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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-25285
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SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2669809
(State or other jurisdiction of (I.R.S. Employere
incorporation or organization) Identification No.)
500 AIRPORT BOULEVARD, 2ND FLOOR, 94010-1904
BURLINGAME, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 650-696-1800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of the Common Stock on March 31,
2000, as reported on the Nasdaq National Market, was approximately $487,140,000.
Shares of Common Stock held by each executive officer and director and by each
person who may be deemed to be an affiliate of the Registrant have been excluded
from this computation. This determination of affiliate status is not necessarily
a conclusive determination for other purposes. As of March 31, 2000, the
Registrant had 39,267,866 shares of Common Stock, $0.001 par value, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this
Form 10-K portions of its Proxy Statement for the 2000 Annual Meeting of
Stockholders, which is currently scheduled to be held on June 30, 2000.
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SERENA SOFTWARE, INC.
ANNUAL REPORT ON FORM 10-K
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TABLE OF CONTENTS
PAGE
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PART I...................................................... 3
Item 1. Business........................................ 3
Item 2. Properties...................................... 13
Item 3. Legal Proceedings............................... 13
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 13
PART II..................................................... 15
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............................ 15
Item 6. Selected Consolidated Financial Data............ 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 19
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk............................................ 35
Item 8. Financial Statements and Supplementary Data..... 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 37
PART III.................................................... 37
Item 10. Directors and Executive Officers of the
Registrant............................................. 37
Item 11. Executive Compensation......................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 37
Item 13. Certain Relationships and Related
Transactions........................................... 37
PART IV..................................................... 38
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 38
SIGNATURES.................................................. 40
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2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS," AND ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN
THIS REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND
OTHER FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS AND OUR
ABILITY TO MANAGE OUR GROWTH. WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD
LOOKING INFORMATION CONTAINED IN THIS REPORT.
OVERVIEW
SERENA is a leading provider of eBusiness infrastructure software change
management, or SCM, solutions. Our products and services are used to manage and
control software change for organizations whose business operations are
dependent on managing information technology, or IT. In our 19 year history, we
have developed highly effective solutions for managing software change that
enable our customers to improve their return on IT investments by improving
software quality, accelerating time to market, and increasing programmer
productivity while reducing application development and IT infrastructure
maintenance costs. A key challenge for IT managers is managing software change
throughout the business organization, including new version releases, "bug
fixes," upgrades and application introductions. Our products help IT managers
manage software changes to applications by automating the software application
life cycle. IT managers use our products to track software changes during the
software application design and development process, manage separate programming
teams that are concurrently developing and enhancing applications, and oversee
the deployment of software applications. As of January 31, 2000, our products
have been installed in over 2,500 customer sites worldwide and our customers
include 40 of the Fortune 50 companies such as Chase Manhattan, Citigroup,
General Electric, IBM, MetLife, Merrill Lynch and Prudential.
The Company was incorporated in California in 1980 and reincorporated in
Delaware in 1998. Unless the context otherwise requires, references in this
report to "SERENA" and the "Company" refer to SERENA Software, Inc., a Delaware
corporation, and its predecessor, SERENA Software International, Inc., a
California corporation. The Company's executive offices are located at 500
Airport Boulevard, 2(nd) Floor, Burlingame, California 94010-1904 and its
telephone number is (650) 696-1800.
INDUSTRY BACKGROUND
The evolution of enterprise computing from centralized, mainframe-based
computing to distributed, client/server computing has added substantial
complexity in recent years to the management of IT infrastructures. Today's IT
environment is characterized by distributed information systems, applications
and networks, comprising a wide range of hardware platforms, operating systems,
databases, development tools, networking protocols and packaged and internally
developed software. This distributed computing
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environment has fueled a proliferation of applications disseminated throughout
the enterprise as departments and individual users have been empowered to
independently sponsor applications. These often disparate applications must be
continually maintained and often reprogrammed to be compatible with emerging
technologies. The advent of the Internet, intranets, extranets, and eBusiness
has added further complexity by stimulating the development of new applications,
extending the reach of applications throughout and beyond the enterprise while
introducing additional networking requirements.
In connection with the developments associated with the distributed
computing environment, the mainframe has continued to be a critical component of
IT infrastructures. Many IT organizations maintain applications that are vital
to their business on the mainframe because of its unmatched performance,
reliability and security.
Successful management of IT infrastructures requires the ability to manage
rapid and unpredictable technological change within increasingly complex and
heterogeneous computing environments. Change drivers include eBusiness,
competitive pressures, short time-to-market windows, mergers and acquisitions,
and regulatory changes.
According to the Yankee Group, 70% of mission critical applications in
Fortune 1000 companies run on mainframe computers. As organizations create new
eBusiness applications and "Webify" their existing applications, they typically
do so over a multi-tier, multi-platform architecture. Often these applications
contain a legacy mainframe application utilizing data in a mainframe database, a
middle-tier of UNIX, LINUX or Window NT servers, and Web browser client
software.
A key challenge for IT organizations is managing software change across
multiple platforms throughout the enterprise, including new version releases,
bug fixes, upgrades and application introductions. Any software change, if not
managed effectively, has the potential to cause system outages or corrupt data,
which could result in disruption throughout the enterprise and lost business.
For example, a single, undetected error in a software update could have
catastrophic results in such critical systems as airline flight planning and
securities trading. Change in software applications can occur at all phases of
the software application life cycle, from design and analysis to development,
through testing and production and into post-deployment support and maintenance.
Historically, organizations have attempted to address their SCM requirements
internally either with paper based, manually implemented policies and procedures
or by developing their own software solutions. These internal solutions
generally require substantial IT resources, have lengthy implementation cycles,
frequently fail and are not cost effective. To overcome the costs and risks
associated with internally developed software change management solutions, many
organizations are now seeking commercially developed SCM solutions that enable
them to cost effectively manage and control change throughout the software
application life cycle and across the enterprise. We believe sophisticated SCM
solutions are required as organizations face increasingly complex and
distributed IT infrastructures, limited IT resources, remote IT project teams
and tight budget constraints.
SERENA provides a full suite of software change management products and
services for managing and controlling change throughout the software application
life cycle. Our product suite automates the management of the software
application life cycle and creates an IT environment that facilitates concurrent
development efforts by separate programming teams, improves process consistency,
enhances software integrity and protects valuable software assets. Key
components of our solution are broad functionality within our FULL.CYCLE
mainframe and distributed systems product suites, a high level of adaptability
and ease of use and implementation of our FULL.CYCLE mainframe and distributed
systems product suites, the use of our comprehensive SER(POWER) consulting
services which complement our product offerings, and improved return on IT
investment. Key components of our strategy include maintaining our technology
leadership, extending SCM solutions across the enterprise, leveraging our
customer base, continuing to expand professional services offerings, expanding
global sales, and pursuing strategic relationships and acquisitions.
4
PRODUCTS
SERENA develops, markets and supports a full suite of mainframe SCM products
for managing and controlling change throughout the software application life
cycle. SERENA's product offerings support the industry standard IBM mainframe
platforms, including MVS, and are marketed under the brand name FULL.CYCLE
mainframe. This product suite automates the software application life cycle and
creates an IT environment that facilitates concurrent development efforts by
separate programming teams, improves process consistency, enhances software
integrity and protects valuable software assets. Our products significantly
improve programmer productivity, reduce software application development costs
and improve customers' return on IT investments.
In addition, SERENA develops, markets, and supports an SCM product suite for
the distributed systems environment to support Microsoft Windows 95/98/NT and
UNIX platforms. The first of these products, DETECT+RESOLVE, released in
December 1998, automatically repairs Windows 95/98/NT software configuration
problems, and our second distributed systems product, ECHANGE MAN, released in
June 1999 after our acquisition of Diamond Optimum Systems, Inc., automates
software change management on Windows 95/98/NT, UNIX, LINUX and HP platforms.
Customers typically purchase our FULL.CYCLE mainframe products under Million
Instructions Per Second, or MIPS-based, perpetual licenses. A description of
MIPS-based licenses is included in the "Overview" section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The following products comprise the FULL.CYCLE mainframe product suite:
YEAR PRODUCT
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FIRST LAST
PRODUCT NAME INTRODUCED RELEASED BRIEF DESCRIPTION
- ------------ ---------- -------- ------------------------------------
Change Man.......................... 1988 1999 Provides automated infrastructure to
control and manage software change
COMPAREX............................ 1981 1999 Performs data comparison for
application testing and software
quality
Merge+Reconcile..................... 1994 1999 Merges versions of programs to
enable concurrent development
StarTool............................ 1989 1999 Facilitates complex file and data
management tasks
StarWarp............................ 1997 1999 Addresses data aging problems by
converting data to new formats
Detect+Resolve Mainframe
(formerly SyncTrac)............... 1993 1999 Detects, tracks and synchronizes
changes in multiple environments
to improve system integrity and
recoverability
Change Transfer..................... 1999 1999 Record level backup and Restore
utility for VSAM data
CHANGE MAN, our flagship product, is a comprehensive SCM solution that
provides an automated infrastructure to help customers manage and control change
throughout the software application life cycle. CHANGE MAN manages change by
coupling application development and production control and provides developers
and their managers with the assurance of technological control and integrity
throughout the development process enabling them to focus on software quality
and production reliability. CHANGE MAN automates the entire software application
life cycle, by providing impact analysis, version control, promotion of fixed
code into production, online management of approvals and authorizations,
management of
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concurrent development efforts by separate programming teams, code freezing to
prevent further development while testing, and auditing and automating the
backout of changes.
CHANGE MAN is a flexible, compatible SCM solution that supports multiple
operating systems and database platforms and integrates easily with customers'
existing IT environments by using standard IBM programming languages and working
with existing customer security systems, libraries and inventory lists.
COMPAREX is a comparison SCM product used for efficient application testing
and software quality assurance. COMPAREX performs fast, accurate, single-step
comparisons of the contents of libraries, directories, files or databases by
performing line-by-line byte-level comparisons. COMPAREX performs several
functions, including supporting a variety of data types, providing sophisticated
comparison algorithms for both data and text, minimizing the scope of
comparisons by utilizing keywords to compare specific portions of a file,
providing direct interfaces to most major databases, and producing detailed
reports on the comparison differences.
MERGE+RECONCILE, OR M+R, facilitates the management of multiple versions of
software by providing a comprehensive comparison tool that can merge up to eight
versions of source code into a single version, and produces a report that
compares the different versions and clearly identifies differences and
conflicts. M+R can reduce application development costs by enabling separate
programming teams to work concurrently on the same parts of an application. By
merging different versions of a program's source code to provide a consolidation
of each team's changes, M+R greatly reduces implementation time and improves the
quality of new releases. M+R can be closely integrated with CHANGE MAN to
provide enhanced concurrent development capabilities.
STARTOOL is used for complex file and data management tasks and has
extensive editing tools. STARTOOL provides a comprehensive workbench of
utilities that may be used for application and system testing or conversion and
recovery support. STARTOOL enables users to perform many data management tasks,
including locating and replacing data and data sets, automatically tracking
changes to applications or systems, recreating lost source code, and diagnosing
and mapping recovery strategies for file-related problems.
STARWARP addresses data aging by providing a method for converting or
"warping" data stored in a particular format, including dates, currency and
other business fields into new formats. For example, STARWARP enables over 400
date fields to be converted into new formats to resolve Year 2000 issues.
STARWARP minimizes the need to write batch programs for each file-aging
situation and enables programmers to create test data by automating the process
of specifying default values for data fields.
DETECT+RESOLVE MAINFRAME (formerly SyncTrac) detects, tracks and
synchronizes changes in multiple environments to improve system integrity and
recoverability. DETECT+RESOLVE MAINFRAME provides centralized control to
software change implementation and distribution after applications are initially
deployed. DETECT+RESOLVE MAINFRAME speeds development and problem resolution by
detecting, reporting and recovering from changes across local and remote
environments. DETECT+RESOLVE MAINFRAME provides configuration security for the
production environment by using fingerprinting technology to audit and track
changes enabling system programmers to repair unauthorized changes and to
facilitate the replication of authorized changes to remote environments.
CHANGE TRANSFER is a backup utility for Virtual Storage Access Method (VSAM)
data. CHANGE TRANSFER detects VSAM changes at the record level and has the
ability to back up only those records that have changed. If VSAM data needs to
be restored, CHANGE TRANSFER provides a simple-to-use function to restore those
changes to the desired state. CHANGE TRANSFER improves efficiency by reducing
the time and resources it takes to backup and restore VSAM data.
6
The following products comprise the FULL.CYCLE distributed systems product
suite:
YEAR PRODUCT
---------------------
FIRST LAST
PRODUCT NAME INTRODUCED RELEASED BRIEF DESCRIPTION
- ------------ ---------- -------- ------------------------------------
eChange Man......................... 1993 1999 Provides automated infrastructure to
control and manage software change
Detect+Resolve Desktop.............. 1998 1999 Automatically repairs software
configuration problems
ECHANGE MAN is a comprehensive SCM solution that provides an automated
infrastructure to help customers manage and control change throughout the
software application life cycle. ECHANGE MAN manages change by coupling
application development, build management, and application deployment; and
provides developers and their managers with technological control and integrity
throughout the development process enabling them to focus on software quality
and reliability. ECHANGE MAN automates the software application life cycle, by
providing impact analysis, version control, promotion of fixed code into
production, online management of approvals and authorizations, management of
concurrent development efforts by separate programming teams, code freezing to
prevent further development while testing, and auditing and automating the
backout of changes.
DETECT+RESOLVE DESKTOP automatically repairs software configuration problems
on desktops, laptops, and servers. DETECT+RESOLVE DESKTOP utilizes SERENA's
fingerprinting technology to identify and repair problems at the component
level. By automatically repairing problems, DETECT+RESOLVE DESKTOP reduces help
desk calls, escalation calls, and desk side visits to improve application uptime
and availability while reducing total cost of ownership.
PRODUCTS UNDER DEVELOPMENT
To address the need to provide a single point of control to manage software
changes across the multi-tier, multi-platform architecture common to eBusiness
applications, SERENA is working on integrating its CHANGE MAN and ECHANGE MAN
SCM products. In October 1999, the Company announced its integration plans and
provided a preliminary demonstration of this capability at the GartnerGroup
ITxpo. In March 2000, the Company announced CHANGEXPRESS, a Web browser based
product that will be the initial point of integration of CHANGE MAN and ECHANGE
MAN. CHANGEXPRESS will provide customers with a single point of control to
approve changes and view and print reports from either CHANGE MAN or ECHANGE
MAN.
The software change process is usually initiated through a change request.
Providing a companion change request management product to a software change
management product offers additional opportunities to add value to customers by
further automating and improving processes to increase quality and efficiency
while reducing time to market. In March 2000, the Company announced EREQUESTMAN,
a change request management product that will integrate with, and be able to
share the same meta data repository as, ECHANGE MAN. EREQUESTMAN will provide a
request management solution that features predefined processes and business
rules. The predefined processes are extremely flexible and easily customized to
reflect the multi-level workflow and sub-processes found in many organizations.
SERENA may be unable, for technological or other reasons, to develop and
introduce these products in a timely manner. Any failure by us to successfully
develop, market, sell and support the FULL.CYCLE distributed systems product
suite would have a material adverse effect on our business, operating results
and financial condition. See "Factors That May Affect Future Results--Our
Introduction of SERENA SCM Products for Distributed Systems May Not Be
Successful" and "We May Experience Delays in Developing Our Products Which Could
Adversely Affect Our Business."
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TECHNOLOGY
SERNET provides a common platform for the continued enhancement of our
existing products and the rapid development of future products. SERNET serves as
a repository for our key technologies and provides our product suites with a
common and stable infrastructure, a set of common services for product suite
integration, an interface that promotes third party integration, a communication
module for cross platform interconnectivity, and a common set of modules
including licensing management, file access and security. This technology is the
key infrastructure that will enable our upcoming CHANGEXPRESS product to provide
single point of control for reporting and approvals which unites SERENA's
multiplatform SCM solution.
The SERNET technologies are proven and reliable and already part of many of
the FULL.CYCLE mainframe products. SERNET provides a broad platform for
customers and third parties to integrate into SERENA's technology base. These
interfaces which are provided natively and with language specific "wrappers',
such as Java, C++ etc, facilitate integration of vended and home grown solutions
into the multi-platform and distributed world of software change management.
In addition to SERNET, we have developed a number of other SCM technologies
which are embedded in our products, including:
- A comparison engine detecting differences and tracking changes as small as
individual bit values. This technology enables customers to compare
extremely large volumes of data rapidly from a diverse set of sources
including databases, indexed files and flat file structures. The primary
product that uses this technology is COMPAREX.
- A merge engine processing changes made to the same source code program by
different development teams that enables parallel development teams to
apply changes to an application concurrently, while determining whether
the changes are compatible. The primary product that uses this technology
is MERGE+RECONCILE. But, it is also a key component of both our mainframe
and distributed systems SCM products, CHANGE MAN and ECHANGE MAN.
- A fingerprinting technology enabling application or system changes to be
detected with a high level of granularity by reducing each data file in a
system to a unique eight-byte token or "fingerprint" which changes if any
bit is altered. Fingerprinting allows programmers and systems managers to
quickly determine which changes have led to operational errors, thereby
facilitating timely problem detection and resolution. Substantially all of
SERENA's products use this technology.
