sublicense fees associated with our STARTOOL and STARWARP products through the
middle of the current fiscal quarter and our
14
DETECT+RESOLVE MAINFRAME product through the first fiscal quarter ended
April 30, 2000. Cost of software licenses as a percentage of total software
licenses revenue was 2% and 3% in the current fiscal quarter and current fiscal
nine months, respectively, ended October 31, 2000 as compared to 6% and 8% in
the same quarter and nine months a year ago. Cost of software licenses decreased
$0.3 million or 47% to $0.3 million and $0.8 million or 40% to $1.3 million in
the current fiscal quarter and fiscal nine months, respectively, from
$0.6 million and $2.1 million in the same quarter and nine months a year ago.
For both the quarter and nine months, the decreases in absolute dollar terms and
as a percentage of total software licenses revenue, is attributable to decreases
in royalty-bearing software licenses, predominantly STARTOOL, as a percentage of
total software licenses revenue and the elimination of royalty fees beginning in
the second fiscal quarter of the current fiscal year associated with our
DETECT+RESOLVE MAINFRAME product due to our purchase of HPS and most recently,
the elimination of royalty fees associated with our STARTOOL and STARWARP
products as a result of the STARTOOL asset purchase in the current fiscal
quarter.
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 through the middle of the current fiscal quarter and our DETECT+RESOLVE
MAINFRAME product through the first fiscal quarter ended April 30, 2000. Cost of
maintenance as a percentage of total maintenance revenue was 13% and 16% in the
current fiscal quarter and current fiscal nine months, respectively, as compared
to 22% and 23% in the same quarter and nine months a year ago. Cost of
maintenance decreased $0.3 million or 22% to $1.3 million and increased
$0.1 million or 2% to $4.4 million in the current fiscal quarter and fiscal nine
months, respectively, from $1.6 million and $4.3 million in the same quarter and
nine months a year ago, respectively. For the current fiscal quarter, when
compared to the same quarter a year ago, the absolute dollar decrease is
predominantly due to decreases in sublicense fees associated with the STARTOOL
and STARWARP products and the removal of royalty fees on DETECT+RESOLVE
MAINFRAME beginning in the second fiscal quarter, offset in part by increased
personnel and expenses associated with our customer support organization. For
the current fiscal nine months, when compared to the same period a year ago, the
absolute dollars increased slightly as decreases in sublicense fees were offset
by increased expenses associated with our customer support organization.
Sublicense fees are paid to owners of third party products for providing
maintenance enhancements and code fixes. For both the current fiscal quarter and
current fiscal nine 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 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 80% and 84% in the current fiscal quarter and
current fiscal nine months, respectively, as compared to 82% and 80% in the same
quarter and nine months a year ago. Cost of professional services increased
$0.8 million or 65% to $2.1 million and $0.3 million or 6% to $4.7 million in
the current fiscal quarter and current fiscal nine months, respectively, from
$1.3 million and $4.4 million in the same quarter and nine months a year ago.
For both the quarter and nine months, the absolute dollar increases are directly
related to the increases in our professional services organization, offset in
part by reductions earlier in the current fiscal year 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 the most recent
quarter, when compared to the same quarter a year ago, cost of professional
services as a percentage of total professional services revenue decreased as the
rate of increase in professional services revenue was greater than the rate of
increase in costs associated with our professional services organization.
