-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPVAI/hfERxZ7qe1ThMF9Am4zGET0y8K3ZQCeSvSjyDYs2afDLxwiGOP7l4Z5AwK u7Y5wmKoeKyzVi5WQcAPKw== /in/edgar/work/20000614/0000912057-00-028514/0000912057-00-028514.txt : 20000919 0000912057-00-028514.hdr.sgml : 20000919 ACCESSION NUMBER: 0000912057-00-028514 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERENA SOFTWARE INC CENTRAL INDEX KEY: 0001073967 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 942669809 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25285 FILM NUMBER: 654563 BUSINESS ADDRESS: STREET 1: 500 AIRPORT BLVD 2ND FLOOR CITY: BURLINGTON STATE: CA ZIP: 54010 BUSINESS PHONE: 6506961800 10-Q 1 a10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 000-25285 ------------------------ SERENA SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2669809 State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
500 AIRPORT BOULEVARD, 2ND FLOOR, BURLINGAME, CALIFORNIA 94010-1904 Address of principal executive offices, including zip code) 650-696-1800 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of the registrant's Common Stock, par value $0.001, outstanding as of April 30, 2000 was 39,276,394. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX
PAGE -------- PART I FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets as of April 30, 2000 and January 31, 2000...................................... 3 Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended April 30, 2000 and 1999............................................. 4 Condensed Consolidated Statements of Cash Flows for The Three Months Ended April 30, 2000 and 1999................ 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................................... 24 PART II OTHER INFORMATION Item 1 Legal Proceedings........................................... 25 Item 2 Change in Securities and Use of Proceeds.................... 25 Item 3 Defaults Upon Senior Securities............................. 25 Item 4 Submission of Matters to a Vote of Security Holders......... 25 Item 5 Other Information........................................... 25 Item 6 Exhibits and Reports on Form 8-K............................ 25 Signatures.................................................. 26
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SERENA SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 30, JANUARY 31, 2000 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 85,270,270 $ 80,930,648 Short-term investments.................................... 25,789,033 20,213,259 Accounts receivable, net of allowance of $1,208,367 and $983,367 at April 30 and January 31, 2000, respectively............................................ 14,469,750 15,380,341 Deferred taxes............................................ 1,818,313 1,818,313 Prepaid expenses and other current assets................. 1,311,195 595,040 ------------ ------------ Total current assets.................................... 128,658,561 118,937,601 Long-term investments....................................... -- 3,041,650 Property and equipment, net................................. 2,455,046 2,419,871 Deferred taxes.............................................. 1,927,822 1,927,822 Intangible assets, net...................................... 22,076,083 22,612,525 Other assets................................................ 128,193 119,327 ------------ ------------ TOTAL ASSETS............................................ $155,245,705 $149,058,796 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 308,894 $ 365,771 Income taxes payable...................................... 4,081,197 3,000,485 Accrued expenses.......................................... 10,086,345 11,307,366 Deferred revenue.......................................... 15,776,646 14,632,947 ------------ ------------ Total current liabilities............................... 30,253,082 29,306,569 Deferred revenue, net of current portion.................... 4,760,993 4,391,827 Deferred taxes.............................................. 836,093 836,093 ------------ ------------ Total liabilities....................................... 35,850,168 34,534,489 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding............ -- -- Common stock, $0.001 par value; 60,000,000 shares authorized; 39,276,394 and 38,285,612 shares issued and outstanding at April 30 and January 31, 2000, respectively............................................ 39,276 38,286 Additional paid-in capital................................ 105,452,094 89,280,527 Deferred stock-based compensation......................... (296,931) (380,790) Notes receivable from stockholders........................ (19,172,876) (3,181,875) Accumulated other comprehensive losses.................... (145,838) (40,014) Retained earnings......................................... 33,519,812 28,808,173 ------------ ------------ Total stockholders' equity.............................. 119,395,537 114,524,307 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $155,245,705 $149,058,796 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 SERENA SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999 (UNAUDITED)
