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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-25285
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SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2669809
(State or other jurisdiction of (I.R.S. Employere
incorporation or organization) Identification No.)
500 AIRPORT BOULEVARD, 2ND FLOOR, 94010-1904
BURLINGAME, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 650-696-1800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of the Common Stock on March 31,
2000, as reported on the Nasdaq National Market, was approximately $487,140,000.
Shares of Common Stock held by each executive officer and director and by each
person who may be deemed to be an affiliate of the Registrant have been excluded
from this computation. This determination of affiliate status is not necessarily
a conclusive determination for other purposes. As of March 31, 2000, the
Registrant had 39,267,866 shares of Common Stock, $0.001 par value, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this
Form 10-K portions of its Proxy Statement for the 2000 Annual Meeting of
Stockholders, which is currently scheduled to be held on June 30, 2000.
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SERENA SOFTWARE, INC.
ANNUAL REPORT ON FORM 10-K
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TABLE OF CONTENTS
PAGE
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PART I...................................................... 3
Item 1. Business........................................ 3
Item 2. Properties...................................... 13
Item 3. Legal Proceedings............................... 13
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 13
PART II..................................................... 15
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............................ 15
Item 6. Selected Consolidated Financial Data............ 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 19
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk............................................ 35
Item 8. Financial Statements and Supplementary Data..... 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 37
PART III.................................................... 37
Item 10. Directors and Executive Officers of the
Registrant............................................. 37
Item 11. Executive Compensation......................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 37
Item 13. Certain Relationships and Related
Transactions........................................... 37
PART IV..................................................... 38
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 38
SIGNATURES.................................................. 40
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2
PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. CERTAIN STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS," AND ELSEWHERE IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS." THESE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN
THIS REPORT THAT ARE NOT HISTORICAL FACTS. WHEN USED IN THIS REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS, INCLUDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND
OTHER FACTORS DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS REPORT.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS AND OUR
ABILITY TO MANAGE OUR GROWTH. WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD
LOOKING INFORMATION CONTAINED IN THIS REPORT.
OVERVIEW
SERENA is a leading provider of eBusiness infrastructure software change
management, or SCM, solutions. Our products and services are used to manage and
control software change for organizations whose business operations are
dependent on managing information technology, or IT. In our 19 year history, we
have developed highly effective solutions for managing software change that
enable our customers to improve their return on IT investments by improving
software quality, accelerating time to market, and increasing programmer
productivity while reducing application development and IT infrastructure
maintenance costs. A key challenge for IT managers is managing software change
throughout the business organization, including new version releases, "bug
fixes," upgrades and application introductions. Our products help IT managers
manage software changes to applications by automating the software application
life cycle. IT managers use our products to track software changes during the
software application design and development process, manage separate programming
teams that are concurrently developing and enhancing applications, and oversee
the deployment of software applications. As of January 31, 2000, our products
have been installed in over 2,500 customer sites worldwide and our customers
include 40 of the Fortune 50 companies such as Chase Manhattan, Citigroup,
General Electric, IBM, MetLife, Merrill Lynch and Prudential.
The Company was incorporated in California in 1980 and reincorporated in
Delaware in 1998. Unless the context otherwise requires, references in this
report to "SERENA" and the "Company" refer to SERENA Software, Inc., a Delaware
corporation, and its predecessor, SERENA Software International, Inc., a
California corporation. The Company's executive offices are located at 500
Airport Boulevard, 2(nd) Floor, Burlingame, California 94010-1904 and its
telephone number is (650) 696-1800.
INDUSTRY BACKGROUND
The evolution of enterprise computing from centralized, mainframe-based
computing to distributed, client/server computing has added substantial
complexity in recent years to the management of IT infrastructures. Today's IT
environment is characterized by distributed information systems, applications
and networks, comprising a wide range of hardware platforms, operating systems,
databases, development tools, networking protocols and packaged and internally
developed software. This distributed computing
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environment has fueled a proliferation of applications disseminated throughout
the enterprise as departments and individual users have been empowered to
independently sponsor applications. These often disparate applications must be
continually maintained and often reprogrammed to be compatible with emerging
technologies. The advent of the Internet, intranets, extranets, and eBusiness
has added further complexity by stimulating the development of new applications,
extending the reach of applications throughout and beyond the enterprise while
introducing additional networking requirements.
In connection with the developments associated with the distributed
computing environment, the mainframe has continued to be a critical component of
IT infrastructures. Many IT organizations maintain applications that are vital
to their business on the mainframe because of its unmatched performance,
reliability and security.
Successful management of IT infrastructures requires the ability to manage
rapid and unpredictable technological change within increasingly complex and
heterogeneous computing environments. Change drivers include eBusiness,
competitive pressures, short time-to-market windows, mergers and acquisitions,
and regulatory changes.
According to the Yankee Group, 70% of mission critical applications in
Fortune 1000 companies run on mainframe computers. As organizations create new
eBusiness applications and "Webify" their existing applications, they typically
do so over a multi-tier, multi-platform architecture. Often these applications
contain a legacy mainframe application utilizing data in a mainframe database, a
middle-tier of UNIX, LINUX or Window NT servers, and Web browser client
software.
A key challenge for IT organizations is managing software change across
multiple platforms throughout the enterprise, including new version releases,
bug fixes, upgrades and application introductions. Any software change, if not
managed effectively, has the potential to cause system outages or corrupt data,
which could result in disruption throughout the enterprise and lost business.
For example, a single, undetected error in a software update could have
catastrophic results in such critical systems as airline flight planning and
securities trading. Change in software applications can occur at all phases of
the software application life cycle, from design and analysis to development,
through testing and production and into post-deployment support and maintenance.
Historically, organizations have attempted to address their SCM requirements
internally either with paper based, manually implemented policies and procedures
or by developing their own software solutions. These internal solutions
generally require substantial IT resources, have lengthy implementation cycles,
frequently fail and are not cost effective. To overcome the costs and risks
associated with internally developed software change management solutions, many
organizations are now seeking commercially developed SCM solutions that enable
them to cost effectively manage and control change throughout the software
application life cycle and across the enterprise. We believe sophisticated SCM
solutions are required as organizations face increasingly complex and
distributed IT infrastructures, limited IT resources, remote IT project teams
and tight budget constraints.
SERENA provides a full suite of software change management products and
services for managing and controlling change throughout the software application
life cycle. Our product suite automates the management of the software
application life cycle and creates an IT environment that facilitates concurrent
development efforts by separate programming teams, improves process consistency,
enhances software integrity and protects valuable software assets. Key
components of our solution are broad functionality within our FULL.CYCLE
mainframe and distributed systems product suites, a high level of adaptability
and ease of use and implementation of our FULL.CYCLE mainframe and distributed
systems product suites, the use of our comprehensive SER(POWER) consulting
services which complement our product offerings, and improved return on IT
investment. Key components of our strategy include maintaining our technology
leadership, extending SCM solutions across the enterprise, leveraging our
customer base, continuing to expand professional services offerings, expanding
global sales, and pursuing strategic relationships and acquisitions.
4
PRODUCTS
SERENA develops, markets and supports a full suite of mainframe SCM products
for managing and controlling change throughout the software application life
cycle. SERENA's product offerings support the industry standard IBM mainframe
platforms, including MVS, and are marketed under the brand name FULL.CYCLE
mainframe. This product suite automates the software application life cycle and
creates an IT environment that facilitates concurrent development efforts by
separate programming teams, improves process consistency, enhances software
integrity and protects valuable software assets. Our products significantly
improve programmer productivity, reduce software application development costs
and improve customers' return on IT investments.
In addition, SERENA develops, markets, and supports an SCM product suite for
the distributed systems environment to support Microsoft Windows 95/98/NT and
UNIX platforms. The first of these products, DETECT+RESOLVE, released in
December 1998, automatically repairs Windows 95/98/NT software configuration
problems, and our second distributed systems product, ECHANGE MAN, released in
June 1999 after our acquisition of Diamond Optimum Systems, Inc., automates
software change management on Windows 95/98/NT, UNIX, LINUX and HP platforms.
Customers typically purchase our FULL.CYCLE mainframe products under Million
Instructions Per Second, or MIPS-based, perpetual licenses. A description of
MIPS-based licenses is included in the "Overview" section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The following products comprise the FULL.CYCLE mainframe product suite:
YEAR PRODUCT
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FIRST LAST
PRODUCT NAME INTRODUCED RELEASED BRIEF DESCRIPTION
- ------------ ---------- -------- ------------------------------------
Change Man.......................... 1988 1999 Provides automated infrastructure to
control and manage software change
COMPAREX............................ 1981 1999 Performs data comparison for
application testing and software
quality
Merge+Reconcile..................... 1994 1999 Merges versions of programs to
enable concurrent development
StarTool............................ 1989 1999 Facilitates complex file and data
management tasks
StarWarp............................ 1997 1999 Addresses data aging problems by
converting data to new formats
Detect+Resolve Mainframe
(formerly SyncTrac)............... 1993 1999 Detects, tracks and synchronizes
changes in multiple environments
to improve system integrity and
recoverability
Change Transfer..................... 1999 1999 Record level backup and Restore
utility for VSAM data
CHANGE MAN, our flagship product, is a comprehensive SCM solution that
provides an automated infrastructure to help customers manage and control change
throughout the software application life cycle. CHANGE MAN manages change by
coupling application development and production control and provides developers
and their managers with the assurance of technological control and integrity
throughout the development process enabling them to focus on software quality
and production reliability. CHANGE MAN automates the entire software application
life cycle, by providing impact analysis, version control, promotion of fixed
code into production, online management of approvals and authorizations,
management of
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concurrent development efforts by separate programming teams, code freezing to
prevent further development while testing, and auditing and automating the
backout of changes.
CHANGE MAN is a flexible, compatible SCM solution that supports multiple
operating systems and database platforms and integrates easily with customers'
existing IT environments by using standard IBM programming languages and working
with existing customer security systems, libraries and inventory lists.