- An object factory technology consolidating desktop components into single
objects and collecting them in class libraries, allowing for code re-use
and enabling customers to develop inventories containing proven, tested
and reliable codes, thereby facilitating the rapid development and
deployment of products to the desktop. The object factory technology has
an open interface structure of class libraries that can be incorporated
with original equipment manufacturer tool kits. SERENA uses this
technology to develop new SCM products or to upgrade existing products.
Known as the XPI and the EPI, these programming interfaces work directly
with our mainframe and distributed systems products. The architecture is
TCP/IP based thus enabling applications on disparate platforms in diverse
locations to interact with SERENA's software products.
- A fourth generation, object-oriented development engine developed entirely
in Java and based on extensible markup language (XML) to facilitate
integration into third party products. This technology is used to
accelerate the time to market of future SERENA products.
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PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our services group provides technical consulting, education, customer
support and product maintenance to help customers maximize the utilization of
SERENA's FULL.CYCLE products. We offer our consulting and education services
under the SER(POWER) brand name.
CONSULTING. SERENA provides a comprehensive range of consulting services to
our customers. Our consultants review customers' existing IT systems and
applications and make recommendations for changing those systems and
applications and customizing SERENA's SCM products so that customers can fully
realize the benefits of the FULL.CYCLE products. In addition to helping
customers customize, install and deploy our software products, our consulting
services may also include process reengineering and developing interfaces with
customers' databases, third party proprietary software repositories or
programming languages.
We also offer customers more specialized consulting services. These
specialized consulting services expand SERENA's SER(POWER) services to include
our BEST PRACTICES CONSULTING SERVICES, which provide customers with expertise
and assistance in defining and developing a best practice change and
configuration management architecture and in identifying corresponding products,
methods and procedures. SERENA's consulting services are typically billed on a
time and materials basis.
EDUCATION. We offer hands-on training courses for the implementation and
administration of our products. Product training is provided on a periodic basis
at our headquarters in Burlingame, California, at our offices in London and also
at customer sites throughout the United States and Europe. We also offer custom
course development for certain of our products. We bill our education services
on a per class basis.
CUSTOMER SUPPORT AND PRODUCT MAINTENANCE. We have a staff of customer
service personnel who provide technical support to customers. We offer technical
support services 24 hours a day, seven days a week via our Internet site, toll
free telephone lines, electronic mail, bulletin board service and facsimile
lines. Customers are notified about the availability of regular maintenance and
enhancement releases via Internet-based electronic mail. Initial product license
fees include one year of product software maintenance and support. Thereafter,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee equivalent to approximately 17%
of the current list price of the licensed product.
RESEARCH AND DEVELOPMENT
SERENA believes that the ability to introduce new and enhanced products to
customers will be a key factor for future success. As part of our efforts to
generate ideas for enhancing our existing products and for developing new ones,
we maintain an ongoing dialogue with our customers who are continually facing
new SCM challenges in their evolving IT environments. SERENA has devoted and
expects to continue to devote significant resources to developing new and
enhanced products, particularly distributed systems products and other
initiatives aimed at the Web.
Most of our technical personnel have been employed by SERENA for a
substantial length of time and their significant knowledge base contributes to
SERENA's ability to understand and address customers' SCM requirements. We
believe that attracting and retaining talented software developers who
understand the customers' problems is an important component of product
development activities. We encourage our developers to assume responsibility for
the design and delivery of our products through our product authorship incentive
program that rewards our developers with commissions based on the market success
of the applications they design, write, market and support. Competition for
developers is intense and any failure by us to continue to attract and retain
qualified personnel could have a material adverse effect on our business,
operating results and financial condition. See "Factors That May Affect Future
Results--We May Not Be Able to Recruit and Retain the Personnel We Need to
Succeed."
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SERENA's research and development expenses were $5.5 million, $4.5 million
and $6.8 million in fiscal 1998, 1999 and 2000, representing 17%, 9% and 9% of
total revenues, respectively. The reduction in research and development expenses
in fiscal 1999 is attributable principally to the restructuring of compensation
arrangements with SERENA's founder and Chief Technology Officer. We expect
research and development expenses will increase as we hire additional research
and development personnel to develop our distributed systems product suite. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We believe that our ability to develop and introduce enhancements to our
products and new products on a timely basis is a key success factor. 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. SERENA has in
the past devoted and expects in the future to continue to devote a significant
amount of resources to developing new and enhanced products. We currently have a
number of product development initiatives underway. There can be no assurance
that any enhanced products, new products or product suites will be embraced by
existing or new customers. The failure of these products to achieve market
acceptance could have a material adverse effect on our business, operating
results and financial condition. See "Factors That May Affect Future
Results--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."
SALES AND MARKETING
In North America, the United Kingdom and Germany, we market our software
primarily through our direct sales organization. SERENA's North American sales
organization includes personnel in the metropolitan areas of Boston, Chicago,
Los Angeles, New York, Sacramento, San Francisco, Dallas, Atlanta and Toronto.
Our direct sales force works closely with customers to understand and
address their SCM needs. In particular, we plan to broaden our direct sales and
telesales efforts to reduce sales cycles and provide a rapid response to
customer product requests.
In addition to our direct sales and telesales efforts, we have established
relationships with distributors and resellers located in North America, Spain,
Italy, Latin America, Belgium, Hong Kong, Israel, Australia, Japan, Korea and
South Africa. In addition to marketing and selling our software, these
distributors and resellers provide technical support as well as educational and
consulting services.
We market our products through seminars, industry conferences, trade shows,
advertising, direct mailing efforts and our Internet site. In addition, we have
developed programs that promote an active exchange of information between us and
our existing customers. These programs include customer meetings with our senior
management at our Executive Briefing Center and focus group meetings with
customers to evaluate product positioning. We plan to continue to expand our
marketing organization to broaden our market presence.
COMPETITION
The market for our products and services is highly competitive and diverse.
The technology for SCM products may change rapidly. New products are frequently
introduced and existing products are continually enhanced. Competitors vary in
size and in the scope and breadth of the products and services that they offer.
Many of our current and potential competitors have greater financial, technical,
marketing and other resources than we have. 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. We may not be
able to compete successfully against current and future competitors.
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MAINFRAME COMPETITION. We currently face competition from a number of
sources, including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with CHANGE MAN and
COMPAREX such as Computer Associates, MERANT, IBM and smaller private
companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market or from
emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may materially adversely affect our
business and future quarterly and annual operating results due to price
reductions, reduced gross margins and reduction in market share. Established
companies may not only develop their own mainframe SCM solutions, but they may
also acquire or establish cooperative relationships with our current
competitors, including cooperative relationships between large, established
companies and smaller private companies. Because larger companies have
significant financial and organizational resources available, they may be able
to quickly penetrate the mainframe SCM market through acquisitions or strategic
relationships and may be able to leverage the technology and expertise of
smaller companies and develop successful SCM products for the mainframe. We
expect that the software industry, in general, and providers of SCM solutions,
in particular, will continue to consolidate. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third party
products, particularly those provided by IBM. Developers of these third party
products may change their products so that they will no longer be compatible
with our products. These third party developers may also decide to bundle their
products with other SCM products for promotional purposes. If that were to
happen, our business and future quarterly and annual operating results may be
materially adversely affected as we may be priced out of the market or no longer
be able to offer commercially viable products.
COMPETITION IN THE DISTRIBUTED SYSTEMS SCM MARKET. We also face significant
competition as we develop, market and sell our distributed systems products,
including ECHANGE MAN. If we are unable to successfully penetrate the
distributed systems SCM market, our business and future quarterly and annual
operating results will be materially adversely affected. Penetrating the
existing distributed systems SCM market will be difficult. Competitors in the
distributed systems market include Rational Software, Computer Associates,
Continuus, MERANT, Microsoft, Novadigm, Novell, and other smaller private
companies.
INTELLECTUAL PROPERTY
Our success will be heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Such laws, procedures and contracts provide only limited
protection. We submitted four patent applications for our technology in 1998 and
four more in 1999, and each of these applications is still pending. These
patents may never be issued. Even if these patents are issued, they may not
provide sufficiently broad protection or they may not prove enforceable in
actions against alleged infringors. Despite the precautions that we take, it may
be possible for unauthorized third parties to copy aspects of our current or
future products or to obtain and use information that we regard as proprietary.
In particular, we may provide our licensees with access to our data model and
other proprietary information underlying our licensed applications. Such means
of protecting our proprietary rights may not be adequate. Additionally, our
competitors may independently develop similar or superior technology. Policing
unauthorized use of software is difficult and some foreign laws do not protect
11
SERENA's proprietary rights to the same extent as United States laws. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of SERENA's resources and could materially adversely affect our
business, operating results, and financial condition.
Third parties may claim that our current or future products infringe their
proprietary rights. In September 1998, Compuware filed a lawsuit against SERENA
alleging copyright infringement, trade secret misappropriation and various tort
claims related to the sale of our STARTOOL and STARWARP products. See "Legal
Proceedings" and "Factors That May Affect Future Results--Third Parties in the
Future Could Assert That Our Products Infringe Their Intellectual Property
Rights, Which Could Adversely Affect Our Business; There Could Be Potential
Adverse Affects of the Pending Compuware Claim." We may receive additional
claims in the future and any such claims 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,
including the Compuware claim, with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Royalty or license agreements may
not be available on acceptable terms or at all. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the software industry segment grows and the
functionality of products in different industry segments overlaps. As a result
of these factors, infringement claims could materially adversely affect our
business, operating results and financial condition.
We license our STARTOOL and STARWARP products on an exclusive, worldwide
basis from A. Bruce Leland, one of our employees. Mr. Leland holds all
proprietary rights with respect to the STARTOOL and STARWARP technology,
including any derivative works or enhancements of the existing STARTOOL and
STARWARP products. Sales of STARTOOL accounted for 11% and 18% of SERENA's
software licensing revenue for fiscal 1999 and 2000, respectively. Licenses of
STARWARP accounted for 5% and 0% of SERENA's software licensing revenue for
fiscal 1999 and 2000, respectively. Our licenses to copy, market and distribute
STARTOOL and STARWARP are exclusive, worldwide and nontransferable. We pay
sublicense fees of approximately 32% on net revenue recognized from license and
maintenance agreements related to STARTOOL and STARWARP. SERENA's licenses for
these products are terminable by Mr. Leland upon 30 days notice in the event
certain conditions occur, including if we fail to pay sublicense fees on a
timely basis or otherwise materially breach the license agreement. SERENA owns
the trademarks for both STARTOOL and STARWARP.
We share ownership rights in our DETECT+RESOLVE MAINFRAME technology for
mainframe platforms with High Power Software, a developer of data protection
software for the mainframe. Sales of the DETECT+RESOLVE MAINFRAME product
accounted for 4% and 2% of SERENA's software license revenue in fiscal 1999 and
2000, respectively. High Power Software currently receives 30% and 45% of all
software license revenue and maintenance revenue, respectively, derived from
licenses of the DETECT+RESOLVE product for mainframe platforms. Although we have
primary responsibility for marketing, licensing and supporting DETECT+RESOLVE
MAINFRAME, High Power Software has the ability to jointly direct marketing,
sales and support efforts regarding the product. We own the DETECT+RESOLVE
technology for deployment on non-mainframe platforms and do not share this
ownership with High Power Software or any other third party.
If our licenses for our STARTOOL and STARWARP technologies terminated or our
relationship with High Power Software worsened with regard to the joint
direction of marketing, sales and support efforts for DETECT+RESOLVE MAINFRAME,
this could materially adversely affect our business and operating results. See
"Factors That May Affect Future Results--Certain of Our Products Are Licensed
From Third Parties or Are Jointly-Owned with Third Parties; Our Failure To
Maintain These Arrangements with Third Parties Could Adversely Affect Our
Business."
12
EMPLOYEES
As of January 31, 2000, SERENA had 244 full-time employees, 45 of whom were
engaged in research and development, 93 in sales and marketing, 65 in
consulting, education and customer and document support, and 41 in finance,
administration and operations. Our future performance depends in significant
part upon the continued service of our key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees could materially adversely affect our business, operating results and
financial condition. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future. None of our employees are represented by
a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, consulting, education,
customer support and research and development facilities are located at our
headquarters in Burlingame, California. SERENA currently occupies an aggregate
of approximately 30,000 square feet of office space in the Burlingame facility
under the terms of various leases, the first of which terminates, unless
renewed, in December 2001. Management believes its current facilities will be
adequate to meet SERENA's needs for at least the next twelve months. We believe
that suitable additional facilities will be available in the future as needed on
commercially reasonable terms.
SERENA also leases office space for sales and marketing in Sacramento,
California; Woodland Hills, California; Atlanta, Georgia; Dallas, Texas; Parker,
Colorado; and Freehold, New Jersey, and has subsidiaries in Canada, the United
Kingdom and Germany.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, Compuware filed suit against SERENA in the United States
District Court for the Eastern District of Michigan seeking unspecified
compensatory damages, costs and attorneys fees, and injunctive relief based on
allegations of copyright infringement, trade secret misappropriation and various
tort claims related to the sale of our STARTOOL and STARWARP products. Compuware
served the complaint on SERENA in November 1998. As of the date of this
statement, the parties have completed fact discovery. To date, Compuware has not
sought preliminary injunctive relief. However, management cannot ascertain the
availability of injunctive relief or other equitable remedies or estimate the
total expenses, possible damages or settlement value, if any, that may
ultimately be incurred in connection with Compuware's suit. Management believes,
based on the advice of counsel, that SERENA has meritorious defenses to the
allegations contained in Compuware's complaint and management is defending
against the complaint vigorously. We believe that this matter will not have a
material adverse effect on our results of operations or financial condition.
This litigation could be time consuming and costly, and there can be no
assurance that SERENA will necessarily prevail given the inherent uncertainties
in litigation. In the event that we do not prevail in litigation, we could be
prevented from selling our STARTOOL and STARWARP products or be required to
enter into royalty or licensing agreements or pay monetary damages, and/or pay
attorneys' fees. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to SERENA. In the event of a successful claim
against us, our business, operating results or financial condition could be
materially adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of January 31, 2000.
NAME AGE POSITION
- ---- -------- ------------------------------------------
Douglas D. Troxel......................... 55 Chairman of the Board and Chief Technology
Officer
Richard A. Doerr.......................... 57 President, Chief Executive Officer and
Director
Kevin C. Parker........................... 43 Vice President, Research and Development
Robert I. Pender, Jr...................... 42 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Anthony G. Stayner........................ 44 Vice President, Marketing
Vita A. Strimaitis........................ 40 Vice President, General Counsel and
Assistant Secretary
Mark E. Woodward.......................... 41 Vice President, Worldwide Operations
Alan H. Hunt(a)(b)........................ 57 Director
Jerry T. Ungerman(a)(b)................... 55 Director
- ------------------------
(a) Member of Audit Committee
(b) Member of Compensation Committee
DOUGLAS D. TROXEL is the founder of SERENA and has served as the Chairman of
SERENA's Board of Directors since April 1980 and SERENA's Chief Technology
Officer since April 1997. From June 1980 to April 1997, Mr. Troxel served as the
President and Chief Executive Officer of SERENA. Mr. Troxel holds a B.S. in
mathematics from Iowa State University.
RICHARD A. DOERR has served as SERENA's President, Chief Executive Officer
and as a member of SERENA's Board of Directors since April 1997. From
April 1995 until October 1996, Mr. Doerr was Vice President of Sales, Service
and Distribution for Wall Data Incorporated, a software connectivity company.
From October 1991 until October 1994, Mr. Doerr was Vice President, Worldwide
Operations for Oracle Corporation, a developer of relational database management
software. From August 1986 until October 1991, Mr. Doerr was Vice President,
Western Area and U.S. Healthcare Industry for Digital Equipment Corporation, a
developer of networking solutions for computer environments. Mr. Doerr holds a
B.S. from California Polytechnic State University.
KEVIN C. PARKER has served as SERENA's Vice President, Research and
Development since November 1998. From October 1997 until November 1998,
Mr. Parker served as SERENA's Director of Technology Development. From
November 1995 until April 1997, Mr. Parker was Director of Product Development
for Command Technology Corporation, a developer of mainframe-style programmer's
tools. From November 1989 until November 1995, Mr. Parker was Managing Director
of IT Independent Training Limited, a developer of software training products.
ROBERT I. PENDER, JR. has served as SERENA's Vice President, Finance and
Administration, Chief Financial Officer and Secretary since December 1997. From
December 1996 until August 1997, Mr. Pender was Vice President, Finance of
Mosaix, Inc., a customer interaction software company. From April 1993 until
December 1996, Mr. Pender served in a variety of positions, most recently as
Chief Financial Officer, with ViewStar Corporation, a client/server workflow
software company that was acquired by Mosaix, Inc. in December 1996. Mr. Pender
holds a B.A. in accounting from Baylor University and a M.S. in financial
planning and tax from Golden Gate University.
14
ANTHONY G. STAYNER has served as SERENA's Vice President, Marketing since
April 1999. From June 1998 until March 1999, Mr. Stayner served as SERENA's Vice
President, Services. From February 1996 until January 1998, Mr. Stayner was
Director of Product Marketing, Services Business Unit for Network
Associates, Inc., a network security and performance management company. From
November 1994 until February 1996, Mr. Stayner was the Principal for Stayner &
Associates, a marketing and management consulting services firm. From
March 1992 until November 1994, Mr. Stayner was the Vice President of Marketing
for Common Ground Software, a developer of software for the distribution of
electronic documents across multiple platforms. Mr. Stayner holds a B.A. in
economics and mathematics from the University of California, Davis, a J.D. from
the University of California, Berkeley and a M.B.A. from Stanford University.