THREE MONTHS ENDED APRIL 30, ----------------------------- 2000 1999 ------------- ------------- Revenue: Software licenses......................................... $11,613,020 $ 6,908,607 Maintenance............................................... 8,362,374 5,294,079 Professional services..................................... 1,179,897 2,018,070 ----------- ----------- Total revenue........................................... 21,155,291 14,220,756 ----------- ----------- Cost of revenue: Software licenses......................................... 463,604 688,859 Maintenance............................................... 1,649,757 1,335,083 Professional services..................................... 1,065,099 1,557,041 ----------- ----------- Total cost of revenue................................... 3,178,460 3,580,983 ----------- ----------- Gross profit............................................ 17,976,831 10,639,773 ----------- ----------- Operating expenses: Sales and marketing....................................... 6,341,486 4,262,815 Research and development.................................. 2,007,810 1,366,357 General and administrative................................ 2,565,910 1,100,801 Stock-based compensation.................................. 83,859 314,814 Amortization of intangible assets......................... 536,442 502,441 ----------- ----------- Total operating expenses................................ 11,535,507 7,547,228 ----------- ----------- Operating income............................................ 6,441,324 3,092,545 Interest and other income, net.............................. 1,781,024 835,228 ----------- ----------- Income before income taxes................................ 8,222,348 3,927,773 Income taxes................................................ 3,510,709 1,733,551 ----------- ----------- Net income................................................ 4,711,639 2,194,222 Other comprehensive income (loss)........................... (105,824) 22,743 ----------- ----------- Comprehensive income...................................... $ 4,605,815 $ 2,216,965 =========== =========== Net income per share: Basic..................................................... $ 0.12 $ 0.06 =========== =========== Diluted................................................... $ 0.12 $ 0.06 =========== =========== Weighted average shares used in per share calculations: Basic..................................................... 37,972,148 35,203,649 =========== =========== Diluted................................................... 39,783,602 37,336,122 =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 SERENA SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999 (UNAUDITED)
THREE MONTHS ENDED APRIL 30, ------------------------------ 2000 1999 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 4,711,639 $ 2,194,222 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 254,218 184,462 Increase in allowance for bad debts................... 225,000 74,854 Accrued interest on notes receivable.................. (247,879) (46,740) Amortization of deferred stock-based compensation..... 83,859 314,814 Amortization of intangible assets..................... 536,442 502,441 Changes in operating assets and liabilities: Accounts receivable................................. 810,194 1,562,585 Prepaid expenses and other assets................... (721,324) (323,564) Accounts payable.................................... (62,783) (251,635) Income taxes payable................................ 1,074,649 (1,099,891) Accrued expenses.................................... (1,251,849) (365,301) Deferred revenue.................................... 1,416,760 1,958,887 ----------- ------------ Net cash provided by operating activities......... 6,828,926 4,705,134 ----------- ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of property and equipment....................... (280,347) (135,674) Purchases of short-term and long-term investments......... (2,567,486) (23,440,894) Payment of accrued interest and principal on notes receivable.............................................. 75,879 -- Payment of notes due from stockholder..................... -- 616,769 ----------- ------------ Net cash used in investing activities............. (2,771,954) (22,959,799) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock.................................. -- 57,902,226 Exercise of stock options under the employee stock option plan.................................................... 355,112 -- ----------- ------------ Net cash provided by financing activities......... 355,112 57,902,226 ----------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (72,462) 22,743 ----------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,339,622 39,670,304 Cash and cash equivalents at beginning of period............ 80,930,648 21,468,740 ----------- ------------ Cash and cash equivalents at end of period.................. $85,270,270 $ 61,139,044 =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid......................................... $ 2,351,564 $ 2,854,357 =========== ============ NONCASH INVESTING AND FINANCING ACTIVITY: Restricted stock issued in exchange for notes receivable.............................................. $15,819,001 $ -- =========== ============
See accompanying notes to condensed consolidated financial statements. 5 SERENA SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SERENA Software, Inc. (the "Company") is an industry-leading supplier of eBusiness infrastructure change management solutions. Its principal markets are North America and Europe. The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation. These unaudited consolidated financial statements and the notes thereto have been prepared in accordance with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosure required by generally accepted accounting principles and Regulation S-X for annual financial statements. For these additional disclosures, readers should refer to the Company's annual report on Form 10-K for the fiscal year ended January 31, 2000. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2001. (1) NET INCOME PER SHARE Basic net income per share is computed using the weighted-average number of shares of unrestricted common stock outstanding. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potentially dilutive common shares from restricted stock and options to purchase common stock using the treasury stock method. The following is a reconciliation of the shares used in the computation of basic and diluted net income per share:
THREE MONTHS ENDED APRIL 30, ----------------------- 2000 1999 ---------- ---------- Basic net income per share--weighted average number of unrestricted common shares outstanding.......... 37,972,148 35,203,649 Effect of potentially dilutive securities outstanding--restricted stock and options.......... 1,811,454 2,132,473 ---------- ---------- Shares used in diluted net income per share computation........................................ 39,783,602 37,336,122 ========== ==========
(2) STOCKHOLDERS' EQUITY On March 13, 2000, the Company announced that its Board of Directors approved a three-for-two split of the Company's outstanding shares of Common Stock. The stock split was effected in the form of a stock dividend that entitled each stockholder of record, at the close of business on March 21, 2000, to receive one additional share of Common Stock for every two shares of Common Stock held. The stock dividends resulting from the stock split were distributed by the transfer agent on March 29, 2000. The accompanying financial statements have been retroactively restated to reflect the effect of this stock split. (3) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging 6 SERENA SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (3) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) activities. This statement becomes effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS--DEFERRAL OF THE EFFECTIVE DATE OF SFAS STATEMENT NO. 133" ("SFAS 137"). SFAS 137 defers the effective date of SFAS 133 until February 1, 2001. The Company will adopt SFAS 133 in fiscal 2001. The Company does not have any derivative financial instruments and expects the adoption of SFAS 133 will not affect results of operations. In December 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-9, "MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION WITH RESPECT TO CERTAIN TRANSACTIONS." SOP 98-9 amends SOP 97-2 to require the entity to recognize revenue for multiple element arrangements by means of the "residual method" when: (1) there is vendor-specific evidence of the fair values of all of the undelivered elements; (2) vendor-specific evidence of fair value does not exist for one or more of the delivered elements; and (3) the revenue recognition criteria of SOP 97-2 are satisfied. SOP 98-9 became effective February 1, 2000. The Company adopted SOP 98-9 on February 1, 2000 without any material effect on its results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "REVENUE RECOGNITION IN FINANCIAL STATEMENTS." SAB 101 provides guidance for revenue recognition under certain circumstances. In March 2000, the SEC issued SAB No. 101A to defer for one quarter the implementation of SAB No. 101 with earlier application encouraged. The Company is required to adopt SAB No. 101 in the second quarter of fiscal 2001. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to assess the impact, if any, it may have on its financial position or results of operations. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25." This interpretation provides guidance for applying APB No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." This interpretation has provisions that are effective on staggered dates, some of which began after December 15, 1998 and others that become effective after July 31, 2000. The adoption of this interpretation did not and will not have a material impact on the financial statements. (4) ISSUANCE OF RESTRICTED STOCK On February 16, 2000 and under the Company's 1997 Stock Option and Incentive Plan, SERENA issued 817,500 shares of restricted common stock to certain officers of the Company at $19.33 per share in exchange for promissory notes. Restrictions lapse over four years based on the individual's continued employment. In the event an employee is terminated, the Company has the right to repurchase, for a price equal to the individual's original purchase price, any remaining restricted shares held by the individual. There was no deferred stock-based compensation recorded in connection with this restricted stock issuance. 7 SERENA SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (5) SUBSEQUENT EVENT On May 1, 2000, the Company acquired High Power Software, Inc. ("HPS"), a company to which we shared ownership rights in our DETECT+RESOLVE MAINFRAME technology for mainframe platforms. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of HPS will be included in the Company's consolidated financial statements from May 1, 2000. The Company acquired all the assets and assumed all the liabilities of HPS in exchange for cash of $1.4 million and the issuance of 91,954 shares of the Company's common stock valued at $19.97 per share. The transaction was valued at approximately $3.6 million. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS AND OUR ABILITY TO MANAGE OUR GROWTH. WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS REPORT. IT IS IMPORTANT THAT THE DISCUSSION BELOW BE READ TOGETHER WITH THE ATTACHED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, WITH THE DISCUSSION OF SUCH RISKS AND UNCERTAINTIES AND WITH THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO, AND THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION," CONTAINED IN THE COMPANY'S FORM 10-K FOR FISCAL 2000. RESULTS OF OPERATIONS References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENA's results of operations are derived from comparisons of SERENA's condensed consolidated statements of income and comprehensive income for the three months ended April 30, 2000 to the condensed consolidated statements of income and comprehensive income for the three months ended April 30, 1999. These results include the results of Diamond Optimum Systems, Inc. ("DIAMOND") from June 14, 1999, the date our acquisition of DIAMOND was completed. 9 The following table sets forth our results of operations expressed as a percentage of total revenue. These operating results for the periods presented are not necessarily indicative of the results for the full fiscal year or any other period.