COMPAREX is a comparison SCM product used for efficient application testing
and software quality assurance. COMPAREX performs fast, accurate, single-step
comparisons of the contents of libraries, directories, files or databases by
performing line-by-line byte-level comparisons. COMPAREX performs several
functions, including supporting a variety of data types, providing sophisticated
comparison algorithms for both data and text, minimizing the scope of
comparisons by utilizing keywords to compare specific portions of a file,
providing direct interfaces to most major databases, and producing detailed
reports on the comparison differences.
MERGE+RECONCILE, OR M+R, facilitates the management of multiple versions of
software by providing a comprehensive comparison tool that can merge up to eight
versions of source code into a single version, and produces a report that
compares the different versions and clearly identifies differences and
conflicts. M+R can reduce application development costs by enabling separate
programming teams to work concurrently on the same parts of an application. By
merging different versions of a program's source code to provide a consolidation
of each team's changes, M+R greatly reduces implementation time and improves the
quality of new releases. M+R can be closely integrated with CHANGE MAN to
provide enhanced concurrent development capabilities.
STARTOOL is used for complex file and data management tasks and has
extensive editing tools. STARTOOL provides a comprehensive workbench of
utilities that may be used for application and system testing or conversion and
recovery support. STARTOOL enables users to perform many data management tasks,
including locating and replacing data and data sets, automatically tracking
changes to applications or systems, recreating lost source code, and diagnosing
and mapping recovery strategies for file-related problems.
STARWARP addresses data aging by providing a method for converting or
"warping" data stored in a particular format, including dates, currency and
other business fields into new formats. For example, STARWARP enables over 400
date fields to be converted into new formats to resolve Year 2000 issues.
STARWARP minimizes the need to write batch programs for each file-aging
situation and enables programmers to create test data by automating the process
of specifying default values for data fields.
DETECT+RESOLVE MAINFRAME (formerly SyncTrac) detects, tracks and
synchronizes changes in multiple environments to improve system integrity and
recoverability. DETECT+RESOLVE MAINFRAME provides centralized control to
software change implementation and distribution after applications are initially
deployed. DETECT+RESOLVE MAINFRAME speeds development and problem resolution by
detecting, reporting and recovering from changes across local and remote
environments. DETECT+RESOLVE MAINFRAME provides configuration security for the
production environment by using fingerprinting technology to audit and track
changes enabling system programmers to repair unauthorized changes and to
facilitate the replication of authorized changes to remote environments.
CHANGE TRANSFER is a backup utility for Virtual Storage Access Method (VSAM)
data. CHANGE TRANSFER detects VSAM changes at the record level and has the
ability to back up only those records that have changed. If VSAM data needs to
be restored, CHANGE TRANSFER provides a simple-to-use function to restore those
changes to the desired state. CHANGE TRANSFER improves efficiency by reducing
the time and resources it takes to backup and restore VSAM data.
6
The following products comprise the FULL.CYCLE distributed systems product
suite:
YEAR PRODUCT
---------------------
FIRST LAST
PRODUCT NAME INTRODUCED RELEASED BRIEF DESCRIPTION
- ------------ ---------- -------- ------------------------------------
eChange Man......................... 1993 1999 Provides automated infrastructure to
control and manage software change
Detect+Resolve Desktop.............. 1998 1999 Automatically repairs software
configuration problems
ECHANGE MAN is a comprehensive SCM solution that provides an automated
infrastructure to help customers manage and control change throughout the
software application life cycle. ECHANGE MAN manages change by coupling
application development, build management, and application deployment; and
provides developers and their managers with technological control and integrity
throughout the development process enabling them to focus on software quality
and reliability. ECHANGE MAN automates the software application life cycle, by
providing impact analysis, version control, promotion of fixed code into
production, online management of approvals and authorizations, management of
concurrent development efforts by separate programming teams, code freezing to
prevent further development while testing, and auditing and automating the
backout of changes.
DETECT+RESOLVE DESKTOP automatically repairs software configuration problems
on desktops, laptops, and servers. DETECT+RESOLVE DESKTOP utilizes SERENA's
fingerprinting technology to identify and repair problems at the component
level. By automatically repairing problems, DETECT+RESOLVE DESKTOP reduces help
desk calls, escalation calls, and desk side visits to improve application uptime
and availability while reducing total cost of ownership.
PRODUCTS UNDER DEVELOPMENT
To address the need to provide a single point of control to manage software
changes across the multi-tier, multi-platform architecture common to eBusiness
applications, SERENA is working on integrating its CHANGE MAN and ECHANGE MAN
SCM products. In October 1999, the Company announced its integration plans and
provided a preliminary demonstration of this capability at the GartnerGroup
ITxpo. In March 2000, the Company announced CHANGEXPRESS, a Web browser based
product that will be the initial point of integration of CHANGE MAN and ECHANGE
MAN. CHANGEXPRESS will provide customers with a single point of control to
approve changes and view and print reports from either CHANGE MAN or ECHANGE
MAN.
The software change process is usually initiated through a change request.
Providing a companion change request management product to a software change
management product offers additional opportunities to add value to customers by
further automating and improving processes to increase quality and efficiency
while reducing time to market. In March 2000, the Company announced EREQUESTMAN,
a change request management product that will integrate with, and be able to
share the same meta data repository as, ECHANGE MAN. EREQUESTMAN will provide a
request management solution that features predefined processes and business
rules. The predefined processes are extremely flexible and easily customized to
reflect the multi-level workflow and sub-processes found in many organizations.
SERENA may be unable, for technological or other reasons, to develop and
introduce these products in a timely manner. Any failure by us to successfully
develop, market, sell and support the FULL.CYCLE distributed systems product
suite would have a material adverse effect on our business, operating results
and financial condition. See "Factors That May Affect Future Results--Our
Introduction of SERENA SCM Products for Distributed Systems May Not Be
Successful" and "We May Experience Delays in Developing Our Products Which Could
Adversely Affect Our Business."
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TECHNOLOGY
SERNET provides a common platform for the continued enhancement of our
existing products and the rapid development of future products. SERNET serves as
a repository for our key technologies and provides our product suites with a
common and stable infrastructure, a set of common services for product suite
integration, an interface that promotes third party integration, a communication
module for cross platform interconnectivity, and a common set of modules
including licensing management, file access and security. This technology is the
key infrastructure that will enable our upcoming CHANGEXPRESS product to provide
single point of control for reporting and approvals which unites SERENA's
multiplatform SCM solution.
The SERNET technologies are proven and reliable and already part of many of
the FULL.CYCLE mainframe products. SERNET provides a broad platform for
customers and third parties to integrate into SERENA's technology base. These
interfaces which are provided natively and with language specific "wrappers',
such as Java, C++ etc, facilitate integration of vended and home grown solutions
into the multi-platform and distributed world of software change management.
In addition to SERNET, we have developed a number of other SCM technologies
which are embedded in our products, including:
- A comparison engine detecting differences and tracking changes as small as
individual bit values. This technology enables customers to compare
extremely large volumes of data rapidly from a diverse set of sources
including databases, indexed files and flat file structures. The primary
product that uses this technology is COMPAREX.
- A merge engine processing changes made to the same source code program by
different development teams that enables parallel development teams to
apply changes to an application concurrently, while determining whether
the changes are compatible. The primary product that uses this technology
is MERGE+RECONCILE. But, it is also a key component of both our mainframe
and distributed systems SCM products, CHANGE MAN and ECHANGE MAN.
- A fingerprinting technology enabling application or system changes to be
detected with a high level of granularity by reducing each data file in a
system to a unique eight-byte token or "fingerprint" which changes if any
bit is altered. Fingerprinting allows programmers and systems managers to
quickly determine which changes have led to operational errors, thereby
facilitating timely problem detection and resolution. Substantially all of
SERENA's products use this technology.
- An object factory technology consolidating desktop components into single
objects and collecting them in class libraries, allowing for code re-use
and enabling customers to develop inventories containing proven, tested
and reliable codes, thereby facilitating the rapid development and
deployment of products to the desktop. The object factory technology has
an open interface structure of class libraries that can be incorporated
with original equipment manufacturer tool kits. SERENA uses this
technology to develop new SCM products or to upgrade existing products.
Known as the XPI and the EPI, these programming interfaces work directly
with our mainframe and distributed systems products. The architecture is
TCP/IP based thus enabling applications on disparate platforms in diverse
locations to interact with SERENA's software products.
- A fourth generation, object-oriented development engine developed entirely
in Java and based on extensible markup language (XML) to facilitate
integration into third party products. This technology is used to
accelerate the time to market of future SERENA products.
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PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Our services group provides technical consulting, education, customer
support and product maintenance to help customers maximize the utilization of
SERENA's FULL.CYCLE products. We offer our consulting and education services
under the SER(POWER) brand name.
CONSULTING. SERENA provides a comprehensive range of consulting services to
our customers. Our consultants review customers' existing IT systems and
applications and make recommendations for changing those systems and
applications and customizing SERENA's SCM products so that customers can fully
realize the benefits of the FULL.CYCLE products. In addition to helping
customers customize, install and deploy our software products, our consulting
services may also include process reengineering and developing interfaces with
customers' databases, third party proprietary software repositories or
programming languages.
We also offer customers more specialized consulting services. These
specialized consulting services expand SERENA's SER(POWER) services to include
our BEST PRACTICES CONSULTING SERVICES, which provide customers with expertise
and assistance in defining and developing a best practice change and
configuration management architecture and in identifying corresponding products,
methods and procedures. SERENA's consulting services are typically billed on a
time and materials basis.
EDUCATION. We offer hands-on training courses for the implementation and
administration of our products. Product training is provided on a periodic basis
at our headquarters in Burlingame, California, at our offices in London and also
at customer sites throughout the United States and Europe. We also offer custom
course development for certain of our products. We bill our education services
on a per class basis.
CUSTOMER SUPPORT AND PRODUCT MAINTENANCE. We have a staff of customer
service personnel who provide technical support to customers. We offer technical
support services 24 hours a day, seven days a week via our Internet site, toll
free telephone lines, electronic mail, bulletin board service and facsimile
lines. Customers are notified about the availability of regular maintenance and
enhancement releases via Internet-based electronic mail. Initial product license
fees include one year of product software maintenance and support. Thereafter,
customers are entitled to receive software updates, maintenance releases and
technical support for an annual maintenance fee equivalent to approximately 17%
of the current list price of the licensed product.