VITA A. STRIMAITIS has served as SERENA's Vice President, General Counsel
and Assistant Secretary since July 1997. Ms. Strimaitis also served as SERENA's
Director of Licensing from September 1996 until July 1997. From April 1995 until
February 1996, Ms. Strimaitis was Vice President and General Counsel for
Financial Benefit Group, an annuity insurance company. From August 1994 until
April 1995, Ms. Strimaitis was a Senior Corporate Attorney for Uniforce Staffing
Services, a professional services resources company. From June 1986 until
January 1993, Ms. Strimaitis was Assistant General Counsel and Corporate
Secretary for Pioneer Financial Services, Inc., an insurance holding company.
Ms. Strimaitis holds a B.A. in political science and psychology from Loyola
University and a J.D. from Northern Illinois University College of Law.
MARK E. WOODWARD has served as SERENA's Vice President, Worldwide Operations
since February, 2000 and as Vice President, Sales from November 1998 to
February, 2000. From August 1997 until November 1998, Mr. Woodward was Senior
Vice President, Sales for Live Picture, Inc., a developer of Internet imaging
technology. From August 1995 until August 1997, Mr. Woodward was Vice President,
Sales for McAfee Associates, a network management firm. From March 1989 until
August 1995, Mr. Woodward was Vice President, Sales for Legent, Inc., a
developer of SCM products.
ALAN H. HUNT has served as a member of SERENA's Board of Directors since
February 1998. From October 1995 to January 1998, Mr. Hunt was the President and
Chief Executive Officer and a member of the Board of Directors of Peregrine
Systems, Inc., a provider of infrastructure management software solutions. From
July 1994 until November 1995, Mr. Hunt was President and Chief Executive
Officer and a member of the Board of Directors of XVT Software Inc., a
development tools software company. From March 1991 until May 1994, Mr. Hunt was
Senior Vice President of Sales and Marketing (North America) for BMC
Software, Inc., a vendor of software system utilities for IBM mainframe
computing environments. Mr. Hunt holds a B.S. in business administration and
industrial management from San Jose State College.
JERRY T. UNGERMAN has served as a member of SERENA's Board of Directors
since December 1998. Since October 1998, Mr. Ungerman has served as an Executive
Vice President of Check Point Software Technologies Ltd., a developer of
computer network security access software. From July 1971 to October 1998,
Mr. Ungerman was the Executive Vice President of Operations of Hitachi Data
Systems Corp., a provider of computer networking and data storage solutions for
computing environments. Mr. Ungerman holds a B.S.B. in Business from the
University of Minnesota.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "SRNA" since the Company's initial public offering in
February 1999. Prior to February 1999, there was no established public trading
market for the Company's Stock.
As of March 31, 2000, the Company had issued and outstanding 39,267,866
shares of its Common Stock held by 66 stockholders of record.
15
The following table sets forth the range of high and low closing sales
prices for each period indicated, adjusted for the three-for-two stock split
effective March 21, 2000.
HIGH LOW
-------- --------
Fiscal Year Ended January 31, 2001:
First quarter (through March 31, 2000)................ $39.208 $17.167
Fiscal Year Ended January 31, 2000:
Fourth quarter........................................ $22.667 $14.083
Third quarter......................................... $12.500 $ 5.500
Second quarter........................................ $ 9.083 $ 5.917
First quarter (from February 12, 1999)................ $11.333 $ 5.750
The market price of the Company's Common Stock could be subject to
significant fluctuations in the future based on a number of factors, including
any shortfall in the Company's revenues or net income from revenues or net
income expected by securities analysts; announcements of new products by the
Company or its competitors; quarterly fluctuations in the Company's financial
results or the results of other software companies, including those of direct
competitors of the Company; changes in analysts' estimates of the Company's
financial performance, the financial performance of competitors, or the
financial performance of software companies in general; general conditions in
the software industry; changes in prices for the Company's products or
competitors' products; changes in revenue growth rates for the Company or its
competitors; and conditions in the financial markets. In addition, the stock
market may from time to time experience extreme price and volume fluctuations,
which particularly affect the market price for the securities of many technology
companies and which have often been unrelated to the operating performance of
the specific companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to an Agreement and Plan of Reorganization dated June 4, 1999,
whereby SERENA acquired Diamond Optimum Systems, Inc., SERENA issued an
aggregate of 262,500 shares of Common Stock to the selling stockholders of
Diamond Optimum Systems, Inc. The sale of securities in both acquisition
transactions were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) thereof, transactions not involving a public
offering.
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. The
offering was underwritten by Chase H&Q LLC, SG Cowen Securities Corporation and
Soundview Technology Group Inc. In March 1999, an over-allotment option granted
by SERENA to the underwriters for the purchase of up to 1,350,000 additional
shares of SERENA Common Stock was exercised in full by the underwriters.
SERENA received aggregate gross proceeds of $63.7 million in connection with
its initial public offering. Of such amount, approximately $4.4 million was paid
to the underwriters in connection with underwriting discounts, and approximately
$1.2 million was paid by SERENA in connection with offering expenses, including
legal, accounting, printing, filing and other fees. There were no direct or
indirect
16
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical data presented below are derived from the
consolidated financial statements of SERENA Software, Inc. and its subsidiaries.
The financial statements as of and for each of the years in the three-year
period ended January 31, 2000 have been audited by KPMG LLP, independent
auditors. The selected consolidated financial data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of SERENA and notes thereto included
elsewhere in this report.
17
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue:
Software licenses.......................... $ 4,606 $ 8,229 $17,839 $ 27,199 $ 41,808
Maintenance................................ 5,679 8,730 12,258 16,960 26,818
Professional services...................... 459 495 2,050 4,157 6,781
------- ------- ------- -------- --------
Total revenue............................ 10,744 17,454 32,147 48,316 75,407
------- ------- ------- -------- --------
Cost of revenue
Software licenses.......................... 552 1,298 1,087 2,207 2,897
Maintenance................................ 2,434 3,503 4,009 4,524 6,070
Professional services...................... 344 406 1,717 3,532 5,455
------- ------- ------- -------- --------
Total cost of revenue.................... 3,330 5,207 6,813 10,263 14,422
------- ------- ------- -------- --------
Gross profit............................. 7,414 12,247 25,334 38,053 60,985
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing........................ 2,505 4,605 7,947 13,862 22,158
Research and development................... 2,998 4,321 5,518 4,465 6,848
General and administrative................. 1,727 2,296 3,296 3,932 6,116
Stock-based compensation................... -- -- 880 2,499 732
Amortization of intangible assets.......... -- -- -- 739 2,226
Acquired in-process research and
development.............................. -- -- -- -- 992
------- ------- ------- -------- --------
Total operating expenses................. 7,230 11,222 17,641 25,497 39,072
------- ------- ------- -------- --------
Operating income........................... 184 1,025 7,693 12,556 21,913
Interest and other income, net............. 160 115 321 929 4,569
------- ------- ------- -------- --------
Income before income taxes............... 344 1,140 8,014 13,485 26,482
Income taxes............................... 66 278 3,253 6,155 11,839
------- ------- ------- -------- --------
Net income............................... $ 278 $ 862 $ 4,761 $ 7,330 $ 14,643
======= ======= ======= ======== ========
Net income per share:
Basic.................................... $ 0.01 $ 0.04 $ 0.21 $ 0.29 $ 0.40
======= ======= ======= ======== ========
Diluted.................................. $ 0.01 $ 0.04 $ 0.21 $ 0.27 $ 0.38
======= ======= ======= ======== ========
Weighted average shares used in per share
calculations:
Basic.................................... 23,625 23,625 22,872 25,396 36,751
======= ======= ======= ======== ========
Diluted.................................. 23,625 23,625 22,908 27,032 38,819
======= ======= ======= ======== ========
AS OF JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,840 $ 4,031 $ 9,024 $ 21,469 $ 80,931
Working capital............................ 429 618 6,942 16,505 89,631
Total assets............................... 6,717 9,233 20,567 59,678 149,059
Total liabilities and deferred revenue..... 5,508 7,187 13,582 21,573 34,535
Total stockholders' equity................. 1,209 2,046 6,985 38,105 114,524
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF SERENA AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. SERENA'S ACTUAL RESULTS AND THE TIMING
OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS, OUR
ABILITY TO MANAGE OUR GROWTH AND THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT
FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", "BUSINESS", AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
SERENA Software is an industry-leading supplier of eBusiness infrastructure
change management solutions. SERENA was founded in 1980 and we introduced our
first SCM product, COMPAREX, in 1981. Since then, SERENA has developed a full
suite of FULL.CYCLE mainframe products, including our flagship product CHANGE
MAN, which was introduced in 1988. In June 1999, SERENA introduced ECHANGE MAN,
a distributed systems product providing an end-to-end solution to SCM across the
enterprise from the mainframe to the desktop to the Web. IT managers use our
products to track software changes during the software application design and
development process, manage separate programming teams that are concurrently
developing and enhancing applications, and oversee the deployment of the
software applications across both the mainframe and distributed systems
environments.
On June 14, 1999, we acquired Diamond Optimum Systems ("Diamond"), a
provider of enterprise SCM solutions for the Web, NT, and UNIX environments.
This acquisition accelerated the development and introduction of our distributed
systems product offerings and allowed us to provide SCM solutions across the
enterprise from the mainframe to UNIX/NT servers to the Web. The Diamond
acquisition was accounted for under the purchase method of accounting and the
results of operations of Diamond are included in SERENA's historical results
after the acquisition date.
SERENA has grown rapidly in recent years as total revenue has increased from
$10.7 million in fiscal 1996 to $75.4 million in fiscal 2000. The growth in
total revenue has been primarily attributable to increased demand for our
FULL.CYCLE mainframe products, and to a lesser extent in the most recent fiscal
year, the introduction of our distributed systems product, ECHANGE MAN, into the
marketplace. In general, demand is increasing as a result of greater awareness
of and need for automated third party SCM solutions. We derive our revenue from
software licenses, maintenance and professional services.
Currently, the majority of our software license revenue is derived from our
FULL.CYCLE mainframe products. Customers typically purchase the FULL.CYCLE
mainframe products under Million Instructions Per Second, or MIPS-based,
perpetual licenses. Mainframe software products and applications are usually
priced based on hardware computing capacity. MIPS is a capacity measurement used
by hardware manufacturers to rate computer size to determine the amount of
capacity for running applications and supporting users. The higher a hardware's
MIPS capacity, the more expensive a software license will be. Customers
increasing their MIPS capacity are required to purchase an additional software
license when upgrading the hardware. Software products are also typically priced
based on a perpetual license agreement, which entitles a customer to use the
product on an ongoing basis. Initial license transactions generally include one
year of software maintenance and support. Revenue from license agreements,
excluding maintenance revenue included with the license, is recognized upon
receipt and acceptance of a signed contract and delivery of the software,
provided the related fee is fixed, determinable and does not involve an extended
payment term, collectibility of the revenue is probable and the arrangement does
not
19
involve significant customization of the software. In fiscal 1998, 1999 and
2000, sales of CHANGE MAN, COMPAREX and STARTOOL together accounted for
approximately 94%, 87% and 94% of SERENA's software license revenue,
respectively. Any factors adversely affecting the pricing of, demand for or
market acceptance of our FULL.CYCLE mainframe or distributed systems products,
such as competition or technological change, could materially adversely affect
our business, operating results and financial condition. See "Factors That May
Affect Future Results--We Have Relied and Expect to Continue to Rely on Sales of
Our FULL.CYCLE Mainframe Products for Our Revenue" and "Our Business is
Dependent on the Continued Market for IBM and IBM-Compatible Mainframes."
We also provide ongoing maintenance, which includes technical support,
version upgrades and enhancements, for an annual fee of approximately 17% of the
current list price of the licensed product. We recognize maintenance revenue
over the term of the contracts, typically one year, on a straight-line basis.
Professional services revenue is derived from our SER(POWER)consulting and
educational services, including implementation and integration of licensed
software, specialized consulting services such as "best practices" design,
development and deployment of SCM solutions, and education courses for SERENA's
products. Our professional services are typically billed on a time and materials
basis and revenue is recognized as the related services are performed.
Historically, SERENA's revenue has primarily been attributable to sales in
North America. In fiscal 1998, 1999 and 2000, revenue attributable to sales in
North America accounted for approximately 85%, 84% and 85% of SERENA's total
revenue, respectively. Our plan is to expand our international operations
significantly, particularly in Europe, as we believe international markets
represent a significant growth opportunity. Consequently, we anticipate that
international revenue will increase as a percentage of total revenue in the
future. Our expansion of our international operations will be subject to a
variety of risks that could materially adversely affect our business, operating
results and financial condition. See "Factors That May Affect Future Results--We
Intend to Expand Our International Operations And May Encounter a Number of
Problems Doing So; There Are Also a Number of Factors Associated with
International Operations that Could Adversely Affect Our Business." In North
America, SERENA's revenue is generally denominated in United States dollars
while international sales are generally denominated in local currencies,
principally the British pound and German deutsche mark. As SERENA's
international sales and operations expand, we anticipate that our exposure to
foreign currency fluctuations will increase. See "Factors That May Affect Future
Results--Fluctuations in the Value of Foreign Currencies Could Result in
Currency Transaction Losses for SERENA."
Maintenance revenue and professional services revenue have lower gross
profit margins than software license revenue. In addition, we license the
technology for our STARTOOL and STARWARP products and jointly own the technology
for our DETECT+RESOLVE MAINFRAME product and consequently we have sublicense fee
obligations on the revenue we recognize in connection with license and
maintenance transactions involving these products. As a result, our license
revenue for our STARTOOL, STARWARP and DETECT+RESOLVE MAINFRAME products has a
lower gross profit margin than license revenue from other products. We expect
operating expenses to increase substantially in the future as we continue to
develop new and enhanced versions of our products, including our distributed
systems product suite, increase our sales and marketing activities, expand our
distribution channels, increase our professional services capabilities and
pursue strategic relationships and acquisitions. Any failure by SERENA to
significantly increase revenue as we implement these initiatives could
materially adversely affect our business, operating results and financial
condition. See "Factors That May Affect Future Results--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."
20
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the historical results of operations for
SERENA expressed as a percentage of total revenue and are not necessarily
indicative of the results for any future period. Historical results include the
results of Optima from September 25, 1998, and Diamond from June 14, 1999, the
acquisition dates.
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED
JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
Software licenses....................................... 55.5% 56.3% 55.4%
Maintenance............................................. 38.1% 35.1% 35.6%
Professional services................................... 6.4% 8.6% 9.0%
----- ----- -----
Total revenue......................................... 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenue:
Software licenses....................................... 3.4% 4.6% 3.8%
Maintenance............................................. 12.5% 9.3% 8.1%
Professional services................................... 5.3% 7.3% 7.2%
----- ----- -----
Total cost of revenue................................. 21.2% 21.2% 19.1%
----- ----- -----
Gross Profit.......................................... 78.8% 78.8% 80.9%
----- ----- -----
Operating expenses:
Sales and marketing..................................... 24.7% 28.7% 29.4%
Research and development................................ 17.2% 9.3% 9.1%
General and administrative.............................. 10.3% 8.1% 8.1%
Stock-based compensation................................ 2.7% 5.2% 1.0%
Amortization of intangible assets....................... -- 1.5% 2.9%
Acquired in-process research and development............ -- -- 1.3%
----- ----- -----
Total operating expenses.............................. 54.9% 52.8% 51.8%
----- ----- -----
Operating income............................................ 23.9% 26.0% 29.1%
Interest and other income, net.............................. 1.0% 1.9% 6.0%
----- ----- -----
Income before income taxes.............................. 24.9% 27.9% 35.1%
Income taxes................................................ 10.1% 12.7% 15.7%
----- ----- -----
Net income.............................................. 14.8% 15.2% 19.4%
===== ===== =====
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998, 1999 AND 2000
REVENUE
SERENA's total revenue was $32.1 million, $48.3 million and $75.4 million in
fiscal 1998, 1999 and 2000, respectively, representing a 50% increase from
fiscal 1998 to 1999 and 56% from fiscal 1999 to 2000.
SOFTWARE LICENSES. Software licenses revenue was $17.8 million,
$27.2 million and $41.8 million in fiscal 1998, 1999 and 2000, representing 56%,
56% and 55% of total revenue, respectively. Software licenses revenue increased
$9.4 million or 52% from fiscal 1998 to 1999 and $14.6 million or 54% from
fiscal 1999 to 2000. The dollar increases are generally attributed to increased
demand for new licenses of FULL.CYCLE mainframe products as a result of greater
customer awareness of and need for third party SCM solutions and, to a lesser
extent, an increase in sales force productivity and personnel, the introduction
of our distributed systems product, ECHANGE MAN in the second half of fiscal
2000, and
21
software license price increases. In particular, sales of our CHANGE MAN,
COMPAREX, AND STARTOOL products grew significantly. Combined, they accounted for
$16.7 million, $23.8 million and $39.1 million in fiscal 1998, 1999 and 2000,
representing 94%, 87% and 94% of total software licenses revenue, respectively.