PERCENTAGE OF REVENUE THREE MONTHS ENDED APRIL 30, ------------------- 2000 1999 -------- -------- Revenue: Software licenses......................................... 54.9% 48.6% Maintenance............................................... 39.5% 37.2% Professional services..................................... 5.6% 14.2% ----- ----- TOTAL REVENUE........................................... 100.0% 100.0% ----- ----- Cost of revenue: Software licenses......................................... 2.2% 4.8% Maintenance............................................... 7.8% 9.4% Professional services..................................... 5.0% 11.0% ----- ----- TOTAL COST OF REVENUE................................... 15.0% 25.2% ----- ----- GROSS PROFIT............................................ 85.0% 74.8% ----- ----- Operating expenses: Sales and marketing....................................... 30.0% 30.0% Research and development.................................. 9.5% 9.6% General and administrative................................ 12.1% 7.8% Stock-based compensation.................................. 0.4% 2.2% Amortization of intangible assets......................... 2.5% 3.5% ----- ----- TOTAL OPERATING EXPENSES................................ 54.5% 53.1% ----- ----- OPERATING INCOME............................................ 30.5% 21.7% Interest and other income, net.............................. 8.4% 5.9% ----- ----- Income before income taxes.................................. 38.9% 27.6% Income taxes................................................ 16.6% 12.2% ----- ----- NET INCOME.............................................. 22.3% 15.4% ===== =====
REVENUE We derive revenue from software licenses, maintenance and professional services. Our total revenue increased $7.0 million or 49% to $21.2 million in the current fiscal quarter ended April 30, 2000 from $14.2 million in the same quarter a year ago. SOFTWARE LICENSES. Software licenses revenue as a percentage of total revenue was 55% in the current fiscal quarter ended April 30, 2000 as compared to 49% in the same quarter a year ago. Software licenses revenue increased $4.7 million or 68% to $11.6 million in the current fiscal quarter from $6.9 million in the same quarter a year ago. The dollar increase is 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, fueled by new IT initiatives around the internet, eCommerce and the webification of legacy systems. To a lesser extent, an increase in sales force productivity and personnel, the introduction of our distributed system product, ECHANGE MAN in the second half of fiscal 2000, and software license price increases have all contributed to the dollar 10 increase. In particular, sales of our CHANGE MAN product grew significantly, with an increase in aggregate of 225% when comparing the current fiscal quarter ended April 30, 2000 to the same quarter from a year ago. CHANGE MAN, STARTOOL and COMPAREX continue to make up a significant portion of total licenses revenue. Those products accounted for $10.4 million or 90% of total software licenses revenue in the current fiscal quarter as compared to $6.4 million or 93% in the same quarter a year ago. MAINTENANCE. Maintenance revenue as a percentage of total revenue was 40% in the current fiscal quarter ended April 30, 2000 as compared to 37% in the same quarter a year ago. Maintenance revenue increased $3.1 million or 58% to $8.4 million in the current fiscal quarter from $5.3 million in the same quarter a year ago. The dollar increase reflects 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 6% of total revenue in the current fiscal quarter ended April 30, 2000 as compared to 14% in the same quarter a year ago. Professional services revenue decreased $0.8 million or 42% to $1.2 million in the current fiscal quarter from $2.0 million in the same quarter a year ago. The dollar decrease is attributable to certain of our customers putting projects on hold in order to address their remediation, testing and other activities associated with becoming Year 2000 compliant and a delay in closing professional services contracts with a significant customer. The decrease in professional services revenue as a percentage of total revenue was, in addition to the above, also attributable to strong revenue growth in software licenses and maintenance. COST OF REVENUE Cost of revenue, which consists of cost of software licenses, cost of maintenance and cost of professional services, was $3.2 million or 15% of total revenue in the current fiscal quarter ended April 30, 2000 as compared to $3.6 million or 25% in the same quarter a year ago. The decreases in both absolute dollar terms and as a percentage of total revenue, when comparing the current fiscal quarter ended April 30, 2000 to the same quarter a year ago, are predominantly the result of growth in higher margin software licenses revenue exceeding the other categories of lower margin revenue. Margin improvements in both software licenses and maintenance offset a margin decline in professional services. SOFTWARE LICENSES. Cost of software licenses consists principally of sublicense fees associated with our STARTOOL, STARWARP and DETECT+RESOLVE MAINFRAME products. Cost of software licenses as a percentage of total software licenses revenue was 4% in the current fiscal quarter ended April 30, 2000 as compared to 10% in the same quarter a year ago. Cost of software licenses decreased $0.2 million or 33% to $0.5 million in the current fiscal quarter from $0.7 million in the same quarter a year ago. The decrease, both in absolute dollar terms and as a percentage of total software licenses revenue, is attributable to decreases in royalty bearing software licenses, predominantly from STARTOOL, as a percentage of total software licenses revenue. 