RESEARCH AND DEVELOPMENT
SERENA believes that the ability to introduce new and enhanced products to
customers will be a key factor for future success. As part of our efforts to
generate ideas for enhancing our existing products and for developing new ones,
we maintain an ongoing dialogue with our customers who are continually facing
new SCM challenges in their evolving IT environments. SERENA has devoted and
expects to continue to devote significant resources to developing new and
enhanced products, particularly distributed systems products and other
initiatives aimed at the Web.
Most of our technical personnel have been employed by SERENA for a
substantial length of time and their significant knowledge base contributes to
SERENA's ability to understand and address customers' SCM requirements. We
believe that attracting and retaining talented software developers who
understand the customers' problems is an important component of product
development activities. We encourage our developers to assume responsibility for
the design and delivery of our products through our product authorship incentive
program that rewards our developers with commissions based on the market success
of the applications they design, write, market and support. Competition for
developers is intense and any failure by us to continue to attract and retain
qualified personnel could have a material adverse effect on our business,
operating results and financial condition. See "Factors That May Affect Future
Results--We May Not Be Able to Recruit and Retain the Personnel We Need to
Succeed."
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SERENA's research and development expenses were $5.5 million, $4.5 million
and $6.8 million in fiscal 1998, 1999 and 2000, representing 17%, 9% and 9% of
total revenues, respectively. The reduction in research and development expenses
in fiscal 1999 is attributable principally to the restructuring of compensation
arrangements with SERENA's founder and Chief Technology Officer. We expect
research and development expenses will increase as we hire additional research
and development personnel to develop our distributed systems product suite. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We believe that our ability to develop and introduce enhancements to our
products and new products on a timely basis is a key success factor. We expect
that we will have to respond quickly to rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. SERENA has in
the past devoted and expects in the future to continue to devote a significant
amount of resources to developing new and enhanced products. We currently have a
number of product development initiatives underway. There can be no assurance
that any enhanced products, new products or product suites will be embraced by
existing or new customers. The failure of these products to achieve market
acceptance could have a material adverse effect on our business, operating
results and financial condition. See "Factors That May Affect Future
Results--Our Industry Changes Rapidly Due to Evolving Technology Standards And
Our Future Success Will Depend on Our Ability to Continue to Meet the
Sophisticated Needs of Our Customers."
SALES AND MARKETING
In North America, the United Kingdom and Germany, we market our software
primarily through our direct sales organization. SERENA's North American sales
organization includes personnel in the metropolitan areas of Boston, Chicago,
Los Angeles, New York, Sacramento, San Francisco, Dallas, Atlanta and Toronto.
Our direct sales force works closely with customers to understand and
address their SCM needs. In particular, we plan to broaden our direct sales and
telesales efforts to reduce sales cycles and provide a rapid response to
customer product requests.
In addition to our direct sales and telesales efforts, we have established
relationships with distributors and resellers located in North America, Spain,
Italy, Latin America, Belgium, Hong Kong, Israel, Australia, Japan, Korea and
South Africa. In addition to marketing and selling our software, these
distributors and resellers provide technical support as well as educational and
consulting services.
We market our products through seminars, industry conferences, trade shows,
advertising, direct mailing efforts and our Internet site. In addition, we have
developed programs that promote an active exchange of information between us and
our existing customers. These programs include customer meetings with our senior
management at our Executive Briefing Center and focus group meetings with
customers to evaluate product positioning. We plan to continue to expand our
marketing organization to broaden our market presence.
COMPETITION
The market for our products and services is highly competitive and diverse.
The technology for SCM products may change rapidly. New products are frequently
introduced and existing products are continually enhanced. Competitors vary in
size and in the scope and breadth of the products and services that they offer.
Many of our current and potential competitors have greater financial, technical,
marketing and other resources than we have. As a result, they may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements. They may also be able to devote greater resources to the
development, promotion and sale of their products than we can. We may not be
able to compete successfully against current and future competitors.
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MAINFRAME COMPETITION. We currently face competition from a number of
sources, including:
- Customers' internal IT departments
- Providers of SCM products that compete directly with CHANGE MAN and
COMPAREX such as Computer Associates, MERANT, IBM and smaller private
companies
- Providers of SCM application development programmer productivity and
system management products such as Compuware, IBM and smaller private
companies
FUTURE COMPETITION. We may face competition in the future from established
companies who have not previously entered the mainframe SCM market or from
emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may materially adversely affect our
business and future quarterly and annual operating results due to price
reductions, reduced gross margins and reduction in market share. Established
companies may not only develop their own mainframe SCM solutions, but they may
also acquire or establish cooperative relationships with our current
competitors, including cooperative relationships between large, established
companies and smaller private companies. Because larger companies have
significant financial and organizational resources available, they may be able
to quickly penetrate the mainframe SCM market through acquisitions or strategic
relationships and may be able to leverage the technology and expertise of
smaller companies and develop successful SCM products for the mainframe. We
expect that the software industry, in general, and providers of SCM solutions,
in particular, will continue to consolidate. It is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
BUNDLING OR COMPATIBILITY RISKS. Our ability to sell our products also
depends, in part, on the compatibility of our products with other third party
products, particularly those provided by IBM. Developers of these third party
products may change their products so that they will no longer be compatible
with our products. These third party developers may also decide to bundle their
products with other SCM products for promotional purposes. If that were to
happen, our business and future quarterly and annual operating results may be
materially adversely affected as we may be priced out of the market or no longer
be able to offer commercially viable products.
COMPETITION IN THE DISTRIBUTED SYSTEMS SCM MARKET. We also face significant
competition as we develop, market and sell our distributed systems products,
including ECHANGE MAN. If we are unable to successfully penetrate the
distributed systems SCM market, our business and future quarterly and annual
operating results will be materially adversely affected. Penetrating the
existing distributed systems SCM market will be difficult. Competitors in the
distributed systems market include Rational Software, Computer Associates,
Continuus, MERANT, Microsoft, Novadigm, Novell, and other smaller private
companies.
INTELLECTUAL PROPERTY
Our success will be heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Such laws, procedures and contracts provide only limited
protection. We submitted four patent applications for our technology in 1998 and
four more in 1999, and each of these applications is still pending. These
patents may never be issued. Even if these patents are issued, they may not
provide sufficiently broad protection or they may not prove enforceable in
actions against alleged infringors. Despite the precautions that we take, it may
be possible for unauthorized third parties to copy aspects of our current or
future products or to obtain and use information that we regard as proprietary.
In particular, we may provide our licensees with access to our data model and
other proprietary information underlying our licensed applications. Such means
of protecting our proprietary rights may not be adequate. Additionally, our
competitors may independently develop similar or superior technology. Policing
unauthorized use of software is difficult and some foreign laws do not protect
11
SERENA's proprietary rights to the same extent as United States laws. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of SERENA's resources and could materially adversely affect our
business, operating results, and financial condition.
Third parties may claim that our current or future products infringe their
proprietary rights. In September 1998, Compuware filed a lawsuit against SERENA
alleging copyright infringement, trade secret misappropriation and various tort
claims related to the sale of our STARTOOL and STARWARP products. See "Legal
Proceedings" and "Factors That May Affect Future Results--Third Parties in the
Future Could Assert That Our Products Infringe Their Intellectual Property
Rights, Which Could Adversely Affect Our Business; There Could Be Potential
Adverse Affects of the Pending Compuware Claim." We may receive additional
claims in the future and any such claims could affect our relationships with
existing customers and may prevent future customers from licensing our products.
Because we are dependent upon a limited number of products, any such claims,
including the Compuware claim, with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Royalty or license agreements may
not be available on acceptable terms or at all. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the software industry segment grows and the
functionality of products in different industry segments overlaps. As a result
of these factors, infringement claims could materially adversely affect our
business, operating results and financial condition.
We license our STARTOOL and STARWARP products on an exclusive, worldwide
basis from A. Bruce Leland, one of our employees. Mr. Leland holds all
proprietary rights with respect to the STARTOOL and STARWARP technology,
including any derivative works or enhancements of the existing STARTOOL and
STARWARP products. Sales of STARTOOL accounted for 11% and 18% of SERENA's
software licensing revenue for fiscal 1999 and 2000, respectively. Licenses of
STARWARP accounted for 5% and 0% of SERENA's software licensing revenue for
fiscal 1999 and 2000, respectively. Our licenses to copy, market and distribute
STARTOOL and STARWARP are exclusive, worldwide and nontransferable. We pay
sublicense fees of approximately 32% on net revenue recognized from license and
maintenance agreements related to STARTOOL and STARWARP. SERENA's licenses for
these products are terminable by Mr. Leland upon 30 days notice in the event
certain conditions occur, including if we fail to pay sublicense fees on a
timely basis or otherwise materially breach the license agreement. SERENA owns
the trademarks for both STARTOOL and STARWARP.
We share ownership rights in our DETECT+RESOLVE MAINFRAME technology for
mainframe platforms with High Power Software, a developer of data protection
software for the mainframe. Sales of the DETECT+RESOLVE MAINFRAME product
accounted for 4% and 2% of SERENA's software license revenue in fiscal 1999 and
2000, respectively. High Power Software currently receives 30% and 45% of all
software license revenue and maintenance revenue, respectively, derived from
licenses of the DETECT+RESOLVE product for mainframe platforms. Although we have
primary responsibility for marketing, licensing and supporting DETECT+RESOLVE
MAINFRAME, High Power Software has the ability to jointly direct marketing,
sales and support efforts regarding the product. We own the DETECT+RESOLVE
technology for deployment on non-mainframe platforms and do not share this
ownership with High Power Software or any other third party.