15
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 26% and 28% in the current fiscal quarter and
current fiscal nine months ended October 31, 2000, respectively, as compared to
29% and 30% in the same quarter and nine months a year ago. Sales and marketing
expenses increased $1.3 million or 22% to $6.8 million and $5.0 million or 33%
to $20.2 million in the current fiscal quarter and nine months, respectively,
from $5.5 million and $15.2 million in the same quarter and nine months a year
ago. For both the current fiscal quarter and current fiscal nine 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 products 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 nine months to the same quarter and nine months a year ago,
as the rate of increase in total revenue was greater than the rate of increase
in sales and 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 10% in both the current fiscal
quarter and current fiscal nine months ended October 31, 2000, respectively, as
compared to 9% and 10% in the same quarter and nine months, respectively, a year
ago. Research and development expenses increased $0.9 million or 54% to
$2.7 million and $2.2 million or 45% to $7.1 million in the current fiscal
quarter and nine months, respectively, from $1.8 million and $4.9 million in the
same quarter and nine months a year ago. For the current fiscal nine months and
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 expansion of
our research and development efforts to enhance existing products and develop
our distributed systems products. For the current fiscal quarter, when compared
to the same quarter a year ago, the dollar increase is also due to the Company's
acquisition of UltiMIS in September 2000 and the STARTOOL asset purchase in
August 2000. 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 primarily to develop our
distributed systems product suite.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes, and benefits and certain
non-allocable administrative costs, including legal and accounting fees and bad
debts. General and administrative expenses as a percentage of total revenue were
7% and 9% in the current fiscal quarter and nine months, respectively, as
compared to 8% in both the same quarter and nine months a year ago. General and
administrative expenses increased $0.2 million or 16% to $1.8 million and
$2.7 million or 64% to $6.9 million in the current fiscal quarter and nine
months, respectively, from $1.6 million and $4.2 million in the same quarter and
nine months a year ago. For the current fiscal quarter, when compared to the
same quarter 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, all offset
by a decrease in legal fees as a result of the Company's lawsuit settlement
early in the quarter. For the current fiscal nine months, when compared to the
same nine months a year ago, the dollar increase was equally attributable to
administrative infrastructure expansion costs and legal fees. We expect general
and administrative expenses to increase in absolute dollar terms as we expand
our infrastructure and our operations.
16
AMORTIZATION OF INTANGIBLE ASSETS. In connection with the acquisitions of
Optima Software, Inc. in September 1998, Diamond in June 1999, HPS in May 2000
and UltiMIS in September 2000, and the STARTOOL asset purchase in August 2000,
the Company has recorded $65.6 million in intangible assets, of which
$59.6 million is unamortized as of October 31, 2000. Combined, intangible assets
are being amortized over periods of one year or less on $0.9 million, two to
seven years on $43.5 million and fifteen years on the remaining $21.2 million.
Of the total intangible assets, $1.7 million and $3.0 were amortized in the
current fiscal quarter and current fiscal nine months, respectively, as compared
to $0.6 million and $1.6 million in the same quarter and nine months a year ago.
We expect to amortize an additional $2.2 million in the final quarter of fiscal
2001 and approximately $2.0 million per quarter over the next eight quarters
through the end of fiscal 2003. The intangible assets will be fully amortized by
the end of fiscal 2014.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
Company's acquisitions of HPS and UltiMIS in the second and third quarters of
fiscal 2001, respectively, the Company recorded one-time charges of
$2.5 million and $3.0 million in the current quarter and nine months,
respectively, ended October 31, 2000, in recording acquired in-process research
and development. See notes 5, 6 and 7 in the Notes to Condensed Consolidated
Financial Statements. In connection with the Company's acquisition of Diamond in
the second fiscal quarter a year ago, the Company took a one-time charge of
$1.0 million in recording acquired in-process research and development.
INTEREST AND OTHER INCOME, NET
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$0.5 million or 34% to $1.8 million and $2.4 million or 74% to $5.7 million in
the current fiscal quarter and nine months, respectively, from $1.3 million and
$3.3 million in the same quarter and nine months a year ago. For both the
current fiscal quarter and nine 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 nine months ended October 31, 2000, when compared to the same
nine 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 $4.0 million or 43% and $12.1 million or 43% in the current
fiscal quarter and nine months, respectively, ended October 31, 2000 as compared
to $3.1 million or 44% and $7.3 million or 46% in the same quarter and nine
months a year ago. The Company's effective income tax rate has decreased
slightly in the current fiscal quarter and nine months, when compared to the
same quarter and nine months a year ago, predominantly due to increased revenue
growth offset by increases in nondeductible charges of $3.4 million and
$2.9 million in the current fiscal quarter and nine months, respectively.