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 as a percentage of total maintenance revenue was 20% in the current fiscal quarter as compared to 25% in the same quarter a year ago. Cost of maintenance increased $0.3 million or 24% to $1.6 million in the current fiscal quarter from $1.3 million in the same quarter a year ago. The dollar increase is predominantly 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. 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 11 revenue decreased as the rate of increase in maintenance revenue was greater than the rate of increase in costs associated with our customer support organization. PROFESSIONAL SERVICES. Cost of professional services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional services revenue was 90% in the current fiscal quarter as compared to 77% in the same quarter a year ago. Cost of professional services decreased $0.5 million or 32% to $1.1 million in the current fiscal quarter from $1.6 million in the same quarter a year ago. The absolute dollar decrease is due to reducing the use of outside independent contractors and reallocating professional services resources to other parts of our organization as a result of our customers putting projects on hold to address issues associated with becoming Year 2000 compliant and the delay in closing a professional services contract with a significant customer. Cost of professional services as a percentage of total professional services revenue increased as the rate of decrease in professional services revenue was greater than the rate of decrease in costs associated with our professional services organization. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, commissions and bonuses, payroll taxes, and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue was 30% in both the current fiscal quarter ended April 30, 2000 and in the same quarter a year ago. Sales and marketing expenses increased $2.1 million or 49% to $6.3 million in the current fiscal quarter from $4.2 million in the same quarter a year ago. The dollar increase is due primarily to our expansion of our direct sales and marketing organization, and to a lesser extent, our marketing initiatives surrounding our FULL.CYCLE distributed systems capabilities and the development of our international sales and telesales efforts. As a percentage of total revenue, sales and marketing expenses remained unchanged when comparing the current fiscal quarter to the same quarter a year ago as the rate of increase in total revenue was the same as the rate of increase in sales and marketing expenses. In absolute dollar terms, we expect sales and marketing expenses to increase as we continue to hire additional sales and marketing personnel, market our distributed systems products and undertake additional marketing programs. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries, bonuses, payroll taxes, and employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue was 10% in both the current fiscal quarter and the same quarter a year ago. Research and development expenses increased $0.6 million or 47% to $2.0 million in the current fiscal quarter from $1.4 million in the same quarter a year ago. The dollar increase is primarily due to salary, bonus, payroll tax, employee benefits and other headcount related costs which resulted from the Company's acquisition of Diamond in June 1999, and to a lesser extent, increases in expanding our research and development efforts to enhance existing products and develop our FULL.CYCLE distributed systems and SERNET products. We expect research and development expenses to increase as we continue to hire additional research and development personnel to develop our FULL.CYCLE distributed systems product suite. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, and benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of total revenue was 12% in the current fiscal quarter as compared to 8% in the same quarter a year ago. General and administrative expenses increased $1.5 million or 133% to $2.6 million in the current fiscal quarter from $1.1 million in the same quarter a year ago. The dollar increase is primarily due to increases in salary, bonus, payroll tax and employee benefit costs associated with the expansion of our administrative infrastructure in order to support our increased sales, marketing, professional services 12 and maintenance activities, and to a lesser extent, increases in legal fees and costs associated with being a public company. We expect general and administrative expenses to increase in absolute dollar terms as we expand our infrastructure and our operations. STOCK-BASED COMPENSATION. In total, SERENA recorded aggregate deferred stock-based compensation of $4.6 million in connection with the issuance of restricted stock and grants of options to purchase common stock. 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, $0.1 million was amortized in the current fiscal quarter as compared to $0.3 million in the same quarter a year ago. We expect the stock-based compensation charge will continue to trend downward quarter over quarter as the related awards vest or are forfeited. As of April 30, 2000, SERENA had $0.3 million in unamortized stock-based compensation. AMORTIZATION OF INTANGIBLE ASSETS. In connection with the acquisitions of Optima Software, Inc. in September, 1998 and Diamond in June, 1999, the Company has recorded $25.7 million in intangible assets, of which $22.1 million is unamortized as of April 30, 2000. Combined, intangible assets are being amortized over periods of one year or less on $0.7 million, two to seven years on $3.8 million and fifteen years on the remaining $21.2 million. Of the total intangible assets, $0.5 million was amortized in both the current fiscal quarter ended April 30, 2000 and