If our licenses for our STARTOOL and STARWARP technologies terminated or our
relationship with High Power Software worsened with regard to the joint
direction of marketing, sales and support efforts for DETECT+RESOLVE MAINFRAME,
this could materially adversely affect our business and operating results. See
"Factors That May Affect Future Results--Certain of Our Products Are Licensed
From Third Parties or Are Jointly-Owned with Third Parties; Our Failure To
Maintain These Arrangements with Third Parties Could Adversely Affect Our
Business."
12
EMPLOYEES
As of January 31, 2000, SERENA had 244 full-time employees, 45 of whom were
engaged in research and development, 93 in sales and marketing, 65 in
consulting, education and customer and document support, and 41 in finance,
administration and operations. Our future performance depends in significant
part upon the continued service of our key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees could materially adversely affect our business, operating results and
financial condition. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future. None of our employees are represented by
a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, consulting, education,
customer support and research and development facilities are located at our
headquarters in Burlingame, California. SERENA currently occupies an aggregate
of approximately 30,000 square feet of office space in the Burlingame facility
under the terms of various leases, the first of which terminates, unless
renewed, in December 2001. Management believes its current facilities will be
adequate to meet SERENA's needs for at least the next twelve months. We believe
that suitable additional facilities will be available in the future as needed on
commercially reasonable terms.
SERENA also leases office space for sales and marketing in Sacramento,
California; Woodland Hills, California; Atlanta, Georgia; Dallas, Texas; Parker,
Colorado; and Freehold, New Jersey, and has subsidiaries in Canada, the United
Kingdom and Germany.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, Compuware filed suit against SERENA in the United States
District Court for the Eastern District of Michigan seeking unspecified
compensatory damages, costs and attorneys fees, and injunctive relief based on
allegations of copyright infringement, trade secret misappropriation and various
tort claims related to the sale of our STARTOOL and STARWARP products. Compuware
served the complaint on SERENA in November 1998. As of the date of this
statement, the parties have completed fact discovery. To date, Compuware has not
sought preliminary injunctive relief. However, management cannot ascertain the
availability of injunctive relief or other equitable remedies or estimate the
total expenses, possible damages or settlement value, if any, that may
ultimately be incurred in connection with Compuware's suit. Management believes,
based on the advice of counsel, that SERENA has meritorious defenses to the
allegations contained in Compuware's complaint and management is defending
against the complaint vigorously. We believe that this matter will not have a
material adverse effect on our results of operations or financial condition.
This litigation could be time consuming and costly, and there can be no
assurance that SERENA will necessarily prevail given the inherent uncertainties
in litigation. In the event that we do not prevail in litigation, we could be
prevented from selling our STARTOOL and STARWARP products or be required to
enter into royalty or licensing agreements or pay monetary damages, and/or pay
attorneys' fees. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to SERENA. In the event of a successful claim
against us, our business, operating results or financial condition could be
materially adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of January 31, 2000.
NAME AGE POSITION
- ---- -------- ------------------------------------------
Douglas D. Troxel......................... 55 Chairman of the Board and Chief Technology
Officer
Richard A. Doerr.......................... 57 President, Chief Executive Officer and
Director
Kevin C. Parker........................... 43 Vice President, Research and Development
Robert I. Pender, Jr...................... 42 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Anthony G. Stayner........................ 44 Vice President, Marketing
Vita A. Strimaitis........................ 40 Vice President, General Counsel and
Assistant Secretary
Mark E. Woodward.......................... 41 Vice President, Worldwide Operations
Alan H. Hunt(a)(b)........................ 57 Director
Jerry T. Ungerman(a)(b)................... 55 Director
- ------------------------
(a) Member of Audit Committee
(b) Member of Compensation Committee
DOUGLAS D. TROXEL is the founder of SERENA and has served as the Chairman of
SERENA's Board of Directors since April 1980 and SERENA's Chief Technology
Officer since April 1997. From June 1980 to April 1997, Mr. Troxel served as the
President and Chief Executive Officer of SERENA. Mr. Troxel holds a B.S. in
mathematics from Iowa State University.
RICHARD A. DOERR has served as SERENA's President, Chief Executive Officer
and as a member of SERENA's Board of Directors since April 1997. From
April 1995 until October 1996, Mr. Doerr was Vice President of Sales, Service
and Distribution for Wall Data Incorporated, a software connectivity company.
From October 1991 until October 1994, Mr. Doerr was Vice President, Worldwide
Operations for Oracle Corporation, a developer of relational database management
software. From August 1986 until October 1991, Mr. Doerr was Vice President,
Western Area and U.S. Healthcare Industry for Digital Equipment Corporation, a
developer of networking solutions for computer environments. Mr. Doerr holds a
B.S. from California Polytechnic State University.
KEVIN C. PARKER has served as SERENA's Vice President, Research and
Development since November 1998. From October 1997 until November 1998,
Mr. Parker served as SERENA's Director of Technology Development. From
November 1995 until April 1997, Mr. Parker was Director of Product Development
for Command Technology Corporation, a developer of mainframe-style programmer's
tools. From November 1989 until November 1995, Mr. Parker was Managing Director
of IT Independent Training Limited, a developer of software training products.
ROBERT I. PENDER, JR. has served as SERENA's Vice President, Finance and
Administration, Chief Financial Officer and Secretary since December 1997. From
December 1996 until August 1997, Mr. Pender was Vice President, Finance of
Mosaix, Inc., a customer interaction software company. From April 1993 until
December 1996, Mr. Pender served in a variety of positions, most recently as
Chief Financial Officer, with ViewStar Corporation, a client/server workflow
software company that was acquired by Mosaix, Inc. in December 1996. Mr. Pender
holds a B.A. in accounting from Baylor University and a M.S. in financial
planning and tax from Golden Gate University.
14
ANTHONY G. STAYNER has served as SERENA's Vice President, Marketing since
April 1999. From June 1998 until March 1999, Mr. Stayner served as SERENA's Vice
President, Services. From February 1996 until January 1998, Mr. Stayner was
Director of Product Marketing, Services Business Unit for Network
Associates, Inc., a network security and performance management company. From
November 1994 until February 1996, Mr. Stayner was the Principal for Stayner &
Associates, a marketing and management consulting services firm. From
March 1992 until November 1994, Mr. Stayner was the Vice President of Marketing
for Common Ground Software, a developer of software for the distribution of
electronic documents across multiple platforms. Mr. Stayner holds a B.A. in
economics and mathematics from the University of California, Davis, a J.D. from
the University of California, Berkeley and a M.B.A. from Stanford University.
VITA A. STRIMAITIS has served as SERENA's Vice President, General Counsel
and Assistant Secretary since July 1997. Ms. Strimaitis also served as SERENA's
Director of Licensing from September 1996 until July 1997. From April 1995 until
February 1996, Ms. Strimaitis was Vice President and General Counsel for
Financial Benefit Group, an annuity insurance company. From August 1994 until
April 1995, Ms. Strimaitis was a Senior Corporate Attorney for Uniforce Staffing
Services, a professional services resources company. From June 1986 until
January 1993, Ms. Strimaitis was Assistant General Counsel and Corporate
Secretary for Pioneer Financial Services, Inc., an insurance holding company.
Ms. Strimaitis holds a B.A. in political science and psychology from Loyola
University and a J.D. from Northern Illinois University College of Law.
MARK E. WOODWARD has served as SERENA's Vice President, Worldwide Operations
since February, 2000 and as Vice President, Sales from November 1998 to
February, 2000. From August 1997 until November 1998, Mr. Woodward was Senior
Vice President, Sales for Live Picture, Inc., a developer of Internet imaging
technology. From August 1995 until August 1997, Mr. Woodward was Vice President,
Sales for McAfee Associates, a network management firm. From March 1989 until
August 1995, Mr. Woodward was Vice President, Sales for Legent, Inc., a
developer of SCM products.
ALAN H. HUNT has served as a member of SERENA's Board of Directors since
February 1998. From October 1995 to January 1998, Mr. Hunt was the President and
Chief Executive Officer and a member of the Board of Directors of Peregrine
Systems, Inc., a provider of infrastructure management software solutions. From
July 1994 until November 1995, Mr. Hunt was President and Chief Executive
Officer and a member of the Board of Directors of XVT Software Inc., a
development tools software company. From March 1991 until May 1994, Mr. Hunt was
Senior Vice President of Sales and Marketing (North America) for BMC
Software, Inc., a vendor of software system utilities for IBM mainframe
computing environments. Mr. Hunt holds a B.S. in business administration and
industrial management from San Jose State College.
JERRY T. UNGERMAN has served as a member of SERENA's Board of Directors
since December 1998. Since October 1998, Mr. Ungerman has served as an Executive
Vice President of Check Point Software Technologies Ltd., a developer of
computer network security access software. From July 1971 to October 1998,
Mr. Ungerman was the Executive Vice President of Operations of Hitachi Data
Systems Corp., a provider of computer networking and data storage solutions for
computing environments. Mr. Ungerman holds a B.S.B. in Business from the
University of Minnesota.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "SRNA" since the Company's initial public offering in
February 1999. Prior to February 1999, there was no established public trading
market for the Company's Stock.
As of March 31, 2000, the Company had issued and outstanding 39,267,866
shares of its Common Stock held by 66 stockholders of record.
15
The following table sets forth the range of high and low closing sales
prices for each period indicated, adjusted for the three-for-two stock split
effective March 21, 2000.
HIGH LOW
-------- --------
Fiscal Year Ended January 31, 2001:
First quarter (through March 31, 2000)................ $39.208 $17.167
Fiscal Year Ended January 31, 2000:
Fourth quarter........................................ $22.667 $14.083
Third quarter......................................... $12.500 $ 5.500
Second quarter........................................ $ 9.083 $ 5.917
First quarter (from February 12, 1999)................ $11.333 $ 5.750
The market price of the Company's Common Stock could be subject to
significant fluctuations in the future based on a number of factors, including
any shortfall in the Company's revenues or net income from revenues or net
income expected by securities analysts; announcements of new products by the
Company or its competitors; quarterly fluctuations in the Company's financial
results or the results of other software companies, including those of direct
competitors of the Company; changes in analysts' estimates of the Company's
financial performance, the financial performance of competitors, or the
financial performance of software companies in general; general conditions in
the software industry; changes in prices for the Company's products or
competitors' products; changes in revenue growth rates for the Company or its
competitors; and conditions in the financial markets. In addition, the stock
market may from time to time experience extreme price and volume fluctuations,
which particularly affect the market price for the securities of many technology
companies and which have often been unrelated to the operating performance of
the specific companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to an Agreement and Plan of Reorganization dated June 4, 1999,
whereby SERENA acquired Diamond Optimum Systems, Inc., SERENA issued an
aggregate of 262,500 shares of Common Stock to the selling stockholders of
Diamond Optimum Systems, Inc. The sale of securities in both acquisition
transactions were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) thereof, transactions not involving a public
offering.