The Company expects that its distributed systems revenues will increase, but
that CHANGE MAN, COMPAREX, and STARTOOL will continue to account for a
substantial portion of software license revenue in the future.
MAINTENANCE. Maintenance revenue was $12.3 million, $17.0 million and
$26.8 million in fiscal 1998, 1999 and 2000, representing 38%, 35% and 36% of
total revenue, respectively. Maintenance revenue increased $4.7 million or 38%
from fiscal 1998 to 1999 and $9.8 million or 58% from fiscal 1999 to 2000. The
dollar increases reflect both growth in software licenses revenue, 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 $2.1 million,
$4.2 million and $6.8 million in fiscal 1998, 1999 and 2000, representing 6%, 9%
and 9% of total revenue, respectively. Professional services revenue increased
$2.1 million or 103% from fiscal 1998 to 1999 and $2.6 million or 63% from
fiscal 1999 to 2000. The dollar increases are attributable to greater consulting
opportunities resulting from our larger installed customer base and our expanded
consulting service capabilities. The acquisition of Optima on September 25, 1998
contributed $1.6 million in additional professional services revenue in fiscal
1999, or 76% of the total $2.1 million increase in professional service revenue
in fiscal 1999 over 1998. The rate of growth was smaller in fiscal 2000 when
compared to fiscal 1999 predominantly due to certain of our customers putting
projects on hold in calendar 2000 in order to address their remediation, testing
and other activities associated with becoming Year 2000 compliant.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $6.8 million, $10.3 million
and $14.4 million in fiscal 1998, 1999 and 2000, representing 21%, 21% and 19%
of total revenue, respectively. Cost of revenue increased $3.5 million or 51%
from fiscal 1998 to 1999 and $4.1 million or 41% from fiscal 1999 to 2000. The
dollar increases are due primarily to increased expenses associated with
professional services revenue and maintenance revenue, including personnel
additions to support professional services and maintenance revenue growth, and
software sublicense fees. The decrease as a percentage of revenue in fiscal 2000
was a result of the growth in higher margin software licenses exceeding the
other categories of revenue.
SOFTWARE LICENSES. Cost of software licenses consists principally of
sublicense fees associated with our STARTOOL, STARWARP and DETECT+RESOLVE
MAINFRAME products. Cost of software licenses was $1.1 million, $2.2 million and
$2.9 million in fiscal 1998, 1999 and 2000, representing 6%, 8% and 7% of total
software licenses revenue, respectively. Cost of software licenses increased
$1.1 million or 103% from fiscal 1998 to 1999 and $0.7 million or 31% from
fiscal 1999 to 2000. The increase in cost of software licenses as a percentage
of total software licenses revenue in fiscal 1999 over 1998 is attributable to
the increase in royalty bearing software licenses. Royalty bearing software
licenses represented 15%, 19% and 21% of total software license revenue in
fiscal 1998, 1999 and 2000, respectively.
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, STARWARP AND
DETECT+RESOLVE MAINFRAME products. Cost of maintenance was $4.0 million,
$4.5 million and $6.1 million in fiscal 1998, 1999 and 2000, representing 33%,
27% and 23% of total maintenance revenue, respectively. Cost of maintenance
increased $0.5 million or 13% from fiscal 1998 to 1999 and $1.6 million or 34%
from fiscal 1999 to 2000. The dollar increases are predominately due to
increased expenses associated with our customer support organization including
personnel additions needed to support the maintenance revenue growth and, to a
lesser extent, increases in sublicense fees.
22
Sublicense fees are paid to owners of third party products for providing
maintenance enhancements and code fixes. Cost of maintenance as a percentage of
total maintenance revenue has decreased as the rate of increase in maintenance
revenue has been greater than the rate of increase in costs associated with our
customer support organization.
PROFESSIONAL SERVICES. Cost of professional services consists of salaries,
bonuses and other costs associated with supporting our professional services
organization. Cost of professional services was $1.7 million, $3.5 million and
$5.5 million in fiscal 1998, 1999 and 2000, representing 84%, 85% and 81% of
total professional services revenue, respectively. Cost of professional services
increased $1.8 million or 106% from fiscal 1998 to 1999 and $2.0 million or 54%
from fiscal 1999 to 2000. The dollar increases are predominately due to
increased expenses associated with our professional services organization
including personnel additions and other infrastructure costs needed to support
the professional services revenue growth. Prior to fiscal 2000 and as a
percentage of total services revenue, cost of professional services had been
increasing as we expanded our consulting organization. In fiscal 2000, however,
cost of professional services as a percentage of total services revenue
decreased from the prior year. Although costs of professional services increased
in absolute dollar terms, it decreased as a percentage of revenue due in part to
reducing the use of outside independent contractors and reallocating
professional services resources to other parts of our organization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and employee benefits as well as travel, entertainment and
marketing expenses. Sales and marketing expenses were $7.9 million,
$13.9 million and $22.2 million in fiscal 1998, 1999 and 2000, representing 25%,
29% and 29% of total revenue, respectively. Sales and marketing expenses
increased $6.0 million or 74% from fiscal 1998 to 1999 and $8.3 million or 60%
from fiscal 1999 to 2000. The dollar increases in each fiscal year and the
percentage of total revenue increase in fiscal 1999 over 1998 are due primarily
to the expansion of our direct sales and marketing organizations which began in
fiscal 1998, and to a lesser extent, the development of our international sales
and telesales efforts. Sales and marketing expenses as a percentage of total
revenue remained unchanged in fiscal 2000, when compared the prior year, as the
rate of increase in revenues offset the costs of our continued expansion of the
sales and marketing organizations. We expect sales and marketing expenses to
increase in absolute dollars as we continue to hire additional sales and
marketing personnel and market our distributed systems products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and employee benefits and costs attributable to research and
development activities. Research and development expenses were $5.5 million,
$4.5 million and $6.8 million in fiscal 1998, 1999 and 2000, representing 17%,
9% and 9% of total revenue, respectively. Research and development expenses
decreased $1.0 million or 19% from fiscal 1998 to 1999 and increased
$2.3 million or 53% from fiscal 1999 to 2000. The dollar decrease in fiscal 1999
from 1998 is attributable principally to the restructuring of compensation
arrangements with SERENA's founder and Chief Technology Officer. The dollar
increase in fiscal 2000 from 1999 was primarily due to increases in salaries,
bonuses, payroll taxes, employee benefits and other headcount related costs
which resulted from a 41% increase in headcount, primarily associated with the
Company's acquisition of Diamond in June 1999, and to a lesser extent, increases
in infrastructure costs also associated with the acquisition. Prior to fiscal
2000, the Company's development efforts were primarily focused in the mainframe
market and with the acquisition of Diamond, the Company's development efforts
have expanded to other platforms, including the Web, UNIX, NT and other
distributed system platforms. We expect research and development expenses to
increase both in absolute dollar terms and as a percentage of total revenue as
we continue to hire additional research and development personnel to develop our
distributed systems product suite and integrate our existing products using
SERNET.
23
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and benefits and certain non-allocable administrative costs,
including legal and accounting fees and bad debts. General and administrative
expenses were $3.3 million, $3.9 million and $6.1 million in fiscal 1998, 1999
and 2000, representing 10%, 8% and 8% of total revenue, respectively. General
and administrative expenses increased $0.6 million or 19% from fiscal 1998 to
1999 and $2.2 million or 55% from fiscal 1999 to 2000. The dollar increases in
each fiscal year are primarily due to salary, bonus, payroll tax and employee
benefit costs associated with the expansion of our administrative infrastructure
in order to support our increased sales, marketing, professional services and
maintenance activities, and to a lesser extent in fiscal 2000, costs associated
with being a public company. The decrease in general and administrative expenses
as a percentage of total revenue is principally attributable to SERENA's revenue
growth during this period. We expect general and administrative expenses to
increase in absolute dollar terms as we expand our infrastructure and our
operations.
STOCK-BASED COMPENSATION. In the fourth quarter of fiscal 1998, SERENA
recorded aggregate deferred stock-based compensation of $4.0 million in
connection with the issuance of restricted stock and grant of options to
purchase common stock in January 1998. An additional $0.7 million of deferred
stock-based compensation was recorded in fiscal 1999 for stock based awards
granted during this period. No deferred stock-based compensation was recorded in
fiscal 2000. Deferred stock-based compensation is generally being amortized over
the 36 to 48 month vesting periods of the related awards. This amortization is
being recorded in a manner consistent with FASB Interpretation No. 28. Of the
total deferred stock-based compensation, $0.9 million, $2.5 million and
$0.7 million was amortized in fiscal 1998, 1999 and 2000, respectively. We
expect to amortize an additional $0.2 million and $0.1 million in fiscal 2001
and 2002, respectively. See Note 7 of Notes to Consolidated Financial Statements
of SERENA.
AMORTIZATION OF INTANGIBLE ASSETS. In the third quarter of fiscal 1999,
SERENA recorded intangible assets of $21.7 million in connection with the
acquisition of Optima in September 1998. The intangible assets are being
amortized over periods of one year or less on $0.5 million and fifteen years on
the remaining $21.2 million. In the second quarter of fiscal 2000, the Company
recorded intangible assets of $4.0 million in connection with the acquisition of
Diamond in June 1999. Of the total intangible assets, $0.7 million and
$2.2 million was amortized in fiscal 1999 and 2000, respectively. We expect to
amortize an additional $2.1 million in each of the next two fiscal years, fiscal
2001 and 2002. Intangible assets will be fully amortized in fiscal 2014. See
Note 10 of Notes to Consolidated Financial Statements of SERENA.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
Company's acquisition of Diamond in June 1999, the Company took a one-time
charge of $1.0 million for acquired in-process research and development. See
Note 10 of Notes to Consolidated Financial Statements of SERENA.
INTEREST AND OTHER INCOME, NET
INTEREST AND OTHER INCOME, NET. Interest and other income, net was
$0.3 million, $0.9 million and $4.6 million in fiscal 1998, 1999 and 2000,
respectively. The dollar increases 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 fiscal 2000 over fiscal 1999 was
predominantly 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 were $3.3 million, $6.2 million and
$11.8 million in fiscal 1998, 1999 and 2000, representing effective income tax
rates of 41%, 46% and 45%, respectively. The Company's effective income tax rate
increased in fiscal 1999 over 1998 predominantly due to the $3.2 million in
nondeductible
24
charges recorded in fiscal 1999 which consisted of $2.5 million in stock-based
compensation and $0.7 million in amortization of intangible assets arising from
the Optima acquisition as compared to $0.9 million in nondeductible stock-based
compensation recorded in fiscal 1998. The Company's effective income tax rate
decreased slightly in fiscal 2000, when compared to fiscal 1999, as the rate of
growth in pretax profits was greater than the rate of growth in nondeductible
charges. In fiscal 2000, the Company recorded $3.9 million in nondeductible
charges consisting of $0.7 million in stock-based compensation, $2.2 million in
amortization of intangible assets arising from the Optima and Diamond
acquisitions and $1.0 million as a one-time charge for acquired in-process
research and development also arising from the Diamond acquisition in the second
quarter of fiscal 2000. 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 expenditure requirements through cash flows from operations. As of
January 31, 2000, SERENA had $80.9 million in cash and cash equivalents, and an
additional $20.2 million and $3.0 million in short-term and long-term
investments, respectively, consisting principally of high grade commercial
paper, certificates of deposit and short-term bonds. Cash flows provided by
operating activities were $5.7 million, $14.9 million, and $26.0 million in
fiscal 1998, 1999 and 2000, respectively. SERENA's cash flows provided by
operating activities exceeded net income during each of these periods
principally due to cash collections in advance of revenue recognition for
maintenance contracts, the inclusion of non-cash expenses in net income and
growth in accrued expenses and corporate taxes payable; all partially offset by
growth in accounts receivable and net deferred tax assets during the periods.
Non-cash expenses included in net income consisted of amortization of deferred
stock-based compensation for all periods, amortization of intangible assets in
fiscal 1999 and 2000 only, and a one-time charge in fiscal 2000 for acquired
in-process research and development. In fiscal 2000, cash used in investing
activities were predominantly related to the purchase of short and long-term
investments totaling $23.3 million, and cash paid in connection with the Diamond
acquisition in June 1999, net of cash received totaling $1.5 million.
Predominantly in fiscal 1998 and 1999, and to a lesser extent in fiscal 2000,
cash used in investing activities were related to the purchase of computer
equipment and office furniture and equipment totaling $0.6 million,
$1.1 million and $1.5 million, respectively. Cash used in financing activities
related to the repurchase of $0.7 million in common stock in fiscal 1998 from a
resigning executive officer of SERENA and the repayment of $1.4 million of notes
payable assumed in the acquisition of Optima in fiscal 1999. See "Item 13.
Certain Relationships and Related Transactions." There was no cash provided by
financing activities in fiscal 1998 or 1999. Cash provided by financing
activities in fiscal 2000 predominantly related to the Company's initial public
offering in February 1999, the sale of the Company's common stock under the
employee stock purchase plan and the exercise of stock options under the
Company's employee stock option plan; all of which generated cash totaling
$57.9 million (net of IPO costs), $0.9 million and $0.4 million, respectively.
At January 31, 2000, SERENA did not have any material commitments for
capital expenditures and has no revolving credit agreement or other term loan
agreements with any bank or other financial institution.
At January 31, 2000, SERENA had working capital of $89.6 million and
accounts receivable, net of allowances, of $15.4 million. Total deferred revenue
increased to $19.0 million at January 31, 2000 from $12.4 million at
January 31, 1999 primarily as a result of increased billings of maintenance
fees.
We believe that the net proceeds from the offering and cash from operations
will satisfy our working capital and capital expenditure requirements for at
least the next twelve months.
25
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards
No. 133, or SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 addresses the accounting for derivative instruments,
including derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in the fair value (i.e.
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. The Company does not have any derivative financial
instruments. Therefore, the Company does not believe that SFAS No. 133 will have
a material impact on its financial statements.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such Year 2000 requirements.
In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of such software products or the
ability of such products to correctly create, store, process and output
information of data involving dates. We have not observed any material Year 2000
related problems with our business or products to date.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR ANTICIPATED RESULTS, INCLUDING BUT NOT LIMITED TO, OUR RELIANCE ON
OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR
ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE
ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND
INTERNATIONAL ORGANIZATIONS, OUR ABILITY TO MANAGE OUR GROWTH AND THE FOLLOWING:
THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied greatly in the past and may vary
greatly in the future depending upon a number of factors described below and
elsewhere in this "Factors That May Affect Future Results" section of this
report, including many that are beyond our control. As a result, we believe that
quarter-to-quarter comparisons of our financial results are not necessarily
meaningful, and you should not rely on them as an indication of our future
performance.
Our software license revenue in any quarter depends on orders booked and
shipped in the last month, weeks or days of that quarter. At the end of each
quarter, we typically have either minimal or no backlog of orders for the
subsequent quarter. If a large number of orders or several large orders do not
occur or are deferred, our revenue in that quarter could be substantially
reduced. This would materially adversely affect our operating results and could
impair our business in future periods. Because we do not know when, or if, our
potential customers will place orders and finalize contracts, we cannot
accurately predict our revenue and operating results for future quarters.
Historically, a majority of our revenue has been attributable to the
licenses of our FULL.CYCLE 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
26
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, particularly in Europe. To the extent that
our revenue in Europe or other parts of the world increase in future periods, we
expect our period-to-period revenues to reflect any seasonal buying patterns in
these markets.
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 SCM products
- Broaden our professional services offerings and delivery capabilities
- Expand our distribution channels
- Pursue strategic relationships and acquisitions
With these additional expenses, in order to maintain our current levels of
profitability, we will be required to increase our revenue correspondingly. Any
failure to significantly increase our revenue as we implement our product,
service and distribution strategies would materially adversely affect our
business, quarterly and annual operating results and financial condition.
Although our revenue has grown in recent years, we do not believe that we will
maintain this rate of revenue growth. In addition, we may not experience any
revenue growth in the future, and our revenue could in fact decline. Our efforts
to expand our software product suites, sales and marketing activities, direct
and indirect distribution channels and professional service offerings and to
pursue strategic relationships or acquisitions may not succeed or may prove more
expensive than we currently anticipate. As a result, we cannot predict our
future operating results with any degree of certainty.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL SERENA
SCM PRODUCTS; OUR FUTURE PROFESSIONAL SERVICE AND MAINTENANCE REVENUE IS
DEPENDENT ON FUTURE SALES OF OUR SOFTWARE PRODUCTS
We depend on our installed customer base for future revenues from
maintenance renewal fees and licenses of additional SCM products. If our
customers do not purchase additional products or cancel or fail to renew their
maintenance agreements, this could materially adversely affect our business and
future
27
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 FULL.CYCLE
MAINFRAME PRODUCTS FOR OUR REVENUE
Historically, the majority of our software license revenue has resulted from
the sale of our FULL.CYCLE mainframe products. Any factors adversely affecting
the pricing of, demand for or market acceptance of our FULL.CYCLE 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 FULL.CYCLE mainframe products,
have been responsible for a substantial majority of our revenue. In fiscal 1998,
1999 and 2000, sales of CHANGE MAN and COMPAREX together accounted for
approximately 82%, 77% and 75% of our software license revenue, respectively. We
expect that these products will continue to account for a large portion of our
software license revenue for the foreseeable future. Our future operating
results depend on the continued market acceptance of our FULL.CYCLE mainframe
products, including future enhancements.