the same quarter a year ago. We expect to amortize an additional $1.6 million in the remaining three quarters of fiscal 2001 and $2.1 million in fiscal 2002. The intangible assets will be fully amortized by the end of fiscal 2014. INTEREST AND OTHER INCOME, NET INTEREST AND OTHER INCOME, NET. Interest and other income, net increased $0.9 million or 113% to $1.7 million in the current fiscal quarter from $0.8 million in the same quarter a year ago. The dollar increase in interest and other income, net is generally due to increases in balances on interest bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from accumulation of earnings. The increase in the current fiscal quarter ended April 30, 2000 when compared to the same quarter a year ago was also the direct result of the Company's initial public offering in February 1999 which generated net proceeds to the Company totaling $48.4 million and $10.9 million in February 1999 and March 1999, respectively. INCOME TAXES INCOME TAXES. Income taxes were $3.5 million in the current fiscal quarter ended April 30, 2000 and $1.7 million in the same quarter from a year ago, representing effective income tax rates of 43% and 44%, respectively. The Company's effective income tax rate decreased slightly in the current fiscal quarter, when compared to the same quarter a year ago, predominantly due to a decrease of $0.2 million in nondeductible charges recorded in the current fiscal quarter, when compared to the same quarter a year ago. The Company recorded $0.6 million in nondeductible charges in the current fiscal quarter consisting of $0.1 million in stock-based compensation and $0.5 million in amortization of intangible assets arising from both the Optima and Diamond acquisitions as compared to $0.8 million in nondeductible charges recorded in the same quarter from a year ago consisting of $0.3 million in stock-based compensation and $0.5 million in amortization of intangible assets arising from the Optima acquisition. 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. 13 LIQUIDITY AND CAPITAL RESOURCES Since SERENA's inception, we have financed our operations and met our capital requirements through cash flows from operations. As of April 30, 2000, SERENA had $85.3 million in cash and cash equivalents, and an additional $25.8 million in short-term investments consisting principally of high grade commercial paper, certificates of deposit and short-term bonds. Cash flows provided by operating activities were $6.8 million and $4.7 million in the current fiscal quarter ended April 30, 2000 and the same quarter a year ago, respectively. SERENA's cash flows provided by operating activities exceeded net income during each of these quarters principally due to cash collections in advance of revenue recognition for maintenance contracts, the inclusion of non-cash expenses in net income, decreases in accounts receivable, and growth in corporate income taxes payable; all partially offset by decreases in accrued expenses and payables, growth in prepaid expenses and other assets, and in last fiscal year's first quarter only, a decrease in corporate income taxes payable. Cash used in investing activities were predominantly related to the purchase of short and long-term investments totaling $2.6 million and $23.4 million in the current fiscal quarter and the same quarter from a year ago, respectively, and to a lesser extent, purchases of computer equipment and office furniture and equipment in both quarters; all partially offset by payments of accrued interest and principal received on notes receivable in the current fiscal quarter and payments received on stockholder notes in the same quarter from a year ago. In the current fiscal quarter ended April 30, 2000, cash flows from financing activities came entirely from the exercise of stock options under the Company's employee stock option plan totaling $0.3 million. In the same quarter from a year ago, cash flows from financing activities came entirely from the Company's initial public offering of common stock resulting in net proceeds to SERENA of $57.9 million. At April 30, 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 April 30, 2000, SERENA had working capital of $98.4 million and accounts receivable, net of allowances, of $14.5 million. Total deferred revenue increased to $20.5 million at April 30, 2000 from $19.0 million at January 31, 2000 primarily as a result of increased billings of maintenance fees. We believe that current cash and short-term investments, and cash flows from operations (including prepaid maintenance fees) will satisfy our working capital and capital expenditure requirements for at least the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING BUT NOT LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS, OUR ABILITY TO MANAGE OUR GROWTH AND THE FOLLOWING: THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS Our quarterly operating results have varied greatly in the past and may vary greatly in the future depending upon a number of factors described below and elsewhere in this "Factors That May Affect Future Results" section of this report, including many that are beyond our control. As a result, we 14 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 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 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, 15 we may not experience any revenue growth in the future, and our revenue could in fact decline. Our efforts to expand our software product suites, sales and marketing activities, direct and indirect distribution channels and professional service offerings and to pursue strategic relationships or acquisitions may not succeed or may prove more expensive than we currently anticipate. As a result, we cannot predict our future operating results with any