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 October 31, 2000,
SERENA had $81.2 million in cash and cash equivalents, and an additional
$18.7 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 $19.6 million and $14.0 million in the
current fiscal nine months ended October 31, 2000 and the same nine months a
year ago, respectively. SERENA's cash flows provided by operating
17
activities exceeded net income during each of these periods principally due to
the inclusion of non-cash expenses in net income, cash collections in advance of
revenue recognition for maintenance contracts and increases in accrued expenses;
all partially offset by decreases in income taxes payable and growth in trade
accounts receivable and prepaid expenses and other assets. In the current fiscal
nine months ended October 31, 2000, cash used in investing activities were
predominantly related to the Company's acquisitions of StarTool, UltiMIS and
HPS, which accounted for $16.0 million, $7.5 million and $1.6 million,
respectively; all partially offset by the sale of short and long-term
investments totaling $4.6 million. In the same nine month period a year ago,
cash used in investing activities were predominantly related to the purchase of
short and long-term investments totaling $26.7 million and the Company's
acquisition of Diamond totaling $1.5 million; all partially offset by the
payment of notes due from a stockholder totaling $0.6 million. To a lesser
extent, cash used in investing activities also came from purchases of computer
equipment and office furniture and equipment in both nine month periods. In the
current fiscal nine months ended October 31, 2000, cash flows from financing
activities came entirely from the purchase of common stock under the Company's
employee stock purchase plan, the exercise of stock options under the Company's
employee stock option plan, and payment of principal on notes receivable from
stockholders totaling $0.8 million, $0.8 million and $0.7 million, respectively.
In the same nine months from a year ago, cash flows from financing activities
came predominantly from the Company's initial public offering of common stock in
February 1999 resulting in net proceeds to the Company of $57.9 million and the
purchase of common stock under the Company's employee stock purchase plan
totaling $0.5 million.
At October 31, 2000, the Company did not have any material commitments for
capital expenditures and has no revolving credit agreement or other term loan
agreements with any bank or other financial institution.
At October 31, 2000, the Company had working capital of $90.8 million and
accounts receivable, net of allowances, of $18.1 million. Total deferred revenue
increased to $21.7 million at October 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 UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 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, THE PERCENTAGE OF LICENSE REVENUE TYPICALLY CLOSED AT THE END OF
EACH QUARTER MAKING ESTIMATION OF OPERATING RESULTS PRIOR TO THE END OF THE
QUARTER EXTREMELY UNCERTAIN, CHANGES IN REVENUE MIX AND SEASONALITY, OUR ABILITY
TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON
REVENUES FROM OUR INSTALLED BASE, CONTINUED DEMAND FOR ADDITIONAL MAINFRAME MIPS
CAPACITY, 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
18
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 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
19
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.
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
October 31, 2000 and the same quarter from a year ago, sales of CHANGE MAN and
COMPAREX together accounted for approximately 70% and 77% 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 our EREQUESTMAN
product in fiscal 2001. We plan to introduce our CHANGECONTENT product in the
fourth quarter of fiscal 2001, 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
20
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 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, in particular our
CHANGECONTENT product, 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.
21
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 acquisitions of Diamond, HPS and StarTool 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 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 sales 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 28% of our total licenses revenue in the current fiscal quarter
ended October 31, 2000, up from 13% 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
22
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 did cause in the third
quarter of fiscal 2001 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.
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
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.
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
23
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
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 AND EREQUEST 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.
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market, from
emerging software companies, or from other web content management 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.
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.
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
24
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 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. 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
25
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, web application server companies, 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.