USE OF PROCEEDS
In February 1999, SERENA completed the sale of 9 million shares of its
Common Stock, including 3 million shares on behalf of selling stockholders, at a
per share price of $8.67 in a firm commitment underwritten public offering. The
offering was underwritten by Chase H&Q LLC, SG Cowen Securities Corporation and
Soundview Technology Group Inc. In March 1999, an over-allotment option granted
by SERENA to the underwriters for the purchase of up to 1,350,000 additional
shares of SERENA Common Stock was exercised in full by the underwriters.
SERENA received aggregate gross proceeds of $63.7 million in connection with
its initial public offering. Of such amount, approximately $4.4 million was paid
to the underwriters in connection with underwriting discounts, and approximately
$1.2 million was paid by SERENA in connection with offering expenses, including
legal, accounting, printing, filing and other fees. There were no direct or
indirect
16
payments to directors or officers of the Company or any other person or entity.
None of the offering proceeds have been used for the construction of plant,
buildings or facilities or other purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses. The Company is currently investing the net offering proceeds for
future use as additional working capital. Such remaining net proceeds may be
used for potential strategic investments or acquisitions that complement
SERENA's products, services, technologies or distribution channels.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical data presented below are derived from the
consolidated financial statements of SERENA Software, Inc. and its subsidiaries.
The financial statements as of and for each of the years in the three-year
period ended January 31, 2000 have been audited by KPMG LLP, independent
auditors. The selected consolidated financial data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of SERENA and notes thereto included
elsewhere in this report.
17
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue:
Software licenses.......................... $ 4,606 $ 8,229 $17,839 $ 27,199 $ 41,808
Maintenance................................ 5,679 8,730 12,258 16,960 26,818
Professional services...................... 459 495 2,050 4,157 6,781
------- ------- ------- -------- --------
Total revenue............................ 10,744 17,454 32,147 48,316 75,407
------- ------- ------- -------- --------
Cost of revenue
Software licenses.......................... 552 1,298 1,087 2,207 2,897
Maintenance................................ 2,434 3,503 4,009 4,524 6,070
Professional services...................... 344 406 1,717 3,532 5,455
------- ------- ------- -------- --------
Total cost of revenue.................... 3,330 5,207 6,813 10,263 14,422
------- ------- ------- -------- --------
Gross profit............................. 7,414 12,247 25,334 38,053 60,985
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing........................ 2,505 4,605 7,947 13,862 22,158
Research and development................... 2,998 4,321 5,518 4,465 6,848
General and administrative................. 1,727 2,296 3,296 3,932 6,116
Stock-based compensation................... -- -- 880 2,499 732
Amortization of intangible assets.......... -- -- -- 739 2,226
Acquired in-process research and
development.............................. -- -- -- -- 992
------- ------- ------- -------- --------
Total operating expenses................. 7,230 11,222 17,641 25,497 39,072
------- ------- ------- -------- --------
Operating income........................... 184 1,025 7,693 12,556 21,913
Interest and other income, net............. 160 115 321 929 4,569
------- ------- ------- -------- --------
Income before income taxes............... 344 1,140 8,014 13,485 26,482
Income taxes............................... 66 278 3,253 6,155 11,839
------- ------- ------- -------- --------
Net income............................... $ 278 $ 862 $ 4,761 $ 7,330 $ 14,643
======= ======= ======= ======== ========
Net income per share:
Basic.................................... $ 0.01 $ 0.04 $ 0.21 $ 0.29 $ 0.40
======= ======= ======= ======== ========
Diluted.................................. $ 0.01 $ 0.04 $ 0.21 $ 0.27 $ 0.38
======= ======= ======= ======== ========
Weighted average shares used in per share
calculations:
Basic.................................... 23,625 23,625 22,872 25,396 36,751
======= ======= ======= ======== ========
Diluted.................................. 23,625 23,625 22,908 27,032 38,819
======= ======= ======= ======== ========
AS OF JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,840 $ 4,031 $ 9,024 $ 21,469 $ 80,931
Working capital............................ 429 618 6,942 16,505 89,631
Total assets............................... 6,717 9,233 20,567 59,678 149,059
Total liabilities and deferred revenue..... 5,508 7,187 13,582 21,573 34,535
Total stockholders' equity................. 1,209 2,046 6,985 38,105 114,524
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF SERENA AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. SERENA'S ACTUAL RESULTS AND THE TIMING
OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT
LIMITED TO, OUR RELIANCE ON OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN
REVENUE MIX AND SEASONALITY, OUR ABILITY TO DELIVER OUR PRODUCTS ON THE
DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE ON REVENUES FROM OUR INSTALLED BASE,
EXPANSION OF OUR PROFESSIONAL SERVICES AND INTERNATIONAL ORGANIZATIONS, OUR
ABILITY TO MANAGE OUR GROWTH AND THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT
FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", "BUSINESS", AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.
OVERVIEW
SERENA Software is an industry-leading supplier of eBusiness infrastructure
change management solutions. SERENA was founded in 1980 and we introduced our
first SCM product, COMPAREX, in 1981. Since then, SERENA has developed a full
suite of FULL.CYCLE mainframe products, including our flagship product CHANGE
MAN, which was introduced in 1988. In June 1999, SERENA introduced ECHANGE MAN,
a distributed systems product providing an end-to-end solution to SCM across the
enterprise from the mainframe to the desktop to the Web. IT managers use our
products to track software changes during the software application design and
development process, manage separate programming teams that are concurrently
developing and enhancing applications, and oversee the deployment of the
software applications across both the mainframe and distributed systems
environments.
On June 14, 1999, we acquired Diamond Optimum Systems ("Diamond"), a
provider of enterprise SCM solutions for the Web, NT, and UNIX environments.
This acquisition accelerated the development and introduction of our distributed
systems product offerings and allowed us to provide SCM solutions across the
enterprise from the mainframe to UNIX/NT servers to the Web. The Diamond
acquisition was accounted for under the purchase method of accounting and the
results of operations of Diamond are included in SERENA's historical results
after the acquisition date.
SERENA has grown rapidly in recent years as total revenue has increased from
$10.7 million in fiscal 1996 to $75.4 million in fiscal 2000. The growth in
total revenue has been primarily attributable to increased demand for our
FULL.CYCLE mainframe products, and to a lesser extent in the most recent fiscal
year, the introduction of our distributed systems product, ECHANGE MAN, into the
marketplace. In general, demand is increasing as a result of greater awareness
of and need for automated third party SCM solutions. We derive our revenue from
software licenses, maintenance and professional services.
Currently, the majority of our software license revenue is derived from our
FULL.CYCLE mainframe products. Customers typically purchase the FULL.CYCLE
mainframe products under Million Instructions Per Second, or MIPS-based,
perpetual licenses. Mainframe software products and applications are usually
priced based on hardware computing capacity. MIPS is a capacity measurement used
by hardware manufacturers to rate computer size to determine the amount of
capacity for running applications and supporting users. The higher a hardware's
MIPS capacity, the more expensive a software license will be. Customers
increasing their MIPS capacity are required to purchase an additional software
license when upgrading the hardware. Software products are also typically priced
based on a perpetual license agreement, which entitles a customer to use the
product on an ongoing basis. Initial license transactions generally include one
year of software maintenance and support. Revenue from license agreements,
excluding maintenance revenue included with the license, is recognized upon
receipt and acceptance of a signed contract and delivery of the software,
provided the related fee is fixed, determinable and does not involve an extended
payment term, collectibility of the revenue is probable and the arrangement does
not
19
involve significant customization of the software. In fiscal 1998, 1999 and
2000, sales of CHANGE MAN, COMPAREX and STARTOOL together accounted for
approximately 94%, 87% and 94% of SERENA's software license revenue,
respectively. Any factors adversely affecting the pricing of, demand for or
market acceptance of our FULL.CYCLE mainframe or distributed systems products,
such as competition or technological change, could materially adversely affect
our business, operating results and financial condition. See "Factors That May
Affect Future Results--We Have Relied and Expect to Continue to Rely on Sales of
Our FULL.CYCLE Mainframe Products for Our Revenue" and "Our Business is
Dependent on the Continued Market for IBM and IBM-Compatible Mainframes."
We also provide ongoing maintenance, which includes technical support,
version upgrades and enhancements, for an annual fee of approximately 17% of the
current list price of the licensed product. We recognize maintenance revenue
over the term of the contracts, typically one year, on a straight-line basis.
Professional services revenue is derived from our SER(POWER)consulting and
educational services, including implementation and integration of licensed
software, specialized consulting services such as "best practices" design,
development and deployment of SCM solutions, and education courses for SERENA's
products. Our professional services are typically billed on a time and materials
basis and revenue is recognized as the related services are performed.
Historically, SERENA's revenue has primarily been attributable to sales in
North America. In fiscal 1998, 1999 and 2000, revenue attributable to sales in
North America accounted for approximately 85%, 84% and 85% of SERENA's total
revenue, respectively. Our plan is to expand our international operations
significantly, particularly in Europe, as we believe international markets
represent a significant growth opportunity. Consequently, we anticipate that
international revenue will increase as a percentage of total revenue in the
future. Our expansion of our international operations will be subject to a
variety of risks that could materially adversely affect our business, operating
results and financial condition. See "Factors That May Affect Future Results--We
Intend to Expand Our International Operations And May Encounter a Number of
Problems Doing So; There Are Also a Number of Factors Associated with
International Operations that Could Adversely Affect Our Business." In North
America, SERENA's revenue is generally denominated in United States dollars
while international sales are generally denominated in local currencies,
principally the British pound and German deutsche mark. As SERENA's
international sales and operations expand, we anticipate that our exposure to
foreign currency fluctuations will increase. See "Factors That May Affect Future
Results--Fluctuations in the Value of Foreign Currencies Could Result in
Currency Transaction Losses for SERENA."