degree of certainty. OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL SERENA SCM PRODUCTS; OUR FUTURE PROFESSIONAL SERVICE AND MAINTENANCE REVENUE IS DEPENDENT ON FUTURE SALES OF OUR SOFTWARE PRODUCTS We depend on our installed customer base for future revenues from maintenance renewal fees and licenses of additional SCM products. If our customers do not purchase additional products or cancel or fail to renew their maintenance agreements, this could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. The maintenance agreements are renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenue in future periods. In addition, our customers may not necessarily purchase additional products, upgrades or professional services. Our professional service revenue and maintenance revenue are also dependent upon the continued use of these services by our installed customer base. Any downturn in our software license revenue would have a negative impact on the growth of our professional service revenue and maintenance revenue in future quarters. 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 the current fiscal quarter ended April 30, 2000 and the same quarter from a year ago, sales of CHANGE MAN and COMPAREX together accounted for approximately 82% and 68% 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 16 marketing and selling distributed systems products. Additionally, we do not have any experience in providing support services for distributed systems products. Competition for experienced software engineers, sales personnel and support staff is intense and if we fail to attract qualified personnel this would impair our ability to support our distributed systems products. Many of our competitors have substantially greater experience providing distributed systems compatible software products than we do, and many also have significantly greater financial and organizational resources. IF THE SCM MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE ADVERSELY AFFECTED If we fail to properly assess and address the SCM market or if our products and services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. The SCM market is in an early stage of development. IT organizations have traditionally addressed SCM needs internally and have only recently become aware of the benefits of third-party SCM solutions as their SCM requirements have become more complex. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party SCM products and the expansion of their use on a company-wide basis. The SCM market for third-party products may grow more slowly than we anticipate. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our products as rapidly as existing technologies, customer requirements and industry standards evolve, our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our products less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded. OUR BUSINESS IS DEPENDENT ON THE CONTINUED MARKET FOR IBM AND IBM-COMPATIBLE MAINFRAMES We are substantially dependent upon the continued use and acceptance of IBM and IBM-compatible mainframes and the growth of this market. If the role of the mainframe does not 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. 17 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 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. 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 13% and 19% of our total revenue in the current fiscal quarter ended April 30, 2000 and the same quarter a year ago, 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 18 - 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. dollar have caused and will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future. To date, we have not adopted a hedging program to protect SERENA from risks associated with foreign currency fluctuations. SERENA IS SUBJECT TO INTENSE COMPETITION IN THE SCM INDUSTRY AND WE EXPECT TO FACE INCREASED COMPETITION IN THE FUTURE, INCLUDING COMPETITION IN THE SCM DISTRIBUTED SYSTEMS MARKET We may not be able to compete successfully against current and/or future competitors and such inability would materially adversely affect our business, quarterly and annual operating results and financial condition. The market for our products is highly competitive and diverse. Moreover, the technology for SCM products may change rapidly. New products are frequently introduced, and existing products are continually enhanced. Competition may also result in changes in pricing policies by SERENA or our competitors which could materially adversely affect our business and future quarterly and annual operating results. Competitors vary in size and in the scope and breadth of the products and services that they offer. Many of our current and potential competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can. MAINFRAME COMPETITION. We currently face competition from a number of sources, including: - Customers' internal IT departments - Providers of SCM products that compete directly with CHANGE MAN and COMPAREX such as Computer Associates, MERANT, IBM and smaller private companies - Providers of SCM application development programmer productivity and system management products such as Compuware, IBM and smaller private companies FUTURE COMPETITION. We may face competition in the future from established companies who have not previously entered the mainframe SCM market or from emerging software companies. Barriers to entry in the software market are relatively low. Increased competition may materially adversely affect our business and future quarterly and annual operating results due to price reductions, reduced gross margins and reduction in market share. Established companies may not only develop their own mainframe SCM solutions, but they may also acquire or establish cooperative relationships with our current competitors, including cooperative relationships between large, established companies and smaller private companies. Because larger companies have significant financial and organizational 19 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, 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 8% and 25% of our total software licenses revenue in the current fiscal quarter ended April 30, 2000 and the same quarter from a year ago, respectively. Licenses of STARWARP accounted for 1% of our total software licenses revenue in both quarters. 