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR DISTRIBUTED SYSTEMS MAY NOT BE
SUCCESSFUL
We introduced our ECHANGE MAN product in fiscal 2000 and are currently
developing our product suite to support distributed systems platforms. If we do
not successfully develop, market, sell and support our distributed systems
products, this would materially adversely affect our business and our future
quarterly and annual operating results. Historically, the majority of our
products have been designed for the mainframe platform, and the majority of our
software license revenue, maintenance revenue and professional services revenue
to date have been attributable to licenses for these mainframe products. We do
not have experience developing, marketing, selling or supporting distributed
systems products. Developing, marketing and selling our distributed systems
products will require significant resources that we may not have. Our sales and
marketing organizations have historically focused exclusively on sales of our
products for the mainframe and have limited experience marketing and selling
distributed systems products. Additionally, we do not have any experience in
providing support services for distributed systems products. Competition for
experienced software engineers, sales personnel and support staff is intense and
if we fail to attract qualified personnel this would impair our ability to
support our distributed systems products. Many of our competitors have
substantially greater experience providing distributed systems compatible
software products than we do, and many also have significantly greater financial
and organizational resources.
IF THE SCM MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED
If we fail to properly assess and address the SCM market or if our products
and services fail to achieve market acceptance for any reason, our business and
quarterly and annual operating results would be materially adversely affected.
The SCM market is in an early stage of development. IT organizations have
traditionally addressed SCM needs internally and have only recently become aware
of the benefits of third-party SCM solutions as their SCM requirements have
become more complex. Since the market for our products is still evolving, it is
difficult to assess the competitive environment or the size of the market that
may develop. Our future financial performance will depend in large part on the
continued growth in the
28
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 FULL.CYCLE mainframe products. We
expect that, for the foreseeable future, the majority of our software license
revenue will continue to come from sales of our mainframe products. As a result,
future sales of our existing products and associated maintenance revenue and
professional service revenue will depend on continued use of mainframes.
WE MAY EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCTS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business and future quarterly and annual operating results.
We have experienced product development delays in new version and update
releases in the past and may experience similar or more significant product
delays in the future. To date, none of these delays has materially affected our
business. Difficulties in product development could delay or prevent the
successful introduction or marketing of new or improved products or the delivery
of new versions of our products to our customers. In particular, we may
experience delays in introducing our distributed systems product suite. Any
delay in releasing our new distributed systems products, for whatever reason,
would impair our revenue growth.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR BUSINESS
Our ability to compete effectively and to manage our recent growth, any
future growth and our future quarterly and annual operating results will depend
in part on our ability to implement and expand operational, customer support and
financial control systems and to hire, train and manage our employees. We may
not be able to augment or improve existing systems and controls or implement new
systems and controls in response to future growth, if any. Any failure to manage
growth could materially adversely affect our business. Our business has grown
substantially in recent years, with total revenue increasing from $32.1 million
in fiscal 1998 to $48.3 million in fiscal 1999 and $75.4 million in fiscal 2000.
In connection with this revenue growth, beginning in fiscal 1998 and continuing
in fiscal 1999 and 2000, we began a strategic expansion of our sales, marketing
and professional service activities. This expansion included our September 1998
acquisition of Optima which significantly increased the size of our sales,
marketing and professional service organizations and our June 1999 acquisition
of Diamond which expanded our research and development organization. This growth
has resulted, and any future growth will result, in new and increased
responsibilities for management personnel.
29
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND SUCH OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH SERENA IN THE FUTURE
Our success will depend to a significant extent on the continued service of
our senior executives and certain other key employees, including certain sales,
consulting, technical and marketing personnel. If we lost the services of one or
more of our executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or otherwise compete
directly or indirectly with SERENA, this could materially adversely affect our
business. In particular, we have historically relied on the experience and
dedication of our product authors. With the exception of Douglas D. Troxel,
SERENA's founder, Chief Technology Officer and Chairman of SERENA's Board of
Directors, the employment of all of our senior and key employees, including key
product authors, is at will. Mr. Troxel's employment is on a year-to-year basis.
In addition, we do not maintain key man life insurance on our employees and have
no plans to do so.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND MAY ENCOUNTER A NUMBER OF
PROBLEMS IN DOING SO; THERE ARE ALSO A NUMBER OF FACTORS ASSOCIATED WITH
INTERNATIONAL OPERATIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS
EXPANSION OF INTERNATIONAL OPERATIONS. We intend to expand the scope of our
international operations and currently have subsidiaries in the United Kingdom
and in Germany. 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. 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 15%, 16% and 15% of our total revenue in fiscal 1998, 1999 and
2000, respectively. 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
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.
30
dollar have caused and will continue to cause variability in our international
business profitability. We cannot predict the effect of exchange rate
fluctuations upon future quarterly and annual operating results. We may
experience currency losses in the future. To date, we have not adopted a hedging
program to protect SERENA from risks associated with foreign currency
fluctuations.
SERENA IS SUBJECT TO INTENSE COMPETITION IN THE SCM INDUSTRY AND WE EXPECT TO
FACE INCREASED COMPETITION IN THE FUTURE, INCLUDING COMPETITION IN THE SCM
DISTRIBUTED SYSTEMS MARKET
We may not be able to compete successfully against current and/or future
competitors and such inability would materially adversely affect our business,
quarterly and annual operating results and financial condition. The market for
our products is highly competitive and diverse. Moreover, the technology for SCM
products may change rapidly. New products are frequently introduced, and
existing products are continually enhanced. Competition may also result in
changes in pricing policies by SERENA or our competitors which could materially
adversely affect our business and future quarterly and annual operating results.
Competitors vary in size and in the scope and breadth of the products and
services that they offer. Many of our current and potential competitors have
greater financial, technical, marketing and other resources than we do. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements. They may also be able to devote greater
resources to the development, promotion and sale of their products than we can.
MAINFRAME COMPETITION. We currently face competition from a number of
sources, including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with CHANGE MAN and
COMPAREX such as Computer Associates, MERANT, IBM and smaller private
companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market or from
emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may materially adversely affect our
business and future quarterly and annual operating results due to price
reductions, reduced gross margins and reduction in market share. Established
companies may not only develop their own mainframe SCM solutions, but they may
also acquire or establish cooperative relationships with our current
competitors, including cooperative relationships between large, established
companies and smaller private companies. Because larger companies have
significant financial and organizational resources available, they may be able
to quickly penetrate the mainframe SCM market through acquisitions or strategic
relationships and may be able to leverage the technology and expertise of
smaller companies and develop successful SCM products for the mainframe. We
expect that the software industry, in general, and providers of SCM solutions,
in particular, will continue to consolidate. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third party
products, particularly those provided by IBM. Developers of these third party
products may change their products so that they will no longer be compatible
with our products. These third party developers may also decide to bundle their
products with other SCM products for promotional purposes. If that were to
happen, our business and future quarterly and annual operating results may be
materially adversely affected as we may be priced out of the market or no longer
be able to offer commercially viable products.
COMPETITION IN THE DISTRIBUTED SYSTEMS SCM MARKET. We also face significant
competition as we develop, market and sell our distributed systems products,
including ECHANGE MAN. If we are unable to
31
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, Novadigm, Novell,
and other smaller private companies.
CERTAIN OF OUR PRODUCTS ARE LICENSED FROM THIRD PARTIES OR ARE JOINTLY-OWNED
WITH THIRD PARTIES; OUR FAILURE TO MAINTAIN THESE ARRANGEMENTS WITH THIRD
PARTIES COULD ADVERSELY AFFECT OUR BUSINESS
STARTOOL AND STARWARP. We license our STARTOOL and STARWARP products on an
exclusive worldwide basis from A. Bruce Leland, one of our employees. The
termination of our licenses for the STARTOOL or STARWARP products could
materially adversely affect our business and quarterly and annual operating
results. Mr. Leland holds all proprietary rights with respect to the STARTOOL
and STARWARP technology, including any derivative works or enhancements of the
existing STARTOOL and STARWARP products. Our licenses for these products are
terminable by Mr. Leland upon 30 days notice in the event certain conditions
occur, including our failure to pay sublicense fees to Mr. Leland on a timely
basis or any other material breach by us of the license agreement. Should the
licenses for the STARTOOL and STARWARP products terminate, we may not be able to
replace these products which could materially adversely affect our business and
future quarterly and annual operating results. Licenses of STARTOOL accounted
for 12%, 11% and 18% of our total software license revenue in fiscal 1998, 1999
and 2000, respectively. Licenses of STARWARP accounted for 0%, 5% and 0% of our
total software license revenue in fiscal 1998, 1999 and 2000, respectively. For
a description of our license agreements for the STARTOOL and STARWARP products,
see "Business--Intellectual Property."
DETECT+RESOLVE MAINFRAME. We share ownership rights in our DETECT+RESOLVE
MAINFRAME technology for mainframe platforms with High Power Software. Although
we have historically had primary responsibility for marketing, licensing and
supporting DETECT+RESOLVE MAINFRAME, High Power Software has the ability to
jointly direct these efforts. If in the future we are unable to reach agreement
with High Power Software on the direction or evolution of the product, our
ability to market or promote the product may be compromised. This could have a
material adverse effect on our business and future quarterly and annual
operating results. Sales of DETECT+RESOLVE MAINFRAME accounted for 3%, 4% and 2%
of our total software license revenue in fiscal 1998, 1999 and 2000,
respectively. For a description of rights associated with our joint ownership of
the DETECT+RESOLVE MAINFRAME technology for the mainframe see
"Business--Intellectual Property."
THIRD PARTIES IN THE FUTURE COULD ASSERT THAT OUR PRODUCTS INFRINGE THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS; THERE
COULD BE POTENTIAL ADVERSE EFFECTS OF THE PENDING COMPUWARE CLAIM
Third parties may claim that our current or future products infringe their
proprietary rights. Any claims of this type could affect our relationships with
existing customers and may prevent future customers from licensing our products.
Because we are dependent upon a limited number of products, any such claims,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Royalty or license agreements may not be available on acceptable
terms or at all. We expect that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
software industry segment grows and the functionality of products in different
industry segments overlaps. As a result of these factors, infringement claims
could materially adversely affect our business.
In September 1998, Compuware filed suit against SERENA in the United States
District Court for the Eastern District of Michigan seeking unspecified
compensatory damages, costs and attorneys fees, and injunctive relief based on
allegations of copyright infringement, trade secret misappropriation and various
tort claims related to the sale of our STARTOOL and STARWARP products. Compuware
served the complaint on
32
SERENA in November 1998. As of the date of this statement, the parties have
completed fact discovery. To date, Compuware has not sought preliminary
injunctive relief. However, management cannot ascertain the availability of
injunctive relief or other equitable remedies or estimate the total expenses,
possible damages or settlement value, if any, that may ultimately be incurred in
connection with Compuware's suit. Management believes, based on the advice of
counsel, that SERENA has meritorious defenses to the allegations contained in
Compuware's complaint and management is defending against the complaint
vigorously. We believe that this matter will not have a material adverse effect
on our results of operations or financial condition. This litigation could be
time consuming and costly, and there can be no assurance that SERENA will
necessarily prevail given the inherent uncertainties in litigation. In the event
that we do not prevail in litigation, we could be prevented from selling our
STARTOOL and STARWARP products or be required to enter into royalty or licensing
agreements or pay monetary damages, and/or pay attorneys' fees. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
SERENA. In the event of a successful claim against us, our business, operating
results or financial condition could be materially adversely affected.
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 which, excluding our ECHANGE MAN product, is currently in
development. 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, particularly the Ukraine. Limitations
imposed by federal immigration laws and the availability of visas could
materially adversely affect our ability to attract necessary qualified
personnel. This may have a material adverse effect on our business and future
quarterly and annual operating results.
33
WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO EXPAND OUR BUSINESS
AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS GOAL
If we fail to significantly expand our direct sales and telesales force, our
ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired. Failure to expand our
distribution channels through any of these means could materially adversely
affect our business and our future quarterly and annual operating results. In
addition, our ability to achieve revenue growth in future periods will be
heavily dependent on our success in recruiting and training sufficient direct
sales personnel. We are planning to significantly expand our direct sales
efforts in North America and Europe and while we are investing, and plan to
continue to invest, substantial resources on this expansion, we have at times
experienced, and expect to continue to experience, difficulty in recruiting and
retaining qualified direct sales personnel. In addition to expanding our direct
sales efforts, we are also currently investing, and we intend to continue to
invest, substantial resources in selling our products through telesales
personnel. We also intend to extend our distribution channels by partnering with
leading helpdesk management, software distribution application and system
framework providers and may also attempt to develop additional sales and
marketing channels through system integrators, original equipment manufacturers
and other partners.
WE WILL NEED TO EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION IN ORDER TO EXPAND
OUR BUSINESS AND A NUMBER OF FACTORS MAY HINDER OUR ABILITY TO ACCOMPLISH THIS
GOAL
Our existing professional services and customer support organizations may
not be sufficient to manage any 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. 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
34
to make the necessary investments. Any of these events could have a material
adverse effect on our business, quarterly and annual operating results and
financial condition.
ERRORS IN OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO
SPECIFICATIONS COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS FROM US OR
ASSERTING CLAIMS FOR DAMAGES AGAINST US
Because our software products are complex, they often contain errors or
"bugs" that can be detected at any point in a product's life cycle. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software, we
expect that errors in our products will continue to be found in the future.
Although many of these errors may prove to be immaterial, certain of these
errors could be significant. Detection of any significant errors may result in,
among other things, loss of, or delay in, market acceptance and sales of our
products, diversion of development resources, injury to our reputation, or
increased service and warranty costs. These problems could materially adversely
affect our business and future quarterly and annual operating results. In the
past we have discovered errors in certain of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new version and product
update releases. To date none of these delays have materially affected our
business. However, product errors or delays in the future, including any product
errors or delays associated with the introduction of our distributed systems
products, could be material. In addition, in certain cases we have warranted
that our products will operate in accordance with specified customer
requirements. If our products fail to conform to such specifications, customers
could demand a refund for the software license fee paid to us or assert claims
for damages.
PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD ADVERSELY
AFFECT OUR BUSINESS
We may be subject to claims for damages related to product errors in the
future. A material product liability claim could materially adversely affect our
business. Our license agreements with our customers typically contain provisions
designed to limit exposure to potential product liability claims. SERENA's
standard software licenses provide that if our products fail to perform, we will
correct or replace such products. If these corrective measures fail, we may be
required to refund the license fee for such non-performing product. However, our
standard license agreement limits our liability for non-performing products to
the amount of license fee paid, if the license has been in effect for less than
one year, or to the amount of the licensee's current annual maintenance fee, if
the license is more than one year old. Our standard license also provides that
SERENA shall not be liable for indirect or consequential damages caused by the
failure of our products. Such limitation of liability provisions may, however,
not be effective under the laws of certain jurisdictions to the extent local
laws treat certain 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 7A. 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, accounts payable, and long-term obligations.
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 January 31, 2000. The Company's exposure to market risk
for changes in interest rates relates primarily to its short and long-term
investments and short-term obligations, thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities.
Sales to foreign countries accounted for approximately 15% of the total
sales for fiscal 2000 compared to 16% and 15% in fiscal 1999 and 1998,
respectively. Because the Company invoices certain of its foreign
35
sales in currencies other than the United States dollar, predominantly the
British Pound Sterling and German deutsche mark, and does not hedge these
transactions, fluctuations in exchange rates could adversely affect the
translated results of operations of the Company's foreign subsidiaries.
Therefore, foreign exchange fluctuation could create a risk of significant
balance sheet gains or losses on the Company's consolidated financial
statements. However, given the Company's foreign subsidiaries' net book values
as of January 31, 2000 and net cash flows for the most recent fiscal year then
ended, the Company believes that such foreign denominated balances and activity
are not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Our financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.(a)1 for a listing of financial
statements provided in the section titled, "FINANCIAL STATEMENTS".
SUPPLEMENTARY DATA
THE FOLLOWING TABLES (PRESENTED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SET
FORTH QUARTERLY SUPPLEMENTARY DATA FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD
ENDED JANUARY 31, 2000. ALL SHARE AND PER SHARE AMOUNTS REFERRED TO IN THE TABLE
BELOW HAVE BEEN ADJUSTED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT IN THE FORM OF
A STOCK DIVIDEND OF OUR COMMON STOCK EFFECTED MARCH 21, 2000.