Maintenance revenue and professional services revenue have lower gross
profit margins than software license revenue. In addition, we license the
technology for our STARTOOL and STARWARP products and jointly own the technology
for our DETECT+RESOLVE MAINFRAME product and consequently we have sublicense fee
obligations on the revenue we recognize in connection with license and
maintenance transactions involving these products. As a result, our license
revenue for our STARTOOL, STARWARP and DETECT+RESOLVE MAINFRAME products has a
lower gross profit margin than license revenue from other products. We expect
operating expenses to increase substantially in the future as we continue to
develop new and enhanced versions of our products, including our distributed
systems product suite, increase our sales and marketing activities, expand our
distribution channels, increase our professional services capabilities and
pursue strategic relationships and acquisitions. Any failure by SERENA to
significantly increase revenue as we implement these initiatives could
materially adversely affect our business, operating results and financial
condition. See "Factors That May Affect Future Results--We Expect that Our
Operating Expenses Will Increase Substantially in the Future and These Increased
Expenses May Adversely Affect Our Future Operating Results and Financial
Condition."
20
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the historical results of operations for
SERENA expressed as a percentage of total revenue and are not necessarily
indicative of the results for any future period. Historical results include the
results of Optima from September 25, 1998, and Diamond from June 14, 1999, the
acquisition dates.
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED
JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
Software licenses....................................... 55.5% 56.3% 55.4%
Maintenance............................................. 38.1% 35.1% 35.6%
Professional services................................... 6.4% 8.6% 9.0%
----- ----- -----
Total revenue......................................... 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenue:
Software licenses....................................... 3.4% 4.6% 3.8%
Maintenance............................................. 12.5% 9.3% 8.1%
Professional services................................... 5.3% 7.3% 7.2%
----- ----- -----
Total cost of revenue................................. 21.2% 21.2% 19.1%
----- ----- -----
Gross Profit.......................................... 78.8% 78.8% 80.9%
----- ----- -----
Operating expenses:
Sales and marketing..................................... 24.7% 28.7% 29.4%
Research and development................................ 17.2% 9.3% 9.1%
General and administrative.............................. 10.3% 8.1% 8.1%
Stock-based compensation................................ 2.7% 5.2% 1.0%
Amortization of intangible assets....................... -- 1.5% 2.9%
Acquired in-process research and development............ -- -- 1.3%
----- ----- -----
Total operating expenses.............................. 54.9% 52.8% 51.8%
----- ----- -----
Operating income............................................ 23.9% 26.0% 29.1%
Interest and other income, net.............................. 1.0% 1.9% 6.0%
----- ----- -----
Income before income taxes.............................. 24.9% 27.9% 35.1%
Income taxes................................................ 10.1% 12.7% 15.7%
----- ----- -----
Net income.............................................. 14.8% 15.2% 19.4%
===== ===== =====
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998, 1999 AND 2000
REVENUE
SERENA's total revenue was $32.1 million, $48.3 million and $75.4 million in
fiscal 1998, 1999 and 2000, respectively, representing a 50% increase from
fiscal 1998 to 1999 and 56% from fiscal 1999 to 2000.
SOFTWARE LICENSES. Software licenses revenue was $17.8 million,
$27.2 million and $41.8 million in fiscal 1998, 1999 and 2000, representing 56%,
56% and 55% of total revenue, respectively. Software licenses revenue increased
$9.4 million or 52% from fiscal 1998 to 1999 and $14.6 million or 54% from
fiscal 1999 to 2000. The dollar increases are generally attributed to increased
demand for new licenses of FULL.CYCLE mainframe products as a result of greater
customer awareness of and need for third party SCM solutions and, to a lesser
extent, an increase in sales force productivity and personnel, the introduction
of our distributed systems product, ECHANGE MAN in the second half of fiscal
2000, and
21
software license price increases. In particular, sales of our CHANGE MAN,
COMPAREX, AND STARTOOL products grew significantly. Combined, they accounted for
$16.7 million, $23.8 million and $39.1 million in fiscal 1998, 1999 and 2000,
representing 94%, 87% and 94% of total software licenses revenue, respectively.
The Company expects that its distributed systems revenues will increase, but
that CHANGE MAN, COMPAREX, and STARTOOL will continue to account for a
substantial portion of software license revenue in the future.
MAINTENANCE. Maintenance revenue was $12.3 million, $17.0 million and
$26.8 million in fiscal 1998, 1999 and 2000, representing 38%, 35% and 36% of
total revenue, respectively. Maintenance revenue increased $4.7 million or 38%
from fiscal 1998 to 1999 and $9.8 million or 58% from fiscal 1999 to 2000. The
dollar increases reflect both growth in software licenses revenue, as new
licenses generally include one year of maintenance, renewals of maintenance
agreements by existing customers and, to a lesser extent, maintenance price
increases.
PROFESSIONAL SERVICES. Professional services revenue was $2.1 million,
$4.2 million and $6.8 million in fiscal 1998, 1999 and 2000, representing 6%, 9%
and 9% of total revenue, respectively. Professional services revenue increased
$2.1 million or 103% from fiscal 1998 to 1999 and $2.6 million or 63% from
fiscal 1999 to 2000. The dollar increases are attributable to greater consulting
opportunities resulting from our larger installed customer base and our expanded
consulting service capabilities. The acquisition of Optima on September 25, 1998
contributed $1.6 million in additional professional services revenue in fiscal
1999, or 76% of the total $2.1 million increase in professional service revenue
in fiscal 1999 over 1998. The rate of growth was smaller in fiscal 2000 when
compared to fiscal 1999 predominantly due to certain of our customers putting
projects on hold in calendar 2000 in order to address their remediation, testing
and other activities associated with becoming Year 2000 compliant.
COST OF REVENUE
Cost of revenue, which consists of cost of software licenses, cost of
maintenance and cost of professional services, was $6.8 million, $10.3 million
and $14.4 million in fiscal 1998, 1999 and 2000, representing 21%, 21% and 19%
of total revenue, respectively. Cost of revenue increased $3.5 million or 51%
from fiscal 1998 to 1999 and $4.1 million or 41% from fiscal 1999 to 2000. The
dollar increases are due primarily to increased expenses associated with
professional services revenue and maintenance revenue, including personnel
additions to support professional services and maintenance revenue growth, and
software sublicense fees. The decrease as a percentage of revenue in fiscal 2000
was a result of the growth in higher margin software licenses exceeding the
other categories of revenue.
SOFTWARE LICENSES. Cost of software licenses consists principally of
sublicense fees associated with our STARTOOL, STARWARP and DETECT+RESOLVE
MAINFRAME products. Cost of software licenses was $1.1 million, $2.2 million and
$2.9 million in fiscal 1998, 1999 and 2000, representing 6%, 8% and 7% of total
software licenses revenue, respectively. Cost of software licenses increased
$1.1 million or 103% from fiscal 1998 to 1999 and $0.7 million or 31% from
fiscal 1999 to 2000. The increase in cost of software licenses as a percentage
of total software licenses revenue in fiscal 1999 over 1998 is attributable to
the increase in royalty bearing software licenses. Royalty bearing software
licenses represented 15%, 19% and 21% of total software license revenue in
fiscal 1998, 1999 and 2000, respectively.
MAINTENANCE. Cost of maintenance consists primarily of salaries, bonuses
and other costs associated with our customer support organizations, and to a
lesser extent, sublicense fees associated with our STARTOOL, STARWARP AND
DETECT+RESOLVE MAINFRAME products. Cost of maintenance was $4.0 million,
$4.5 million and $6.1 million in fiscal 1998, 1999 and 2000, representing 33%,
27% and 23% of total maintenance revenue, respectively. Cost of maintenance
increased $0.5 million or 13% from fiscal 1998 to 1999 and $1.6 million or 34%
from fiscal 1999 to 2000. The dollar increases are predominately due to
increased expenses associated with our customer support organization including
personnel additions needed to support the maintenance revenue growth and, to a
lesser extent, increases in sublicense fees.
22
Sublicense fees are paid to owners of third party products for providing
maintenance enhancements and code fixes. Cost of maintenance as a percentage of
total maintenance revenue has decreased as the rate of increase in maintenance
revenue has been greater than the rate of increase in costs associated with our
customer support organization.
