Stock-Based Compensation

6 Months Ended

Jul. 31, 2011

Stock-Based Compensation

Stock-Based Compensation

(2) Stock-Based Compensation

Stock-based compensation cost is typically measured at the grant date based on the fair value of the award. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards.

2006 Stock Incentive Plan

Following the completion of the Merger on March 10, 2006, the Company established a new stock incentive plan, the 2006 Stock Incentive Plan (the "2006 Plan"), governing, among other things, the grant of options, restricted stock bonuses, and other forms of share-based payments covering shares of the Company's common stock to our employees (including officers), directors and consultants. The Company's common stock representing 12% of outstanding common stock on a fully diluted basis as of the date of the Merger was reserved for issuance under the 2006 Plan. Stock options granted under the 2006 Plan are either "time options" that vest and become exercisable over a four-year period or "time and performance options" that vest based on the achievement of certain performance targets over a five-year period following the date of grant. All options granted under the 2006 Plan will expire not later than ten years from the date of grant, but generally will terminate earlier upon termination of employment. In the event of a sale of substantially all of the assets of the Company, or a merger or acquisition of the Company, the Board of Directors may provide that awards granted under the 2006 Plan will be cashed out, continued, replaced with new awards that substantially preserve the terms of the original awards, or terminated, with acceleration of vesting of the original awards determined at the discretion of the Board of Directors.

In the quarter ended October 31, 2009, the Company completed a tender offer permitting all eligible employees and its independent directors to exchange, on a one-for-one basis, stock options granted under the 2006 Plan for new stock options granted under Serena's Amended and Restated 2006 Stock Incentive Plan (the "Amended 2006 Plan") having a lower exercise price and different vesting terms. Eligible optionholders exchanged part or all of their time-based options for new time-based options having a vesting period, generally, of three years and an exercise price of $3.00 per share, the fair market value of Serena's common stock after the closing of the tender offer. Eligible employees who were not executive officers or officers of the Company exchanged part or all of their performance-based options for new time-based options having a vesting period of three years. Executive officers and officers of the Company exchanged part or all of their performance-based options for new performance-based options having a vesting period of three years and six months, with vesting based on the achievement of EBITA targets established by Serena's board of directors.

"Roll Over" Options

In connection with the Merger, the management participants were permitted to elect to have the surviving company in the merger assume some or all of the Serena stock options that they held immediately prior to the merger and that had an exercise price of less than $24.00 per share. The number of shares subject to these "roll over" options was adjusted to be the number of shares equal to the product of (1) the difference between $24.00 and the exercise price of the option and (2) the quotient of the total number of shares of Serena's common stock subject to such option, divided by $3.75. The exercise price of these "roll over" options was adjusted to $1.25 per share. The "roll over" options are subject to terms of the original option agreements with Serena, except that in the event of a "change in control" of Serena (as defined in the 2006 Plan), the treatment of the "roll over" options upon such transaction will be determined in accordance with the terms of the 2006 Plan.

The Amended 2006 Plan does not include an evergreen provision to provide for automatic increases in the number of shares available for grant. Any increase in the number of shares available for grant under the Amended 2006 Plan would require approval from the Company's Board of Directors.

As of July 31, 2011, a total of 12,549,313 shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards under the Amended 2006 Plan.

The fair value of each stock option grant under the stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months and six months ended July 31, 2011 and 2010.

	Three Months Ended July 31,		Six Months Ended July  31,
	2011	2010	2011	2010
Expected life (in years)	3.0	2.7 to 3.0	3.0	2.7 to 3.0
Risk-free interest rate	0.2% to 1.2%	0.2% to 1.3%	0.2% to 1.2%	0.2% to 1.5%
Volatility	19% to 33%	26% to 38%	19% to 33%	26% to 38%

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility.

With respect to the amounts set forth above, the Company's expected volatility is based on the combination of historical volatility of the Company's common stock and the Company's peer group's common stock over the period commensurate with the expected life of the options. To assist management in determining the estimated fair value of the Company's common stock, the Company engages a third-party valuation specialist to perform a valuation on a semi-annual basis as of January 31 and July 31. In estimating the fair value of the Company's common stock, the external valuation firm employs a two-step approach that first estimates the fair value of the Company as a whole, and then allocates the enterprise value to the Company's common stock. The risk-free interest rates are derived from the average U.S. Treasury constant maturity rates during the period and approximate the rate in effect at the time of grant for the respective expected term. The expected terms are based on the observed and expected time to post-vesting exercise or cancellation of options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses forecasted projections to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

