SERENA SOFTWARE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements about financial projections, operational plans and objectives, future economic performance and other projections and estimates contained in this report. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, they are subject to important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, including those risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012. We assume no obligation to update any forward-looking statements contained in this report. It is important that the discussion below be read together with the attached unaudited condensed consolidated financial statements and notes thereto and the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

Business and Market Environment At Serena Software, we design, develop and sell products, solutions and services that together provide our customers with Orchestrated information technology ("IT") Solutions. We are focused on serving our enterprise customers and enhancing the business value of IT. We are the largest global independent software company in terms of revenue solely focused on managing change and processes across IT environments.

Our products, solutions and services address the complexity of application lifecycle management and IT service management within both mainframe and distributed systems environments. Our revenue is generated by software licenses, maintenance contracts and professional services. In the third quarter of 2013, we continued to experience a global macroeconomic environment in which our customers exercised care and conservatism in their investment prioritization and project deployments. We expect that our customers will continue to remain cautious with their IT spending in the near term.

Executive Summary Our financial highlights for the three and nine months ended October 31, 2012 and October 31, 2011 were as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 $ Change % Change 2012 2011 $ Change % Change Revenue $ 53,164 $ 55,658 $ (2,494 ) -4 % $ 153,531 $ 162,009 $ (8,478 ) -5 % Operating Income 9,299 10,950 (1,651 ) -15 % 20,325 25,002 (4,677 ) -19 % Percentage of revenue 17 % 20 % 13 % 15 % Net income (loss) 4,134 3,202 932 29 % 707 2,906 (2,199 ) -76 % Percentage of revenue 8 % 6 % 0 % 2 % • Revenue: During the three months ended October 31, 2012, we experienced net revenue declines in software licenses,maintenance contracts and professional services, compared to the prior year period. The declines were led by, on a percentage basis, software licenses and professional services and to a lesser extent maintenance contracts.

• Operating Income: Operating income declined for the three months ended October 31, 2012, compared to the prior year period, primarily due to lower revenue, increased investment in research and development, and increased restructuring and other charges, all partially offset by declines in sales and marketing expenses.

• Net Income: Net income increased for the three months ended October 31, 2012, compared to the prior year period, primarily due to income tax benefits partially offset by lower operating income as discussed above.

• Operating Cash Flows: Operating cash flows increased during the nine months ended October 31, 2012, compared to the prior year period, primarily due to lower net income offset by lower taxes paid, and improved timing of receipts from our customers and payments to our vendors.

Critical Accounting Policies and Estimates The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, accounting for income taxes, impairment of goodwill, valuation of our common stock, and accounting for options and RSUs, among other things. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations could be affected.

14 -------------------------------------------------------------------------------- Table of Contents An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance is material. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows: • Revenue recognition, • Stock-based compensation, • Valuation of long-lived assets, including goodwill, and • Accounting for income taxes.

In the nine months ended October 31, 2012, there was no significant change in the above critical accounting policies or the underlying assumptions and estimates used in their application. See our Annual Report on Form 10-K for the fiscal year ended January 31, 2012 filed with the SEC on April 30, 2012 for further information regarding our critical accounting policies and estimates.

See Recent Accounting Pronouncements in the condensed consolidated financial statements in Item 1 of Part I of this quarterly report for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition.

Results of Operations Revenue The following table summarizes software licenses, maintenance and professional services revenues for the periods indicated (in thousands, except percentages): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 $ Change % Change 2012 2011 $ Change % Change Software licenses $ 13,419 $ 14,637 $ (1,218 ) -8 % $ 32,938 $ 38,347 $ (5,409 ) -14 % Percentage of revenue 25 % 26 % 21 % 24 % Maintenance 34,307 35,163 (856 ) -2 % 103,244 106,179 (2,935 ) -3 % Percentage of revenue 65 % 63 % 67 % 65 % Professional services 5,438 5,858 (420 ) -7 % 17,349 17,483 (134 ) -1 % Percentage of revenue 10 % 11 % 12 % 11 % Total revenue $ 53,164 $ 55,658 $ (2,494 ) -4 % $ 153,531 $ 162,009 $ (8,478 ) -5 % Software licenses revenue declined in the three months ended October 31, 2012, compared to the same prior year period, primarily due to lower sales of our distributed system products, most predominantly Serena Service Manager and Serena Release Manager, partially offset by higher sales of our mainframe products, including ChangeMan ZMF. Software license revenue declined in the nine months ended October 31, 2012, compared to the prior year period, primarily due to lower sales of our distributed system products and mainframe products.