PROFESSIONAL SERVICES. Cost of professional services consists of salaries,
bonuses and other costs associated with supporting our professional services
organization. Cost of professional services was $1.7 million, $3.5 million and
$5.5 million in fiscal 1998, 1999 and 2000, representing 84%, 85% and 81% of
total professional services revenue, respectively. Cost of professional services
increased $1.8 million or 106% from fiscal 1998 to 1999 and $2.0 million or 54%
from fiscal 1999 to 2000. The dollar increases are predominately due to
increased expenses associated with our professional services organization
including personnel additions and other infrastructure costs needed to support
the professional services revenue growth. Prior to fiscal 2000 and as a
percentage of total services revenue, cost of professional services had been
increasing as we expanded our consulting organization. In fiscal 2000, however,
cost of professional services as a percentage of total services revenue
decreased from the prior year. Although costs of professional services increased
in absolute dollar terms, it decreased as a percentage of revenue due in part to
reducing the use of outside independent contractors and reallocating
professional services resources to other parts of our organization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and employee benefits as well as travel, entertainment and
marketing expenses. Sales and marketing expenses were $7.9 million,
$13.9 million and $22.2 million in fiscal 1998, 1999 and 2000, representing 25%,
29% and 29% of total revenue, respectively. Sales and marketing expenses
increased $6.0 million or 74% from fiscal 1998 to 1999 and $8.3 million or 60%
from fiscal 1999 to 2000. The dollar increases in each fiscal year and the
percentage of total revenue increase in fiscal 1999 over 1998 are due primarily
to the expansion of our direct sales and marketing organizations which began in
fiscal 1998, and to a lesser extent, the development of our international sales
and telesales efforts. Sales and marketing expenses as a percentage of total
revenue remained unchanged in fiscal 2000, when compared the prior year, as the
rate of increase in revenues offset the costs of our continued expansion of the
sales and marketing organizations. We expect sales and marketing expenses to
increase in absolute dollars as we continue to hire additional sales and
marketing personnel and market our distributed systems products.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and employee benefits and costs attributable to research and
development activities. Research and development expenses were $5.5 million,
$4.5 million and $6.8 million in fiscal 1998, 1999 and 2000, representing 17%,
9% and 9% of total revenue, respectively. Research and development expenses
decreased $1.0 million or 19% from fiscal 1998 to 1999 and increased
$2.3 million or 53% from fiscal 1999 to 2000. The dollar decrease in fiscal 1999
from 1998 is attributable principally to the restructuring of compensation
arrangements with SERENA's founder and Chief Technology Officer. The dollar
increase in fiscal 2000 from 1999 was primarily due to increases in salaries,
bonuses, payroll taxes, employee benefits and other headcount related costs
which resulted from a 41% increase in headcount, primarily associated with the
Company's acquisition of Diamond in June 1999, and to a lesser extent, increases
in infrastructure costs also associated with the acquisition. Prior to fiscal
2000, the Company's development efforts were primarily focused in the mainframe
market and with the acquisition of Diamond, the Company's development efforts
have expanded to other platforms, including the Web, UNIX, NT and other
distributed system platforms. We expect research and development expenses to
increase both in absolute dollar terms and as a percentage of total revenue as
we continue to hire additional research and development personnel to develop our
distributed systems product suite and integrate our existing products using
SERNET.
23
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, bonuses, payroll taxes, profit sharing expenses (in
fiscal 1998 only) and benefits and certain non-allocable administrative costs,
including legal and accounting fees and bad debts. General and administrative
expenses were $3.3 million, $3.9 million and $6.1 million in fiscal 1998, 1999
and 2000, representing 10%, 8% and 8% of total revenue, respectively. General
and administrative expenses increased $0.6 million or 19% from fiscal 1998 to
1999 and $2.2 million or 55% from fiscal 1999 to 2000. The dollar increases in
each fiscal year are primarily due to salary, bonus, payroll tax and employee
benefit costs associated with the expansion of our administrative infrastructure
in order to support our increased sales, marketing, professional services and
maintenance activities, and to a lesser extent in fiscal 2000, costs associated
with being a public company. The decrease in general and administrative expenses
as a percentage of total revenue is principally attributable to SERENA's revenue
growth during this period. We expect general and administrative expenses to
increase in absolute dollar terms as we expand our infrastructure and our
operations.
STOCK-BASED COMPENSATION. In the fourth quarter of fiscal 1998, SERENA
recorded aggregate deferred stock-based compensation of $4.0 million in
connection with the issuance of restricted stock and grant of options to
purchase common stock in January 1998. An additional $0.7 million of deferred
stock-based compensation was recorded in fiscal 1999 for stock based awards
granted during this period. No deferred stock-based compensation was recorded in
fiscal 2000. Deferred stock-based compensation is generally being amortized over
the 36 to 48 month vesting periods of the related awards. This amortization is
being recorded in a manner consistent with FASB Interpretation No. 28. Of the
total deferred stock-based compensation, $0.9 million, $2.5 million and
$0.7 million was amortized in fiscal 1998, 1999 and 2000, respectively. We
expect to amortize an additional $0.2 million and $0.1 million in fiscal 2001
and 2002, respectively. See Note 7 of Notes to Consolidated Financial Statements
of SERENA.
AMORTIZATION OF INTANGIBLE ASSETS. In the third quarter of fiscal 1999,
SERENA recorded intangible assets of $21.7 million in connection with the
acquisition of Optima in September 1998. The intangible assets are being
amortized over periods of one year or less on $0.5 million and fifteen years on
the remaining $21.2 million. In the second quarter of fiscal 2000, the Company
recorded intangible assets of $4.0 million in connection with the acquisition of
Diamond in June 1999. Of the total intangible assets, $0.7 million and
$2.2 million was amortized in fiscal 1999 and 2000, respectively. We expect to
amortize an additional $2.1 million in each of the next two fiscal years, fiscal
2001 and 2002. Intangible assets will be fully amortized in fiscal 2014. See
Note 10 of Notes to Consolidated Financial Statements of SERENA.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
Company's acquisition of Diamond in June 1999, the Company took a one-time
charge of $1.0 million for acquired in-process research and development. See
Note 10 of Notes to Consolidated Financial Statements of SERENA.
INTEREST AND OTHER INCOME, NET
INTEREST AND OTHER INCOME, NET. Interest and other income, net was
$0.3 million, $0.9 million and $4.6 million in fiscal 1998, 1999 and 2000,
respectively. The dollar increases in interest and other income, net is
generally due to increases in balances on interest bearing accounts, such as
cash and cash equivalents, and both short and long-term investments, resulting
from accumulation of earnings. The increase in fiscal 2000 over fiscal 1999 was
predominantly the direct result of the Company's initial public offering in
February 1999 which generated net proceeds to the Company totaling
$48.4 million and $10.9 million in February 1999 and March 1999, respectively.
INCOME TAXES
INCOME TAXES. Income taxes were $3.3 million, $6.2 million and
$11.8 million in fiscal 1998, 1999 and 2000, representing effective income tax
rates of 41%, 46% and 45%, respectively. The Company's effective income tax rate
increased in fiscal 1999 over 1998 predominantly due to the $3.2 million in
nondeductible
24
charges recorded in fiscal 1999 which consisted of $2.5 million in stock-based
compensation and $0.7 million in amortization of intangible assets arising from
the Optima acquisition as compared to $0.9 million in nondeductible stock-based
compensation recorded in fiscal 1998. The Company's effective income tax rate
decreased slightly in fiscal 2000, when compared to fiscal 1999, as the rate of
growth in pretax profits was greater than the rate of growth in nondeductible
charges. In fiscal 2000, the Company recorded $3.9 million in nondeductible
charges consisting of $0.7 million in stock-based compensation, $2.2 million in
amortization of intangible assets arising from the Optima and Diamond
acquisitions and $1.0 million as a one-time charge for acquired in-process
research and development also arising from the Diamond acquisition in the second
quarter of fiscal 2000. SERENA's effective income tax rate has historically
benefited from the United States research and experimentation tax credit and tax
benefits generated from export sales made from the United States.
LIQUIDITY AND CAPITAL RESOURCES
Since SERENA's inception, we have financed our operations and met our
capital expenditure requirements through cash flows from operations. As of
January 31, 2000, SERENA had $80.9 million in cash and cash equivalents, and an
additional $20.2 million and $3.0 million in short-term and long-term
investments, respectively, consisting principally of high grade commercial
paper, certificates of deposit and short-term bonds. Cash flows provided by
operating activities were $5.7 million, $14.9 million, and $26.0 million in
fiscal 1998, 1999 and 2000, respectively. SERENA's cash flows provided by
operating activities exceeded net income during each of these periods
principally due to cash collections in advance of revenue recognition for
maintenance contracts, the inclusion of non-cash expenses in net income and
growth in accrued expenses and corporate taxes payable; all partially offset by
growth in accounts receivable and net deferred tax assets during the periods.
Non-cash expenses included in net income consisted of amortization of deferred
stock-based compensation for all periods, amortization of intangible assets in
fiscal 1999 and 2000 only, and a one-time charge in fiscal 2000 for acquired
in-process research and development. In fiscal 2000, cash used in investing
activities were predominantly related to the purchase of short and long-term
investments totaling $23.3 million, and cash paid in connection with the Diamond
acquisition in June 1999, net of cash received totaling $1.5 million.
Predominantly in fiscal 1998 and 1999, and to a lesser extent in fiscal 2000,
cash used in investing activities were related to the purchase of computer
equipment and office furniture and equipment totaling $0.6 million,
$1.1 million and $1.5 million, respectively. Cash used in financing activities
related to the repurchase of $0.7 million in common stock in fiscal 1998 from a
resigning executive officer of SERENA and the repayment of $1.4 million of notes
payable assumed in the acquisition of Optima in fiscal 1999. See "Item 13.
Certain Relationships and Related Transactions." There was no cash provided by
financing activities in fiscal 1998 or 1999. Cash provided by financing
activities in fiscal 2000 predominantly related to the Company's initial public
offering in February 1999, the sale of the Company's common stock under the
employee stock purchase plan and the exercise of stock options under the
Company's employee stock option plan; all of which generated cash totaling
$57.9 million (net of IPO costs), $0.9 million and $0.4 million, respectively.
At January 31, 2000, SERENA did not have any material commitments for
capital expenditures and has no revolving credit agreement or other term loan
agreements with any bank or other financial institution.
At January 31, 2000, SERENA had working capital of $89.6 million and
accounts receivable, net of allowances, of $15.4 million. Total deferred revenue
increased to $19.0 million at January 31, 2000 from $12.4 million at
January 31, 1999 primarily as a result of increased billings of maintenance
fees.
We believe that the net proceeds from the offering and cash from operations
will satisfy our working capital and capital expenditure requirements for at
least the next twelve months.
25
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued Statement of Financial Accounting Standards
No. 133, or SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 addresses the accounting for derivative instruments,
including derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in the fair value (i.e.
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. The Company does not have any derivative financial
instruments. Therefore, the Company does not believe that SFAS No. 133 will have
a material impact on its financial statements.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such Year 2000 requirements.