General Stock Option Information

The following table sets forth the summary of option activity under our stock option programs for the six months ended July 31, 2011:

	Options Available  for Grant			Number of Options Outstanding			Weighted Average Exercise Price
Balances as of January 31, 2011		882,171			11,046,652		$	2.79
Granted		(315,000	)		315,000		$	3.58
Exercised		—			(2,382	)	$	1.25
Cancelled(1)		—			(77,128	)	$	1.25
Cancelled		2,309,119			(2,309,119	)	$	3.02
Restricted stock units granted, net of cancellations(2)		700,000			—			—
Balances as of July 31, 2011(3)		3,576,290			8,973,023		$	2.77

(1) Represents cancelled "Roll Over" options which are not returned to the available-for-grant stock option pool.

(2) Restricted stock units are granted from the stock option pool. In the six months ended July 31, 2011, a total of 700,000 units were cancelled and returned to the available-for-grant stock option pool. There were no units granted in the six months ended July 31, 2011. See "Restricted Stock Units" below for further details.

(3) The number of options vested and expected to vest, net of estimated forfeitures, as of July 31, 2011 was 5,870,828 and has a weighted average exercise price of $2.62.

Information regarding the stock options outstanding at July 31, 2011 is summarized as follows:

Range of Exercise Price	Number Outstanding(1)(2)		Weighted  Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable(1)(2)		Weighted Average Exercise Price
$1.25		1,390,956		1.91 years	$	1.25		1,390,956	$	1.25
$3.00		5,737,067		7.40 years	$	3.00		2,493,613	$	3.00
$3.08		980,000		8.74 years	$	3.08		181,171	$	3.08
$3.19		575,000		9.17 years	$	3.19		99,016	$	3.19
$3.58		290,000		9.57 years	$	3.58		—		—
		8,973,023		6.88 years	$	2.77		4,164,756	$	2.42

(1) The table shows options without consideration of expected forfeitures. The Company estimates its forfeiture rate to be approximately 2% per year.

(2) Total stock options outstanding at July 31, 2011 consist of 4,053,077 time-based options, 3,528,990 performance-based options and 1,390,956 roll over options. The Company presently does not record compensation expense associated with performance-based options because management believes their vesting is not probable.

The aggregate intrinsic value for options outstanding and options exercisable as of July 31, 2011 was $6.9 million and $4.6 million, respectively.

Restricted Stock Units

The Company has entered into restricted stock agreements with certain of its employees. These units are unvested and subject to each employee's continued employment with the Company for a period of three years from the date of issuance. In addition, if the Company is subject to a "change in control" or an "initial public offering" (as defined in these agreements) while the employee remains an employee of the Company, his or her remaining unvested restricted stock units will immediately vest in part or in full depending on the price per share at the time of such event.

The following table sets forth the summary of restricted stock units activity under our restricted stock purchase agreements for the six months ended July 31, 2011:

	Non-Vested Shares			Weighted Average Grant Date Fair Value
Balances as of January 31, 2011		2,020,000		$	3.01
Granted		—			—
Cancelled		(700,000	)	$	3.00
Balances as of July 31, 2011		1,320,000		$	3.02

The aggregate intrinsic value for restricted stock units outstanding as of July 31, 2011 was $4.7 million. There were no restricted stock units exercisable as of July 31, 2011.

As of July 31, 2011, total unrecognized compensation costs related to unvested stock options and restricted stock was $4.9 million. Costs related to unvested stock options are expected to be recognized over a period of 3 to 3.5 years and costs related to the restricted stock are expected to be recognized over a period of 3 to 4 years from grant date.

Stock-based compensation expense for the three and six months ended July 31, 2011 and 2010 is categorized as follows (in thousands):

	Three Months Ended July  31,						Six Months Ended July  31,
	2011			2010			2011			2010
Cost of maintenance	$	17		$	20		$	30		$	53
Cost of professional services		15			16			53			30
Stock-based compensation expense in cost of revenue		32			36			83			83
Sales and marketing		156			154			366			321
Research and development		50			146			(247	)		423
General and administrative		(106	)		460			289			1,166
Stock-based compensation expense (benefit) in operating expense		100			760			408			1,910
Total stock-based compensation expense		132			796			491			1,993
Income tax benefit		(51	)		(309	)		(190	)		(774	)
Total stock-based compensation expense, net of tax	$	81		$	487		$	301		$	1,219