2000
----------------------------------------------------------
QUARTER ENDED
--------------------------------------------- YEAR ENDED
APR. 30, JUL. 31, OCT. 31, JAN. 31, JAN. 31,
--------- --------- --------- --------- ----------
Revenue....................................... $14,221 $17,762 $19,051 $24,373 $75,407
Gross Profit.................................. 10,640 13,984 15,546 20,815 60,985
Income before income taxes.................... 3,928 4,814 7,188 10,552 26,482
Net income.................................... 2,194 2,380 4,059 6,010 14,643
Net income per share:
Basic....................................... 0.06 0.07 0.11 0.16 0.40
Diluted..................................... 0.06 0.06 0.11 0.15 0.38
Weighted average shares used in per share
calculations:
Basic....................................... 35,204 36,899 37,301 37,602 36,751
Diluted..................................... 37,337 38,892 39,387 39,660 38,819
1999
----------------------------------------------------------
QUARTER ENDED
--------------------------------------------- YEAR ENDED
APR. 30, JUL. 31, OCT. 31, JAN. 31, JAN. 31,
--------- --------- --------- --------- ----------
Revenue....................................... $ 8,640 $10,275 $12,230 $17,171 $48,316
Gross Profit.................................. 6,900 8,200 9,538 13,415 38,053
Income before income taxes.................... 1,960 2,453 3,577 5,495 13,485
Net income.................................... 1,098 1,373 1,923 2,936 7,330
Net income per share:
Basic....................................... 0.05 0.06 0.08 0.10 0.29
Diluted..................................... 0.05 0.06 0.07 0.09 0.27
Weighted average shares used in per share
calculations:
Basic....................................... 23,348 23,570 25,737 28,929 25,396
Diluted..................................... 24,378 24,705 27,966 31,098 27,032
36
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The information required by this Item is incorporated by reference to the
information under the section captioned "Change in Independent Auditors"
contained in the Proxy Statement.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the 2000 Annual Meeting of
Stockholders scheduled to be held on June 30, 2000, which will be filed by the
Company with the Securities and Exchange Commission within 120 days of the end
of the Company's fiscal year pursuant to General Instruction G(3) of Form 10-K
(the "Proxy Statement"). The information required by this Item concerning
compliance with Section 16(a) of the Securities and Exchange Act of 1934 is
incorporated by reference from the section of the Proxy Statement captioned
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the section captioned "Executive Compensation" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information under the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the sections captioned "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" contained in the Proxy
Statement.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following statements are filed as part of this Report:
PAGE
--------
SERENA SOFTWARE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................. F-2
Consolidated Balance Sheets.............................. F-3
Consolidated Statements of Income and Comprehensive
Income................................................. F-4
Consolidated Statements of Stockholders' Equity.......... F-5
Consolidated Statements of Cash Flows.................... F-6
Notes to Consolidated Financial Statements............... F-7
2. FINANCIAL STATEMENT SCHEDULES
Report on Financial Statement Schedule................... S-1
Valuation and Qualifying Accounts........................ S-2
3. EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- ------------------------------------------------------------
3.1 (b) Amended and Restated Certificate of Incorporation of SERENA
3.2 (b) Bylaws of SERENA, as currently in effect
4.1 (b) Specimen Common Stock Certificate
4.2 (b) Registration Rights Agreement, dated September 25, 1998, by
and among SERENA and certain shareholders of Optima Software
Inc. (related to SERENA's acquisition of Optima Software,
Inc.)
10.1 (b) Form of Indemnification Agreement between SERENA and each of
its directors and officers
10.2A (b) Amended and Restated 1997 Stock Option Plan
10.2B (b) Form of Option Agreement under the Amended and Restated 1997
Stock Option Plan
10.2C (b) Form of Restricted Stock Purchase Agreement under the
Amended and Restated 1997 Stock Option Plan
10.3A (b) 1999 Employee Stock Purchase Plan
10.3B (b) Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan
10.4A (b) 1999 Director Plan
10.4B (b) Form of Option Agreement under 1999 Director Plan
10.5 (b) Employment Agreement, dated April 18, 1997 between SERENA
and Richard A. Doerr
10.6 (b) Employment Agreement, dated June 24, 1980, between SERENA
and Douglas D. Troxel
10.7 (b) Employment and Software Distribution Agreement, dated
October 28, 1993, between SERENA and A. Bruce Leland
(relating to license of proprietary technology)
10.8 (b) Employment Agreement, dated May 18, 1993, between SERENA and
Steven Smith (relating to license of proprietary technology)
10.9 (b) Software Agreement, dated July 1, 1991, by and between
SERENA and High Power Software, Inc. (relating to joint
ownership of technology)
10.10A(b) Lease Agreement, dated August 15, 1994, between SERENA and
Waterfront Towers Partners, L.P. (for Burlingame
headquarters)
38
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- ------------------------------------------------------------
10.10B(b) Addendum to Lease Agreement (for Burlingame headquarters
facility), dated November 21, 1994
10.10C(b) Second Addendum to Lease Agreement (for Burlingame
headquarters) dated November 15, 1994
10.10D(b) Amendment No. 1 to Lease Agreement (for Burlingame
headquarters facility) dated May 21, 1996
10.10E(b) Amendment No. 2 to Lease Agreement (for Burlingame
headquarters facility) dated August 24, 1996
10.10F(b) Amendment No. 3 to Lease Agreement (for Burlingame
headquarters facility) dated June 3, 1997
10.10G(b) Amendment No. 4 to Lease Agreement (for Burlingame
headquarters facility) dated June 9, 1998
10.11 (b) Lease Agreement between SERENA and Waterfront Tower
Partners, L.P. dated May 18, 1998 (for additional space at
Burlingame headquarters facility)
10.12 (b) Form of Restricted Stock Purchase Agreement entered into
between SERENA and certain of its executive officers
10.13 (b) Secured Promissory Note and Security Agreement between
SERENA and Douglas D. Troxel dated July 22, 1998
21.1 (a) List of Subsidiaries
23.1 (a) Consent of KPMG LLP
27.1 (a) Financial Data Schedule
- ------------------------
(a) Filed herewith.
(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration No.
333-67761), which the Securities and Exchange Commission declared effective
on February 11, 1999.
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized in the City of Burlingame,
State of California, this 27th day of April, 2000.
SERENA SOFTWARE, INC.
BY: /S/ RICHARD A. DOERR
-----------------------------------------
Richard A. Doerr
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
POWER OF ATTORNEY
NOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard A. Doerr and Robert I. Pender, Jr.
and each of them acting individually, as his or here attorney-in-fact, each with
the full power of substitution, for him or her in any and all capacities, to
sign any and all amendments to this Report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed on behalf of the Registrant by the
following persons and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD A. DOERR President, Chief Executive
------------------------------------------- Officer and Director April 27, 2000
(Richard A. Doerr)
Vice President, Finance and
/s/ ROBERT I. PENDER, JR. Administration, Chief
------------------------------------------- Financial Officer (Principal April 27, 2000
(Robert I. Pender, Jr.) Financial and Accounting
Officer) and Secretary
/s/ DOUGLAS D. TROXEL Chairman of the Board of
------------------------------------------- Directors and Chief April 27, 2000
(Douglas D. Troxel) Technology Officer
/s/ ALAN H. HUNT Director
------------------------------------------- April 27, 2000
(Alan H. Hunt)
/s/ JERRY T. UNGERMAN Director
------------------------------------------- April 27, 2000
(Jerry T. Ungerman)
/s/ ROBERT I. PENDER, JR. Director
------------------------------------------- April 27, 2000
(Robert I. Pender, Jr. Attorney-In-Fact)
40
SERENA SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
SERENA SOFTWARE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income and Comprehensive
Income.................................................. F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SERENA Software, Inc.
We have audited the accompanying consolidated balance sheets of SERENA
Software, Inc. and Subsidiaries as of January 31, 1999 and 2000, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
January 31, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SERENA
Software, Inc. and its subsidiaries as of January 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 2000, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
February 14, 2000, except as to note 11,
which is as of March 13, 2000
F-2
SERENA SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
---------------------------
1999 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 21,468,740 $ 80,930,648
Short-term investments.................................... -- 20,213,259
Accounts receivable, net of allowance of $311,454 and
$983,367 in fiscal 1999 and 2000, respectively.......... 13,036,551 15,380,341
Due from principal stockholder............................ 196,188 --
Deferred taxes............................................ 1,119,531 1,818,313
Prepaid expenses and other current assets................. 565,679 595,040
------------ ------------
Total current assets.................................... 36,386,689 118,937,601
Long-term investments....................................... -- 3,041,650
Property and equipment, net................................. 1,864,535 2,419,871
Due from principal stockholder.............................. 420,581 --
Deferred taxes.............................................. -- 1,927,822
Intangible assets, net...................................... 20,932,685 22,612,525
Other assets................................................ 73,431 119,327
------------ ------------
Total assets............................................ $ 59,677,921 $149,058,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 401,026 $ 365,771
Income taxes payable...................................... 1,498,725 3,000,485
Accrued expenses.......................................... 7,142,979 11,307,366
Deferred revenue.......................................... 10,839,084 14,632,947
------------ ------------
Total current liabilities............................... 19,881,814 29,306,569
Deferred revenue, net of current portion.................... 1,532,905 4,391,827
Deferred taxes.............................................. 158,152 836,093
------------ ------------
Total liabilities....................................... 21,572,871 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; 30,601,689 and 38,285,612 shares issued and
outstanding at January 31, 1999 and 2000,
respectively............................................ 30,602 38,286
Additional paid-in capital................................ 28,507,771 89,280,527
Deferred stock-based compensation......................... (1,339,030) (380,790)
Notes receivable from stockholders........................ (3,233,374) (3,181,875)
Accumulated other comprehensive losses.................... (25,578) (40,014)
Retained earnings......................................... 14,164,659 28,808,173
------------ ------------
Total stockholders' equity.............................. 38,105,050 114,524,307
------------ ------------
Total liabilities and stockholders' equity.............. $ 59,677,921 $149,058,796
============ ============
See accompanying notes to consolidated financial statements
F-3
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Revenue:
Software licenses (includes related party amounts of
$5,492,184, $3,762,455 and $0 in fiscal 1998, 1999
and 2000, respectively)........................... $17,838,946 $27,199,243 $41,808,021
Maintenance (includes related party amounts of
$4,175,191, $3,060,770 and $0 in fiscal 1998, 1999
and 2000, respectively)........................... 12,257,724 16,959,714 26,817,530
Professional services............................... 2,050,366 4,157,501 6,780,909
----------- ----------- -----------
Total revenue..................................... 32,147,036 48,316,458 75,406,460
----------- ----------- -----------
Cost of revenue:
Software licenses................................... 1,086,820 2,206,898 2,896,023
Maintenance......................................... 4,009,823 4,523,796 6,070,337
Professional services............................... 1,716,597 3,532,736 5,455,294
----------- ----------- -----------
Total cost of revenue............................. 6,813,240 10,263,430 14,421,654
----------- ----------- -----------
Gross profit...................................... 25,333,796 38,053,028 60,984,806
----------- ----------- -----------
Operating expenses:
Sales and marketing................................. 7,946,797 13,861,711 22,157,656
Research and development............................ 5,517,787 4,465,527 6,847,634
General and administrative.......................... 3,295,842 3,932,687 6,115,892
Stock-based compensation............................ 879,803 2,498,608 731,638
Amortization of intangible assets................... -- 738,670 2,226,351
Acquired in-process research and development........ -- -- 992,341
----------- ----------- -----------
Total operating expenses.......................... 17,640,229 25,497,203 39,071,512
----------- ----------- -----------
Operating income...................................... 7,693,567 12,555,825 21,913,294
Interest and other income, net........................ 321,061 929,487 4,568,994
----------- ----------- -----------
Income before income taxes.......................... 8,014,628 13,485,312 26,482,288
Income taxes.......................................... 3,253,490 6,155,205 11,838,774
----------- ----------- -----------
Net income.......................................... 4,761,138 7,330,107 14,643,514
Other comprehensive income (loss)--Foreign currency
translation adjustment.............................. (2,001) 5,026 (14,436)
----------- ----------- -----------
Comprehensive income................................ $ 4,759,137 $ 7,335,133 $14,629,078
=========== =========== ===========
Net income per share:
Basic............................................... $ 0.21 $ 0.29 $ 0.40
=========== =========== ===========
Diluted............................................. $ 0.21 $ 0.27 $ 0.38
=========== =========== ===========
Shares used to compute net income per share:
Basic............................................... 22,871,625 25,395,761 36,751,146
=========== =========== ===========
Diluted............................................. 22,908,284 27,031,701 38,818,617
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-4
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 31, 1998, 1999 AND 2000
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE OTHER
--------------------- PAID-IN STOCK-BASED FROM COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS LOSSES EARNINGS
---------- -------- ----------- ------------- ------------ -------------- -----------
Balance as of January 31,
1997........................ 23,625,000 $23,625 $ (22,622) -- -- $(28,603) $ 2,073,414
Repurchase of common stock.... (945,000) (945) (699,055) -- -- -- --
Issuance of restricted common
stock for notes
receivable.................. 2,760,750 2,761 5,518,739 (3,681,000) (1,840,500) -- --
Deferred stock-based
compensation related to
grants of stock options..... -- -- 297,000 (297,000) -- -- --
Amortization of stock-based
compensation................ -- -- -- 879,803 -- -- --
Net income.................... -- -- -- -- -- -- 4,761,138
Translation adjustment........ -- -- -- -- -- (2,001) --
---------- ------- ----------- ----------- ----------- -------- -----------
Balance as of January 31,
1998........................ 25,440,750 25,441 5,094,062 (3,098,197) (1,840,500) (30,604) 6,834,552
Issuance of restricted common
stock for notes
receivable.................. 379,689 380 1,492,118 (233,069) (1,259,429) -- --
Deferred stock-based
compensation related to
grants of stock options..... -- -- 506,372 (506,372) -- -- --
Amortization of stock-based
compensation................ -- -- -- 2,498,608 -- -- --
Issuance of common stock under
Optima acquisition.......... 4,781,250 4,781 21,415,219 -- -- -- --
Accrued interest on note
receivable.................. -- -- -- -- (133,445) -- --
Net Income.................... -- -- -- -- -- -- 7,330,107
Translation adjustment........ -- -- -- -- -- 5,026 --
---------- ------- ----------- ----------- ----------- -------- -----------
Balance as of January 31,
1999........................ 30,601,689 30,602 28,507,771 (1,339,030) (3,233,374) (25,578) 14,164,659
Issuance of common stock under
initial public offering,
net......................... 7,350,000 7,350 57,894,876 -- -- -- --
Issuance of common stock under
Diamond acquisition......... 262,500 263 2,234,112 -- -- -- --
Issuance of common stock under
the employee stock purchase
plan........................ 123,770 124 876,578 -- -- -- --
Issuance of restricted common
stock for notes
receivable.................. 15,641 15 48,648 -- (48,663) -- --
Repurchase of common stock.... (33,750) (34) (363,737) -- -- -- --
Common stock options
exercised, net of returned
to plan..................... 127,200 127 404,993 11,353 -- -- --
Repurchase of restricted
common stock................ (161,438) (161) (322,714) 215,250 107,625 -- --
Payments of accrued interest
and principal on restricted
common stock................ -- -- -- -- 190,708 -- --
Amortization of stock-based
compensation................ -- -- -- 731,637 -- -- --
Accrued interest on note
receivable.................. -- -- -- -- (198,171) -- --
Net income.................... -- -- -- -- -- -- 14,643,514
Translation adjustment........ -- -- -- -- -- (14,436) --
---------- ------- ----------- ----------- ----------- -------- -----------
Balance as of January 31,
2000........................ 38,285,612 $38,286 $89,280,527 $ (380,790) $(3,181,875) $(40,014) $28,808,173
========== ======= =========== =========== =========== ======== ===========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance as of January 31,
1997........................ $ 2,045,814
Repurchase of common stock.... (700,000)
Issuance of restricted common
stock for notes
receivable.................. --
Deferred stock-based
compensation related to
grants of stock options..... --
Amortization of stock-based
compensation................ 879,803
Net income.................... 4,761,138
Translation adjustment........ (2,001)
------------
Balance as of January 31,
1998........................ 6,984,754
Issuance of restricted common
stock for notes
receivable.................. --
Deferred stock-based
compensation related to
grants of stock options..... --
Amortization of stock-based
compensation................ 2,498,608
Issuance of common stock under
Optima acquisition.......... 21,420,000
Accrued interest on note
receivable.................. (133,445)
Net Income.................... 7,330,107
Translation adjustment........ 5,026
------------
Balance as of January 31,
1999........................ 38,105,050
Issuance of common stock under
initial public offering,
net......................... 57,902,226
Issuance of common stock under
Diamond acquisition......... 2,234,375
Issuance of common stock under
the employee stock purchase
plan........................ 876,702
Issuance of restricted common
stock for notes
receivable.................. --
Repurchase of common stock.... (363,771)
Common stock options
exercised, net of returned
to plan..................... 416,473
Repurchase of restricted
common stock................ --
Payments of accrued interest
and principal on restricted
common stock................ 190,708
Amortization of stock-based
compensation................ 731,637
Accrued interest on note
receivable.................. (198,171)
Net income.................... 14,643,514
Translation adjustment........ (14,436)
------------
Balance as of January 31,
2000........................ $114,524,307
============
See accompanying notes to consolidated financial statements
F-5
SERENA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,761,138 $ 7,330,107 $14,643,514
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 430,664 646,012 998,662
Deferred income taxes................................... (462,876) (193,681) (2,772,110)
Increase in allowance for bad debts..................... 167,682 113,972 671,913
Loss on sale of property and equipment.................. 58,130 5,379 13,037
Accrued interest on notes receivable.................... -- (133,445) (198,171)
Amortization of deferred stock-based compensation....... 879,803 2,498,608 731,638
Amortization of intangible assets....................... -- 738,670 2,226,351
Acquired in-process research and development............ -- -- 992,341
Changes in operating assets and liabilities:
Accounts receivable................................... (6,421,099) (4,251,819) (3,016,457)
Prepaid expenses and other assets..................... (139,364) 247,274 (51,051)
Accounts payable...................................... 196,598 (51,345) (56,588)
Income taxes payable.................................. 565,637 791,324 1,481,717
Accrued expenses...................................... 2,675,790 2,535,469 3,698,230
Deferred revenue...................................... 2,956,545 4,639,576 6,667,786
----------- ----------- -----------
Net cash provided by operating activities........... 5,668,648 14,916,101 26,030,812
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (567,469) (1,138,630) (1,459,525)
Cash and cash equivalents acquired in Optima
acquisition............................................. -- 439,092 --
Purchases of short-term and long-term investments......... -- -- (23,254,909)
Issuance of notes due from stockholder.................... (130,000) (600,000) --
Payment of notes due from stockholder..................... 723,947 173,136 599,659
Issuance of notes due from other parties.................. -- -- (150,000)
Payment of notes due from other parties................... -- -- 150,000
Payment of accrued interest and principal on notes
receivable.............................................. -- -- 190,708
Cash paid in acquisition of Diamond Optimum Systems, Inc.,
net of cash acquired.................................... -- -- (1,462,031)
----------- ----------- -----------
Net cash (used in) provided by investing
activities........................................ 26,478 (1,126,402) (25,386,098)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net............................. -- -- 57,902,226
Repurchase of common stock................................ (700,000) -- (363,771)
Sale of common stock under the employee stock purchase
plan.................................................... -- -- 876,701
Exercise of employee stock options........................ -- -- 416,474
Payment of notes to stockholders of Optima................ -- (1,350,000) --
----------- ----------- -----------
Net cash (used in) provided by financing
activities........................................ (700,000) (1,350,000) 58,831,630
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (2,001) 5,026 (14,436)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,993,125 12,444,725 59,461,908
Cash and cash equivalents at beginning of year.............. 4,030,890 9,024,015 21,468,740
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 9,024,015 $21,468,740 $80,930,648
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 3,106,632 $ 5,540,277 $12,912,006
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITY:
Issuance of common stock and notes for acquisition of
Optima Software, Inc.................................... -- $21,420,000 --
=========== =========== ===========
Common stock issued in acquisition of Diamond Optimum
Systems, Inc............................................ -- -- $ 2,234,375
=========== =========== ===========
Restricted stock issued (repurchased) in exchange for
notes receivable........................................ $ 1,840,500 $ 1,492,498 $ (107,625)
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-6
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
SERENA Software, Inc. (the "Company") is an industry-leading supplier of
eBusiness infrastructure change management solutions. Its principal markets are
North America, and to a lesser extent, Europe. Export sales represented
approximately 15%, 16%, and 15% of revenue in fiscal 1998, 1999 and 2000,
respectively.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
(C) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's U.K. and German subsidiaries are
the British pound and the German deutsche mark, respectively. These foreign
subsidiaries' financial statements are translated using current exchange rates
for balance sheet accounts and average rates for income statement accounts.