In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of such software products or the
ability of such products to correctly create, store, process and output
information of data involving dates. We have not observed any material Year 2000
related problems with our business or products to date.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT, INCLUDING THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING
STATEMENTS AND OTHER PROSPECTIVE INFORMATION RELATING TO FUTURE EVENTS. THESE
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR ANTICIPATED RESULTS, INCLUDING BUT NOT LIMITED TO, OUR RELIANCE ON
OUR MAINFRAME PRODUCTS FOR REVENUE, CHANGES IN REVENUE MIX AND SEASONALITY, OUR
ABILITY TO DELIVER OUR PRODUCTS ON THE DISTRIBUTED SYSTEMS PLATFORM, DEPENDENCE
ON REVENUES FROM OUR INSTALLED BASE, EXPANSION OF OUR PROFESSIONAL SERVICES AND
INTERNATIONAL ORGANIZATIONS, OUR ABILITY TO MANAGE OUR GROWTH AND THE FOLLOWING:
THERE ARE MANY FACTORS, INCLUDING SOME BEYOND OUR CONTROL, THAT MAY CAUSE
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly operating results have varied greatly in the past and may vary
greatly in the future depending upon a number of factors described below and
elsewhere in this "Factors That May Affect Future Results" section of this
report, including many that are beyond our control. As a result, we believe that
quarter-to-quarter comparisons of our financial results are not necessarily
meaningful, and you should not rely on them as an indication of our future
performance.
Our software license revenue in any quarter depends on orders booked and
shipped in the last month, weeks or days of that quarter. At the end of each
quarter, we typically have either minimal or no backlog of orders for the
subsequent quarter. If a large number of orders or several large orders do not
occur or are deferred, our revenue in that quarter could be substantially
reduced. This would materially adversely affect our operating results and could
impair our business in future periods. Because we do not know when, or if, our
potential customers will place orders and finalize contracts, we cannot
accurately predict our revenue and operating results for future quarters.
Historically, a majority of our revenue has been attributable to the
licenses of our FULL.CYCLE mainframe software products. Changes in the mix of
software products and services sold by us, including the mix between higher
margin software products and lower margin maintenance and services, could
26
materially affect our operating results for future quarters as could the
percentage of software products sold which require us to pay a sublicense fee to
a third party.
SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY
OPERATING RESULTS
We have experienced and expect to continue to experience seasonality in
sales of our software products. These seasonal trends materially affect our
quarter-to-quarter operating results. Revenue and operating results in our
quarter ending January 31 are typically higher relative to our other quarters,
because many customers make purchase decisions based on their calendar year-end
budgeting requirements. In addition, our January quarter tends to reflect the
effect of the incentive compensation structure for our sales organization, which
is based on satisfaction of fiscal year-end quotas. As a result, we have
historically experienced a substantial decline in revenue in the first quarter
of each fiscal year relative to the preceding quarter. We are also currently
attempting to expand our presence in international markets, particularly in
Europe. We expect our quarter ending October 31 to reflect the effects of summer
slowing of international business activity and spending activity generally
associated with that time of year, particularly in Europe. To the extent that
our revenue in Europe or other parts of the world increase in future periods, we
expect our period-to-period revenues to reflect any seasonal buying patterns in
these markets.
WE EXPECT THAT OUR OPERATING EXPENSES WILL INCREASE SUBSTANTIALLY IN THE FUTURE
AND THESE INCREASED EXPENSES MAY ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS
AND FINANCIAL CONDITION
Although SERENA has been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially in the foreseeable future as we:
- Increase our sales and marketing activities, including expanding our
United States and international direct sales forces and extending our
telesales efforts
- Develop our technology, including our distributed systems SCM products
- Broaden our professional services offerings and delivery capabilities
- Expand our distribution channels
- Pursue strategic relationships and acquisitions
With these additional expenses, in order to maintain our current levels of
profitability, we will be required to increase our revenue correspondingly. Any
failure to significantly increase our revenue as we implement our product,
service and distribution strategies would materially adversely affect our
business, quarterly and annual operating results and financial condition.
Although our revenue has grown in recent years, we do not believe that we will
maintain this rate of revenue growth. In addition, we may not experience any
revenue growth in the future, and our revenue could in fact decline. Our efforts
to expand our software product suites, sales and marketing activities, direct
and indirect distribution channels and professional service offerings and to
pursue strategic relationships or acquisitions may not succeed or may prove more
expensive than we currently anticipate. As a result, we cannot predict our
future operating results with any degree of certainty.
OUR FUTURE REVENUE IS SUBSTANTIALLY DEPENDENT UPON OUR INSTALLED CUSTOMERS
RENEWING MAINTENANCE AGREEMENTS FOR OUR PRODUCTS AND LICENSING ADDITIONAL SERENA
SCM PRODUCTS; OUR FUTURE PROFESSIONAL SERVICE AND MAINTENANCE REVENUE IS
DEPENDENT ON FUTURE SALES OF OUR SOFTWARE PRODUCTS
We depend on our installed customer base for future revenues from
maintenance renewal fees and licenses of additional SCM products. If our
customers do not purchase additional products or cancel or fail to renew their
maintenance agreements, this could materially adversely affect our business and
future
27
quarterly and annual operating results. The terms of our standard license
arrangements provide for a one-time license fee and a prepayment of one year of
software maintenance and support fees. The maintenance agreements are renewable
annually at the option of the customers and there are no minimum payment
obligations or obligations to license additional software. Therefore, our
current customers may not necessarily generate significant maintenance revenue
in future periods. In addition, our customers may not necessarily purchase
additional products, upgrades or professional services. Our professional service
revenue and maintenance revenue are also dependent upon the continued use of
these services by our installed customer base. Any downturn in our software
license revenue would have a negative impact on the growth of our professional
service revenue and maintenance revenue in future quarters.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR FULL.CYCLE
MAINFRAME PRODUCTS FOR OUR REVENUE
Historically, the majority of our software license revenue has resulted from
the sale of our FULL.CYCLE mainframe products. Any factors adversely affecting
the pricing of, demand for or market acceptance of our FULL.CYCLE mainframe
products, such as competition or technological change, could materially
adversely affect our business and quarterly and annual operating results. In
particular, CHANGE MAN and COMPAREX, two of our FULL.CYCLE mainframe products,
have been responsible for a substantial majority of our revenue. In fiscal 1998,
1999 and 2000, sales of CHANGE MAN and COMPAREX together accounted for
approximately 82%, 77% and 75% of our software license revenue, respectively. We
expect that these products will continue to account for a large portion of our
software license revenue for the foreseeable future. Our future operating
results depend on the continued market acceptance of our FULL.CYCLE mainframe
products, including future enhancements.
OUR INTRODUCTION OF SERENA SCM PRODUCTS FOR DISTRIBUTED SYSTEMS MAY NOT BE
SUCCESSFUL
We introduced our ECHANGE MAN product in fiscal 2000 and are currently
developing our product suite to support distributed systems platforms. If we do
not successfully develop, market, sell and support our distributed systems
products, this would materially adversely affect our business and our future
quarterly and annual operating results. Historically, the majority of our
products have been designed for the mainframe platform, and the majority of our
software license revenue, maintenance revenue and professional services revenue
to date have been attributable to licenses for these mainframe products. We do
not have experience developing, marketing, selling or supporting distributed
systems products. Developing, marketing and selling our distributed systems
products will require significant resources that we may not have. Our sales and
marketing organizations have historically focused exclusively on sales of our
products for the mainframe and have limited experience marketing and selling
distributed systems products. Additionally, we do not have any experience in
providing support services for distributed systems products. Competition for
experienced software engineers, sales personnel and support staff is intense and
if we fail to attract qualified personnel this would impair our ability to
support our distributed systems products. Many of our competitors have
substantially greater experience providing distributed systems compatible
software products than we do, and many also have significantly greater financial
and organizational resources.
IF THE SCM MARKET DOES NOT EVOLVE AS WE ANTICIPATE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED
If we fail to properly assess and address the SCM market or if our products
and services fail to achieve market acceptance for any reason, our business and
quarterly and annual operating results would be materially adversely affected.
The SCM market is in an early stage of development. IT organizations have
traditionally addressed SCM needs internally and have only recently become aware
of the benefits of third-party SCM solutions as their SCM requirements have
become more complex. Since the market for our products is still evolving, it is
difficult to assess the competitive environment or the size of the market that
may develop. Our future financial performance will depend in large part on the
continued growth in the
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number of businesses adopting third-party SCM products and the expansion of
their use on a company-wide basis. The SCM market for third-party products may
grow more slowly than we anticipate. In addition, technologies, customer
requirements and industry standards may change rapidly. If we cannot improve or
augment our products as rapidly as existing technologies, customer requirements
and industry standards evolve, our products or services could become obsolete.
The introduction of new or technologically superior products by competitors
could also make our products less competitive or obsolete. As a result of any of
these factors, our position in existing markets or potential markets could be
eroded.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED MARKET FOR IBM AND IBM-COMPATIBLE
MAINFRAMES
We are substantially dependent upon the continued use and acceptance of IBM
and IBM-compatible mainframes and the growth of this market. If the role of the
mainframe does not increase as we anticipate, or if it in any way decreases,
this would materially adversely affect our business, future quarterly and annual
operating results and financial condition. Additionally, if there is a wide
acceptance of other platforms or if new platforms emerge that provide enhanced
enterprise server capabilities, our business and future operating results may be
materially adversely affected. The majority of our software license revenue to
date has been attributable to sales of our FULL.CYCLE mainframe products. We
expect that, for the foreseeable future, the majority of our software license
revenue will continue to come from sales of our mainframe products. As a result,
future sales of our existing products and associated maintenance revenue and
professional service revenue will depend on continued use of mainframes.
WE MAY EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCTS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business and future quarterly and annual operating results.
We have experienced product development delays in new version and update
releases in the past and may experience similar or more significant product
delays in the future. To date, none of these delays has materially affected our
business. Difficulties in product development could delay or prevent the
successful introduction or marketing of new or improved products or the delivery
of new versions of our products to our customers. In particular, we may
experience delays in introducing our distributed systems product suite. Any
delay in releasing our new distributed systems products, for whatever reason,
would impair our revenue growth.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH WILL AFFECT OUR BUSINESS