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% and 4% of our total software licenses revenue in the current fiscal quarter ended April 30, 2000 and the same quarter from a year ago, respectively. 20 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 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. 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 21 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. 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 22 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 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 23 one year, or to the amount of the licensee's current annual maintenance fee, if the license is more than one year old. Our standard license also provides that SERENA shall not be liable for indirect or consequential damages caused by the failure of our products. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions to the extent local laws treat certain warranty exclusions as unenforceable. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of such claims. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not use derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments consist of cash and cash equivalents, short and long-term investments, trade accounts and contracts receivable, 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 April 30, 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 13% of the total revenue during the quarter ended April 30, 2000. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and German deutsche mark, and does not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Company's foreign subsidiaries. Therefore, foreign exchange fluctuation could create a risk of significant balance sheet gains or losses on the Company's consolidated financial statements. However, given the Company's foreign subsidiaries' net book values as of April 30, 2000 and net cash flows for the most recent fiscal quarter then ended, the Company believes that such foreign denominated balances and activity are not material. 24 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS In February 1999, SERENA completed the sale of 9 million shares of its Common Stock, including 3 million shares on behalf of selling stockholders, at a per share price of $8.67 in a firm commitment underwritten public offering pursuant to a Registration Statement on Form S-1 (File No. 333-67761) which the Securities and Exchange Commission declared effective on February 11, 1999. The offering was underwritten by Chase H&Q LLC, SG Cowen Securities Corporation and Soundview Technology Group Inc. In March 1999, an over-allotment option granted by SERENA to the underwriters for the purchase of up to 1,350,000 additional shares of SERENA Common Stock was exercised in full by the underwriters. SERENA received aggregate gross proceeds of $63.7 million in connection with its initial public offering. Of such amount, approximately $4.4 million was paid to the underwriters in connection with underwriting discounts, and approximately $1.4 million was paid by SERENA in connection with offering expenses, including legal, accounting, printing, filing and other fees. There were no direct or indirect payments to directors or officers of the Company or any other person or entity. None of the offering proceeds have been used for the construction of plant, buildings or facilities or other purchase or installation of machinery or equipment or for purchases of real estate or the acquisition of other businesses. The Company is currently investing the net offering proceeds for future use as additional working capital. Such remaining net proceeds may be used for potential strategic investments or acquisitions that complement SERENA's products, services, technologies or distribution channels. On June 14, 1999, SERENA acquired Diamond Optimum Systems, Inc. ("Diamond"), a provider of enterprise software change management solutions for NT and UNIX environments, in a transaction valued at approximately $4.0 million. The Company acquired all the assets and assumed all the liabilities of Diamond in exchange for cash totaling $1.75 million and the issuance of 262,500 shares of the Company's common stock valued at $8.51 per share. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. EXHIBIT TITLE - --------------------- ------------------------------------------------------------ 27.1 Financial Data Schedule
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended April 30, 2000. 25 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SERENA SOFTWARE, INC. By: /s/ ROBERT I. PENDER, JR. ----------------------------------------- Robert I. Pender, Jr. VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) AND SECRETARY
Date: June 14, 2000 26 EX-27.1 2 ex-27_1.txt EX 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-Q QUARTERLY REPORT UNDER THE SECURITIES ACT OF 1934 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JAN-31-2001 FEB-01-2000 APR-30-2000 85,270,270 25,789,033 15,678,117 1,208,367 0 128,658,561 5,107,339 2,652,293 155,245,705 30,253,082 0 0 0 39,276 119,356,261 155,245,705 11,613,020 21,155,291 463,604 14,713,967 0 0 0 8,222,348 3,510,709 4,711,639 0 0 0 4,711,639 0.12 0.12
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