Translation adjustments are recorded as accumulated other comprehensive losses
in stockholders' equity. Foreign currency transaction gains and (losses) are
included in interest and other income, net, and totaled $74,000, $17,000 and
$(27,000) in fiscal 1998, 1999 and 2000, respectively.
(D) CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with original
remaining maturities of three months or less to be cash equivalents. As of
January 31, 1999 and 2000, cash equivalents consisted of commercial paper and
money market funds.
The Company has classified its investments as "available-for-sale." These
investments are carried at fair value, based on quoted market prices, and
unrealized gains and losses, net of taxes, are included in accumulated other
comprehensive income, which is normally reflected as a separate component of
stockholders' equity. As of January 31, 2000, unrealized gains and losses on
available-for-sale investments were insignificant. Realized gains and losses
upon sale or maturity of these investments are determined using the specific
identification method.
Cash equivalents consist of securities with remaining maturities of 90 days
or less. Investments as of January 31, 2000 consisted of $20,213,000 of
securities which mature in less than one year and 3,042,000 of
F-7
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
securities which mature in one to five years. The Company did not hold
investments as of January 31, 1999. Cash, cash equivalents and investments
consisted of the following as of January 31, 2000 (in thousands).
UNREALIZED
-------------------
COST LOSS GAIN MARKET
-------- -------- -------- --------
Cash and cash equivalents:
Cash....................................... $12,847 $ -- $ -- $12,847
CD's/Bonds................................. 14,926 18 14,944
Money market funds......................... 38,041 187 38,228
Corporate notes............................ 14,537 375 14,912
------- ---- ---- -------
$80,351 $ -- $580 $80,931
======= ==== ==== =======
Investments:
CD's/Bonds................................. $16,961 $ -- $460 $17,421
Corporate notes............................ 5,743 91 5,834
------- ---- ---- -------
$22,704 $ -- $551 $23,255
======= ==== ==== =======
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three to five years. Recoverability of property and equipment is measured by
comparison of the carrying amount to future net cash flows the property and
equipment are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured as the difference between
the carrying amount of the property and equipment and its fair value. To date,
the Company has no long-lived assets that are considered to be impaired.
(F) INTANGIBLE ASSETS
Intangible assets include workforce, non-compete, acquired technology and
goodwill associated with the acquisitions of Optima Software, Inc. and Diamond
Optimum Systems, Inc. and are amortized using the straight-line method over the
estimated useful lives of the related assets, from 6 months to 15 years.
(G) SOFTWARE DEVELOPMENT COSTS
Development costs related to software products are expensed as incurred
until technological feasibility of the product has been established. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have not been significant, and, accordingly, no costs
have been capitalized. The Company has, however, capitalized certain costs
totaling $295,000 in fiscal 2000 associated with computer software it has
obtained for internal use. The capitalization and amortization of these costs
have been consistent with generally accepted accounting principles as stated in
AICPA Statement of Position 98-1 (SOP 98-1) "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."
F-8
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(H) INCOME TAXES
Income taxes are recorded using the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(I) CONCENTRATIONS OF CREDIT RISK
Financial instruments, potentially subjecting the Company to concentrations
of credit risk, consist primarily of temporary cash investments. The Company
places its temporary cash investments with two major financial institutions. The
Company maintains an allowance for potential credit losses on customer accounts.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate their respective carrying amounts.
(K) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(L) REVENUE RECOGNITION
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-9, SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS. SOP 98-9 requires recognition of revenue using
the "residual method" in a multiple-element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
residual method, the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company is required
to adopt SOP 98-9 in fiscal 2001. The Company does not expect a material change
to its accounting for revenues as a result of the provisions of SOP 98-9.
The Company sells its products to its end users and distributors under
license agreements. Each new license includes maintenance, which includes the
right to receive telephone support and unspecified upgrades and enhancements,
for a specified duration of time, usually one year. The fee associated with such
agreements is allocated between software license revenue and maintenance revenue
based on their respective fair values. Software license revenue from these
agreements is recognized upon receipt and acceptance of a signed contract and
delivery of the software, provided the related fee is fixed and determinable,
collectibility of the revenue is probable and the arrangement does not involve
significant customization of the software. If an acceptance period is required,
revenue is recognized upon the earlier
F-9
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of customer acceptance or the expiration of the acceptance period, as defined in
the applicable software license agreement.
The Company recognizes maintenance revenue ratably over the life of the
related contract, generally 12 months. Maintenance contracts on perpetual
licenses are available annually. The Company typically invoices and collects
maintenance revenue on an annual basis at the anniversary date of the license.
Service and other revenue includes fees derived from the delivery of training,
installation, and consulting services. Revenue from training, installation, and
consulting services is recognized as the related services are performed.
Deferred revenue represents amounts received by the Company in advance of
product delivery or service performance.
(M) STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
compensation. The Company amortizes deferred stock-based compensation on an
accelerated basis in accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 28.
(N) NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of
shares of common stock. Diluted net income per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, common equivalent shares from restricted stock and options to purchase
common stock using the treasury stock method.
(O) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSSES)
Accumulated other comprehensive income (losses) consists entirely of
cumulative translation adjustments resulting from the Company's application of
its foreign currency translation policy. The tax effects of translation
adjustments were not significant during any of the periods presented.
(P) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the Company's chief executive officer (CEO). The CEO reviews
financial information presented on an entity level basis accompanied by
disaggregated information about revenues by product type and certain information
about geographic regions for purposes of making operating decisions and
assessing financial performance. The entity level financial information is
identical to the information presented in the accompanying statements of
operations. Therefore, the Company has determined that it operates in a single
operating segment: change management software.
F-10
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(Q) ADVERTISING
Advertising costs are expensed as incurred. Advertising expense is included
in sales and marketing expense and amounted to $0.7 million, $0.6 million and
$1.3 million in fiscal 1998, 1999 and 2000, respectively.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JANUARY 31,
-----------------------
1999 2000
---------- ----------
Computers, equipment and other....................... $2,375,022 $3,549,913
Furniture and fixtures............................... 849,550 1,146,847
Automobiles.......................................... 107,110 107,110
---------- ----------
3,331,682 4,803,870
Less: accumulated depreciation....................... 1,467,147 2,383,999
---------- ----------
$1,864,535 $2,419,871
========== ==========
(3) INTANGIBLE ASSETS
Intangible assets consisted of the following:
JANUARY 31,
-------------------------
1999 2000
----------- -----------
Work-force-in-place................................ $ 300,000 $ 479,100
Non-compete agreement.............................. 200,000 427,451
Acquired technology................................ -- 1,917,276
Goodwill........................................... 21,171,355 22,801,650
----------- -----------
21,671,355 25,625,477
Less: accumulated amortization..................... 738,670 3,012,952
----------- -----------
$20,932,685 $22,612,525
=========== ===========
F-11
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following:
JANUARY 31,
------------------------
1999 2000
---------- -----------
Profit sharing...................................... $ 617,190 $ --
Management incentive bonuses........................ 721,621 1,179,123
Payroll-related items............................... 525,470 880,506
Royalties........................................... 1,510,967 2,896,450
Commissions......................................... 1,378,296 2,162,568
Other............................................... 2,389,435 4,188,719
---------- -----------
$7,142,979 $11,307,366
========== ===========
(5) STOCKHOLDERS' EQUITY
(A) REPURCHASE OF COMMON STOCK
In April 1997, the Company repurchased 945,000 shares of its common stock
for cash at a price of $0.74 per share from a founder. In connection with the
Company's Stock Repurchase Program, the Company in the third quarter of fiscal
2000 repurchased an additional 33,750 shares of its common stock for cash at an
average price of $10.78 per share.
(B) INITIAL PUBLIC OFFERING
INITIAL PUBLIC OFFERING. On February 12, 1999, the Company offered and sold
6,000,000 shares of its common stock generating net proceeds of $48,360,000
after underwriting discounts and commissions. On March 12, 1999, the Company's
lead underwriter exercised its over-allotment option by acquiring an additional
1,350,000 shares from the Company generating additional net proceeds to the
Company of $10,881,000 after underwriting discounts and commissions. The Company
plans to use the proceeds to finance the growth of its operations in general and
for other strategic initiatives.
(C) STOCK SPLITS AND REINCORPORATION
In June 1997, the Company's Board of Directors authorized a 70,000 to 1
stock split. In July 1998 and again in November 1998, the Company's Board of
Directors authorized a 3-for-2 stock split. In January 1999, the Company
reincorporated in the State of Delaware. Share information has been restated in
the accompanying consolidated financial statements to reflect the
reincorporation and stock splits for all periods presented.
(D) RESTRICTED STOCK AGREEMENTS
In January 1998, the Company issued 2,760,750 shares of restricted common
stock to certain officers at $0.67 per share in exchange for full recourse
notes. In March 1998, the Company issued 84,375 shares of restricted common
stock to a director at $0.96 per share in exchange for a full recourse note. In
May 1999, 161,438 shares associated with the original restricted common stock
issuance in January 1998 were repurchased at the original purchase price. In the
fourth quarter of fiscal 2000, two officers early exercised
F-12
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(5) STOCKHOLDERS' EQUITY (CONTINUED)
common stock options and received 295,314 shares of restricted stock at an
average price of $3.99 per share. The early exercise feature was included in the
original stock option plan. Restrictions lapse over three or four years,
depending upon the individual, based on continued employment or service on the
Board of Directors. In the event an employee is terminated or the director
leaves the service of the Board, 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.
In connection with restricted common stock issued in January 1998, the
Company recorded deferred stock-based compensation of $3,681,000 representing
the difference between the issuance price and the fair value of the Company's
common stock at the date of issuance. An additional $158,063 of deferred
stock-based compensation was recorded for the March 1998 issuance. These amounts
are being amortized over the restriction period of the individual shares.
Amortization of deferred stock-based compensation related to restricted common
stock of $2,498,608 and $731,638 was recognized in fiscal 1999 and 2000,
respectively.
(E) NET INCOME PER SHARE
The following is a reconciliation of the shares used in the computation of
basic and diluted net income per share:
FISCAL YEAR ENDED JANUARY 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Basic net income per share--weighted average number
of common shares outstanding............................. 22,871,625 25,395,761 36,751,146
Effect of potentially dilutive securities
outstanding--restricted stock and options.............. 36,659 1,635,940 2,067,471
---------- ---------- ----------
Shares used in diluted net income per share
computation............................................ 22,908,284 27,031,701 38,818,617
========== ========== ==========
Options to purchase shares of common stock at an average share price which
is greater than the average market price of the shares are not included in the
computation of diluted earnings per share, or EPS, because the effect of their
inclusion would have been anti-dilutive. For the year ended January 31, 1999,
there were no options excluded from the computation of diluted EPS. For the year
ended January 31, 2000, 64,500 options to purchase shares of common stock at an
average share price of $18.635 were excluded from the computation of diluted
EPS.
F-13
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(6) INCOME TAXES
Income taxes are as follows:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------
1998 1999 2000
---------- ---------- -----------
Current:
Federal............................... $3,135,927 $5,396,687 $11,490,757
State................................. 554,436 908,646 3,017,803
Foreign............................... 26,003 43,553 102,324
---------- ---------- -----------
3,716,366 6,348,886 14,610,884
---------- ---------- -----------
Deferred:
Federal............................... (361,220) (204,108) (2,271,025)
State................................. (101,656) 10,427 (501,085)
---------- ---------- -----------
(462,876) (193,681) (2,772,110)
---------- ---------- -----------
Total income taxes.................. $3,253,490 $6,155,205 $11,838,774
========== ========== ===========
The Company's effective tax rate differs from the statutory federal income
tax rate of 34% for fiscal 1998, and 35% for fiscal 1999 and 2000, primarily due
to the following:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------
1998 1999 2000
---------- ---------- -----------
Tax expense at federal statutory rate... $2,724,974 $4,719,853 $ 9,293,299
Research and experimentation credit..... (233,996) (263,062) (70,600)
State tax, net of federal benefit....... 298,833 597,398 1,327,847
Foreign sales corporation benefit....... (53,208) (80,330) (149,260)
Nondeductible stock-based
compensation.......................... 299,132 874,513 256,073
Nondeductible intangible asset
amortization.......................... -- 258,535 683,937
In-process research and development..... -- -- 347,319
Other................................... 217,755 48,298 150,159
---------- ---------- -----------
Total income taxes.................... $3,253,490 $6,155,205 $11,838,774
========== ========== ===========
Undistributed earnings of foreign subsidiaries for which U.S. income taxes
have not been provided were immaterial during the periods presented.
F-14
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(6) INCOME TAXES (CONTINUED)
The Company's net deferred tax assets are summarized as follows:
JANUARY 31,
-----------------------
1999 2000
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts.................... $ 129,964 $ 432,178
Accrued expenses................................... 551,590 633,528
Cash to accrual adjustments........................ 136,104 --
State taxes........................................ 278,647 739,196
Other.............................................. 23,226 1,941,233
---------- ----------
Total deferred tax assets.......................... 1,119,531 3,746,135
---------- ----------
Deferred tax liabilities:
Long lived assets acquired in a business
combination...................................... -- (737,291)
Property and equipment............................. (158,152) (98,802)
---------- ----------
Total deferred tax liabilities..................... (158,152) (836,093)
---------- ----------
Net deferred tax assets (liabilities).............. $ 961,379 $2,910,042
========== ==========
(7) EMPLOYEE BENEFIT PLANS
(A) RETIREMENT PLAN
The Company has a defined contribution retirement plan for all eligible
employees. Participants may make contributions to the plan in accordance with
provisions of the plan. The Company may make discretionary contributions to the
plan. For the years ended January 31, 1998, 1999, and 2000, the Company made
contributions of $285,486, $558,528 and $560,643, respectively. Such
contributions generally vest over six years.
(B) STOCK OPTION PLAN
In October 1997, the Company's Board of Directors approved the Company's
1997 Stock Option and Incentive Plan (the Plan). The Plan allows for grants to
officers, directors and employees of the Company incentive stock options,
nonqualified stock options and restricted stock. Options are generally granted
for a 10-year term (5 years if the employee is more than a 10% shareholder) and
generally vest over 4 years. Options are generally granted at fair market value
(110% of fair market value if optionee is a more than a 10% shareholder), as
determined by the Board of Directors. Restricted stock may be granted pursuant
to the Plan, as evidenced by agreement and determined by the Board of Directors.
The Plan automatically terminates in September 2007. Each option and award
granted under the Plan will remain in effect until such option or award has been
satisfied by the issuance of shares or terminated in accordance with its terms
and the terms of the Plan.