OUR INDUSTRY CHANGES RAPIDLY DUE TO EVOLVING TECHNOLOGY STANDARDS AND OUR FUTURE
SUCCESS WILL DEPEND ON OUR ABILITY TO CONTINUE TO MEET THE SOPHISTICATED NEEDS
OF OUR CUSTOMERS
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
hardware, software, database and networking platforms particularly for our
distributed systems products. We will have to develop and introduce enhancements
to our existing products and new products on a timely basis to keep pace with
technological developments, evolving industry standards and changing customer
requirements. We expect that we will have to respond quickly to rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. As a result, our position in existing markets or
potential markets could be eroded rapidly by product advances. The life cycles
of our products are difficult to estimate. Our growth and future financial
performance will depend in part upon our ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. We expect that our product development efforts will
continue to require substantial investments. We may not have sufficient
resources to make the necessary investments. Any of these events could have a
material adverse effect on our business, quarterly and annual operating results
and financial condition.
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
26
work with customers through our customer support services to identify and
correct bugs in our software, we expect that errors in our products will
continue to be found in the future. Although many of these errors may prove to
be immaterial, certain of these errors could be significant. Detection of any
significant errors may result in, among other things, loss of, or delay in,
market acceptance and sales of our products, diversion of development resources,
injury to our reputation, or increased service and warranty costs. These
problems could materially adversely affect our business and future quarterly and
annual operating results. In the past we have discovered errors in certain of
our products and have experienced delays in the shipment of our products during
the period required to correct these errors. These delays have principally
related to new version and product update releases. To date none of these delays
have materially affected our business. However, product errors or delays in the
future, including any product errors or delays associated with the introduction
of our distributed systems products, could be material. In addition, in certain
cases we have warranted that our products will operate in accordance with
specified customer requirements. If our products fail to conform to such
specifications, customers could demand a refund for the software license fee
paid to us or assert claims for damages.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
We may be subject to claims for damages related to product errors in the
future. A material product liability claim could materially adversely affect our
business. Our license agreements with our customers typically contain provisions
designed to limit exposure to potential product liability claims. SERENA's
standard software licenses provide that if our products fail to perform, we will
correct or replace such products. If these corrective measures fail, we may be
required to refund the license fee for such non-performing product. However, our
standard license agreement limits our liability for non-performing products to
the amount of license fee paid, if the license has been in effect for less than
one year, or to the amount of the licensee's current annual maintenance fee, if
the license is more than one year old. Our standard license also provides that
SERENA shall not be liable for indirect or consequential damages caused by the
failure of our products. Such limitation of liability provisions may, however,
not be effective under the laws of certain jurisdictions to the extent local
laws treat certain warranty exclusions as unenforceable. Although we have not
experienced any product liability claims to date, the sale and support of our
products entail the risk of such claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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 October 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 22% and 17% of the
total revenue during the quarter and nine months, respectively, ended
October 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 did in the third quarter of fiscal 2001, and
could in the future 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.
27
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
Wit SoundView Corp. 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.
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
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connection with the acquisition. Technology acquired has been capitalized and is
being amortized over its estimated useful life of seven years.
On September 18, 2000, the Company acquired UltiMIS Corporation ("UltiMIS"),
a leading provider of data center performance and programmer productivity
software products which allowed the Company to accelerate its time to market for
StarSuite, a group of collaborative products packaged as a complete suite. The
acquisition was accounted for using the purchase method of accounting, and
accordingly, the results of operations of UltiMIS are included in the Company's
consolidated financial statements from September 18, 2000. The Company acquired
all the assets and assumed all the liabilities of UltiMIS in exchange for cash
of approximately $7.7 million and the issuance of 173,758 shares of the
Company's common stock valued at $43.35 per share. The transaction was valued at
approximately $15.3 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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
The Registrant filed a Report on Form 8-K dated August 18,
2000 reporting an event under Item 2 and 7.
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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: December 13, 2000
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