F-15
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock option activity under the Plan is as follows:
WEIGHTED-
AVERAGE
SHARES WEIGHTED- GRANT DATE
AVAILABLE OPTIONS AVERAGE FAIR VALUE
FOR GRANT OUTSTANDING EXERCISE PRICE PER SHARE
---------- ----------- -------------- ----------
Shares reserved................................ 5,062,500 --
Restricted stock issued........................ (2,760,750) --
Granted with an exercise price below the fair
value of common stock........................ (307,125) 307,125 $0.67 $2.00
---------- ---------
Balances as of January 31, 1998................ 1,994,625 307,125 0.67 2.00
Authorized..................................... 1,012,500 --
Restricted stock issued........................ (84,375) --
Granted with an exercise price below the fair
value of common stock........................ (151,875) 151,875 1.03 2.74
Granted with an exercise price equal to the
fair value of common stock................... (1,773,975) 1,773,975 3.95 3.95
Cancelled...................................... 156,750 (156,750) 2.18
Exercised...................................... -- (295,314) 3.99
---------- ---------
Balances as of January 31, 1999................ 1,153,650 1,780,911 3.27
Restricted stock cancelled..................... 161,438
Granted with an exercise price below the fair
value of common stock........................ (15,641) 15,641 3.11 5.71
Granted with an exercise price equal to the
fair value of common stock................... (576,000) 576,000 9.64 9.64
Cancelled...................................... 382,071 (382,071) 5.27
Exercised...................................... -- (127,200) 3.27
---------- ---------
Balance as of January 31, 2000................. 1,105,518 1,863,281 4.85
========== =========
In connection with options granted in January 1998, the Company has recorded
deferred stock-based compensation of $297,000 representing the difference
between the exercise price and the fair value of the Company's common stock at
the date of grant. An additional $506,372 of deferred stock-based compensation
was recorded for options issued during fiscal 1999. The amount is being
amortized over the vesting period of the individual options, generally 4 years.
Stock-based compensation related to options to purchase common stock of $14,575
and $419,704 was recognized in fiscal 1998 and 1999, respectively. The grant
date fair value per share was determined by management after considering a
number of factors, including a prior cash transaction for the Company's common
stock, an appraisal performed by an outside consultant, the methodologies used
by the Company's underwriters to establish the anticipated IPO price, the effect
of the Optima acquisition and the Company's operating results and future
prospects.
In fiscal 2000, there was no deferred stock-based compensation recorded with
respect to options issued by the Company. However, the repurchase of restricted
common stock in May 1999 and the return to the plan of unexercised common stock
options resulted in the removal of unamortized deferred stock-
F-16
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
based compensation of $215,250 and $11,353, respectively, in fiscal 2000.
Stock-based compensation related to options to purchase common stock of $304,143
was recognized in fiscal 2000.
From time to time, the Company has granted options to purchase shares of its
common stock. The table below sets forth the stock option grant dates, the
number of options granted, the exercise price per share and the weighted-average
fair value per share. The fair value of the Company's common stock on the date
of grant for such options was estimated using fair market value on NASDAQ for
periods after our initial public offering (IPO) and principally using the
midpoint of the offering range adjusted for the change in comparable company
price-to-earnings multiples between the grant date and the date the midpoint was
established for periods prior to the IPO.
WEIGHTED-
AVERAGE FAIR
DATE OF OPTIONS EXERCISE PRICE VALUE PER
GRANT GRANTED PER SHARE SHARE
- ------- -------- -------------- ------------
November 2, 1998........................... 564,435 $ 4.667 $ 4.833
November 19, 1998.......................... 267,750 $ 4.667 $ 5.233
December 2, 1998........................... 48,750 $ 6.000 $ 6.000
January 7, 1999............................ 33,000 $ 6.667 $ 6.667
February 17, 1999.......................... 87,000 $ 9.833 $ 9.833
March 10, 1999............................. 75,000 $ 9.291 $ 9.291
April 16, 1999............................. 47,250 $ 6.583 $ 6.583
May 18, 1999............................... 108,750 $ 8.333 $ 8.333
June 16, 1999.............................. 88,500 $ 8.417 $ 8.417
June 29, 1999.............................. 9,000 $ 8.458 $ 8.458
August 13, 1999............................ 72,750 $ 7.000 $ 7.000
September 20, 1999......................... 9,750 $11.667 $11.667
October 15, 1999........................... 13,500 $10.167 $10.167
November 5, 1999........................... 1,500 $15.000 $15.000
December 10, 1999.......................... 21,000 $20.333 $20.333
January 19, 2000........................... 42,000 $17.917 $17.917
Had compensation expense for the Company's stock-based compensation plans,
including the restricted stock discussed in Note 5(d), been determined
consistent with SFAS No. 123 using the minimum value option-pricing model, the
Company's net income in fiscal 1998 or 1999 would not have been materially
affected. Assumptions used for fiscal 1998 and 1999 were as follows: no expected
dividends; an average risk-free interest rate of 5.9%; and an average expected
restricted stock or option term of 4.5 years. As of January 31, 1999, the
weighted-average exercise price and weighted-average remaining contractual life
of outstanding options was $3.27 per share and 9.5 years. As of January 31,
1999, 55,686 shares of outstanding options were exercisable. The
weighted-average fair value of options granted in fiscal 1998 and 1999 was $1.33
and $1.13 per share, respectively.
Had compensation expense for the Company's stock-based compensation plans,
including the restricted stock discussed in Note 5(d), been determined
consistent with SFAS No. 123 using the Black-Scholes single option model, the
Company's net income in fiscal 2000 would not have been materially affected.
Assumptions used for fiscal 2000 were as follows: no expected dividends; an
average risk-free
F-17
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
interest rate of 6.56%; an expected volatility in stock price of 97%; and an
average expected restricted stock or option term of 4.5 years. As of
January 31, 2000, the weighted-average exercise price and weighted-average
remaining contractual life of outstanding options was $4.85 per share and
8.3 years. As of January 31, 2000, 265,668 shares of outstanding options were
exercisable. The weighted-average fair value of options granted in fiscal 2000
was $9.64 per share.
(8) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company has remaining noncancelable operating lease agreements for
office space that expire in calendar 2000, 2001, 2002, 2003 and 2004. Minimum
lease payments for the five succeeding years as of January 31, 2000, are as
follows:
FISCAL YEAR ENDING JANUARY 31,
- ------------------------------
2001............................................ $ 996,341
2002............................................ 989,309
2003............................................ 662,705
2004............................................ 164,888
2005............................................ 99,807
thereafter...................................... 7,500
----------
$2,920,550
==========
Rent expense was $454,087, $616,238 and $993,900 for the fiscal years ended
January 31, 1998, 1999, and 2000, respectively.
(B) LICENSING AND OTHER AGREEMENTS
The Company has commitments under licensing agreements that provide for
payments based on revenues of certain products. For the fiscal years ended
January 31, 1998, 1999, and 2000, the Company's fees paid or accrued under these
license agreements were $2,075,083, $3,790,887 and $5,352,457, respectively.
The Company had a Marketing Agreement with Optima Software, Inc. (Optima).
The principal stockholder of the Company owned 15% of the capital stock of
Optima. Pursuant to the Marketing Agreement, the Company granted the exclusive
right within most jurisdictions to market and sell SERENA's CHANGE MAN software
product to Optima. The Company was entitled to license fees of 40% and 75% upon
initial sales of software licenses and maintenance and renewal maintenance,
respectively. For the years ended January 31, 1998, 1999, and 2000, licenses
revenues under this license agreement were $5,492,184, $3,762,445 and $0,
respectively. For the years ended January 31, 1998, 1999 and 2000, maintenance
revenues under this license agreement were $4,175,191, $3,060,770 and $0,
respectively. The Company acquired Optima in September 1998.
The Company's U.K. subsidiary (Serena-UK) had a reseller agreement with
Optima. Pursuant to the agreement, Serena-UK had a non-exclusive right to market
and license CHANGE MAN to end users in the U.K. Serena-UK was required to pay a
license fee of 30% for all new license agreements and 50% for all
F-18
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
maintenance renewals sold under the terms of the agreement. License fee expense
associated with the agreement totaled $203,804, $317,578 and $0 for the fiscal
years ended January 31, 1998, 1999, and 2000, respectively. This agreement was
terminated in September 1998 in connection with the Optima acquisition.
(C) LITIGATION
In September 1998, Compuware filed suit against SERENA in the United States
District Court for the Eastern District of Michigan seeking unspecified
compensatory damages, costs and attorneys fees, and injunctive relief based on
allegations of copyright infringement, trade secret misappropriation and various
tort claims related to the sale of our STARTOOL and STARWARP products. Compuware
served the complaint on SERENA in November 1998. As of the date of this
statement, the parties have completed fact discovery. To date, Compuware has not
sought preliminary injunctive relief. However, management cannot ascertain the
availability of injunctive relief or other equitable remedies or estimate the
total expenses, possible damages or settlement value, if any, that may
ultimately be incurred in connection with Compuware's suit. Management believes,
based on the advice of counsel, that SERENA has meritorious defenses to the
allegations contained in Compuware's complaint and management is defending
against the complaint vigorously. We believe that this matter will not have a
material adverse effect on our results of operations or financial condition.
This litigation could be time consuming and costly, and there can be no
assurance that SERENA will necessarily prevail given the inherent uncertainties
in litigation. In the event that we do not prevail in litigation, we could be
prevented from selling our STARTOOL and STARWARP products or be required to
enter into royalty or licensing agreements or pay monetary damages, and/or pay
attorneys' fees. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to SERENA. In the event of a successful claim
against us, our business, operating results or financial condition could be
materially adversely affected.
(9) DUE FROM PRINCIPAL STOCKHOLDER
In July 1998, the Company advanced $600,000 to its principal stockholder in
exchange for a promissory note secured by shares of the Company's common stock.
The loan accrues interest at 5.56%. The principal and interest are due and
payable in three equal installments of $222,641 payable on the annual
anniversary of the funding of the loan. As of January 31, 1999, $616,874 of
principal and accrued interest was outstanding. All outstanding principal and
accrued interest was paid in full in March 1999.
Interest income on amounts due from the principal stockholder was $35,769,
$29,934 and $2,191 for fiscal 1998, 1999 and 2000, respectively.
F-19
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(10) ACQUISITIONS
(A) OPTIMA SOFTWARE, INC.
On September 25, 1998, the Company acquired Optima, the primary distributor
of the Company's CHANGE MAN software product. The acquisition was accounted for
using the purchase method of accounting, and accordingly, the results of
operations of Optima have been included in the Company's consolidated financial
statements from September 25, 1998. The Company acquired all of the outstanding
shares of Optima in exchange for the issuance of 4,781,250 shares of the
Company's common stock valued at $4.48 per share. The fair value of the shares
issued in the Optima acquisition was determined in accordance with Accounting
Principles Board Option No. 16 and its interpretations and was computed based
upon the midpoint of management's estimate of the pre- and post-agreement fair
value of the Company's common stock. The transaction was valued at approximately
$21.4 million and the allocation of the purchase price was as follows:
Net tangible liabilities.................................... $ (251,355)
Work-force-in-place......................................... 300,000
Non-compete agreement....................................... 200,000
Goodwill.................................................... 21,171,355
-----------
Total purchase price........................................ $21,420,000
===========
Work-force-in-place, consisting principally of Optima's sales force, was
valued on a replacement cost basis and was amortized over a six-month period,
the period of time the Company estimated would be required to hire, train, and
achieve full productivity for a replacement work force. The non-compete
agreement was entered into with an Optima officer and founder who did not
continue with the combined company. The non-compete agreement was valued based
on his anticipated salary and benefits for the period of the agreement and was
amortized over the one-year term of the agreement. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired and
is being amortized over 15 years. Management determined to use this period after
considering that Optima has sold CHANGE MAN profitably since 1988, CHANGE MAN is
an integral part of many large company IT infrastructures for managing change to
mainframe applications, and customers who purchase and implement CHANGE MAN make
a considerable investment, not only in the software, but in the creation of an
automated and consistent software change management process. Moreover,
management believes this investment has a long lasting effect on IT
environments, and annual maintenance releases of CHANGE MAN have consisted
principally of bug fixes and updates, including updates to remain compatible
with the stable IBM MVS operating system, which was introduced over 20 years
ago.
(B) DIAMOND OPTIMUM SYSTEMS, INC.
On June 14, 1999, the Company acquired Diamond Optimum Systems, Inc.
("Diamond"), a provider of enterprise software change management solutions (SCM)
for NT and UNIX environments. As of the end of the Company's third fiscal
quarter on October 31, 1999, the operations of Diamond had been fully integrated
into the operations of the Company. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of
Diamond have been included in the Company's consolidated financial statements
from June 14, 1999. 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
F-20
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(10) ACQUISITIONS (CONTINUED)
262,500 shares of the Company's common stock valued at $8.51 per share. The
transaction was valued at approximately $4.5 million with the allocation of the
total consideration as follows:
Net tangible assets......................................... $ 358,060
Deferred tax liability...................................... (843,601)
Acquired technology......................................... 1,917,276
Acquired in-process research and development................ 992,341
Work-force-in-place......................................... 179,100
Non-compete agreement....................................... 227,451
Goodwill.................................................... 1,630,295
----------
Total consideration......................................... $4,460,922
==========
Acquired technology, consisting of current completed technologies at the
date of acquisition valued on the premise of fair market value in continued use
under the discounted cash flow approach, is being amortized over a 5 year
period, the period of time the Company estimates as its economic useful life.
Acquired in-process research and development, consisting of current technologies
under development at the date of acquisition and valued on the premise of fair
market value in continued use under the discounted cash flow approach, was
expensed immediately in the second fiscal quarter ended July 31, 1999 in
accordance with generally accepted accounting principles. Work-force-in-place,
consisting principally of the Diamond development team, was valued on a
replacement cost basis and is being 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
agreement was entered into with a Diamond officer and founder who will continue
with the combined company. The non-compete agreement was valued based on his
anticipated salary and benefits for the period of the agreement and is being
amortized over the two-year term of the agreement. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired and
deferred tax liabilities assumed and is being 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 actual operating results.
Among the assets that were valued by the Company were the Change Management
2.0, the Problem Management and the Enterprise Management products which were
currently under development at the date of acquisition. These technologies
currently under development were valued on the premise of fair market value in
continued use employing a version of the income approach referred to as the
discounted cash flow approach. This methodology is based on discounting to
present value, at an appropriate risk-adjusted discount rate, both the
expenditures to be made to complete the development efforts (excluding the
efforts to be completed on the development efforts underway) and the operating
cash flows which the applications are projected to generate, less a return on
the assets necessary to generate the operating cash flows.
From these projected revenues, the Company deducted costs of sales,
operating costs (excluding costs associated with the efforts to be completed on
the development efforts underway), royalties and taxes to determine net cash
flows. The Company estimated the percentage of completion of the development
F-21
SERENA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JANUARY 31, 1998, 1999, AND 2000
(10) ACQUISITIONS (CONTINUED)
efforts for each application by comparing the estimated costs incurred and
portions of the development accomplished through the acquisition date by the
total estimated cost and total development effort of developing these same
applications. This percentage was calculated for each application and was then
applied to the net cash flows for which each application was projected to
generate. These net cash flows were then discounted to present values using
appropriate risk-adjusted discount rates in order to arrive at discounted fair
values for each application.
In short, the percentage complete and the appropriate risk-adjusted discount
rate for each application were as follows:
APPLICATION UNDER DEVELOPMENT PERCENTAGE COMPLETE DISCOUNT RATE
- ----------------------------- ------------------- -------------
Change Management version 2.0................. 60.00% 25.00%
Project Management............................ 75.00% 25.00%
Enterprise Management......................... 25.38% 27.50%
The rates used to discount the net cash flows to present value were
initially based on the weighted average cost of capital ("WACC"). The Company
used discount rates of 25.0% and 27.5% for valuing the acquired in-process
research and development and 25.0% for the core technologies. These discount
rates are higher than the implied WACC due to the inherent uncertainties
surrounding the successful development of the acquired in-process research and
development, the useful life of such in-process research and development, the
profitability levels of such in-process research and development, and the
uncertainty of technological advances that were unknown at the time.
(11) SUBSEQUENT EVENTS
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.
F-22
REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
SERENA Software, Inc.
Under date of February 14, 2000, except as to Note 11, which is as of
March 13, 2000, we reported on the consolidated balance sheets of SERENA
Software, Inc. and Subsidiaries as of January 31, 1999 and 2000, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
January 31, 2000, which are included in the January 31, 2000 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in the January 31, 2000 annual report on Form 10-K. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ KPMG LLP
Mountain View, California
February 14, 2000, except as to Note 11,
which is as of March 13, 2000
S-1
SCHEDULE II
SERENA SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS-
BALANCE OF CHARGES TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS- END OF
PERIOD EXPENSES WRITE-OFFS PERIOD
------------ ---------- ----------- ----------
Year Ended January 31, 1998:
Allowance for doubtful accounts................. $ 30,000 $200,000 $(33,000) $197,000
Year Ended January 31, 1999:
Allowance for doubtful accounts................. $197,000 $130,000 $(16,000) $311,000
Year Ended January 31, 2000
Allowance for doubtful accounts................. $311,000 $685,000 $(13,000) $983,000
S-2