Maintenance revenue declined in both the three and nine months ended October 31, 2012, compared to the respective prior year periods, primarily due to recent declines in total license revenues. Professional services revenue declined in both the three and nine months ended October 31, 2012, compared to the respective prior year periods, primarily due to a declines in the number of consulting engagements.

Gross Profit The following table summarizes gross profit for the periods indicated (in thousands, except percentages): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 $ Change % Change 2012 2011 $ Change % ChangeSoftware licenses gross profit $ 12,535 $ 13,631 $ (1,096 ) -8 % $ 31,082 $ 36,544 $ (5,462 ) -15 % Percentage of software licenses revenue 93 % 93 % 94 % 95 % Maintenance gross profit 31,403 32,214 (811 ) -3 % 94,683 97,517 (2,834 ) -3 % Percentage of maintenance revenue 92 % 92 % 92 % 92 % Professional services gross profit 126 595 (469 ) -79 % 718 1,058 (340 ) -32 % Percentage of professional services revenue 2 % 10 % 4 % 6 % Amortization of technology - (21 ) 21 -100 % - (3,672 ) 3,672 -100 % Percentage of total revenue 0 % 0 % 0 % -2 % Total gross profit $ 44,064 $ 46,419 $ (2,355 ) -5 % $ 126,483 $ 131,447 $ (4,964 ) -4 % Percentage of revenue 83 % 83 % 82 % 81 % Software license gross profit as a percentage of software licenses revenue was unchanged during the three months ended October 31, 2012 and was down slightly during the nine months ended October 30, 2012, compared to the respective prior year periods. The slight decrease in the nine month period is primarily attributable to an increase in commissions earned by external business partners.

15 -------------------------------------------------------------------------------- Table of Contents Maintenance gross profit as a percentage of maintenance revenue was unchanged during the three and nine months ended October 31, 2012, compared to the respective prior year periods, as declines in revenue were offset with reductions in costs as a result of our effort to maintain cost efficiencies and the impact of variable compensation. Professional services gross profit as a percentage of professional services revenue declined significantly during the three and nine months ended October 31, 2012, compared to the respective prior year periods, due to lower revenue and continued investments to build out our professional services capabilities, partially offset by declines in variable compensation. Acquired technology became fully amortized in the third quarter of fiscal 2012.

Operating Expenses The following table summarizes operating expenses for the periods indicated (in thousands, except percentages): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 $ Change % Change 2012 2011 $ Change % Change Sales and marketing $ 13,835 $ 15,446 $ (1,611 ) -10 % $ 42,983 $ 45,646 $ (2,663 ) -6 % Percentage of revenue 26 % 28 % 28 % 28 % Research and development 6,985 6,757 228 3 % $ 20,695 $ 20,296 399 2 % Percentage of revenue 13 % 12 % 13 % 13 % General and administrative 3,603 3,406 197 6 % $ 11,870 $ 10,573 1,297 12 % Percentage of revenue 7 % 6 % 8 % 7 % Amortization of intangible assets 9,077 9,198 (121 ) -1 % $ 27,336 $ 27,599 (263 ) -1 % Percentage of revenue 17 % 17 % 18 % 17 % Restructuring, acquisition & other charges 1,265 662 603 91 % $ 3,274 $ 2,331 943 40 % Percentage of revenue 2 % 1 % 2 % 1 % Total operating expenses $ 34,765 $ 35,469 $ (704 ) -2 % $ 106,158 $ 106,445 $ (287 ) 0 % Percentage of revenue 65 % 64 % 69 % 66 % Sales and marketing expenses declined during the three and nine months ended October 30, 2012, compared to the respective prior year periods, primarily due to declines in personnel-related expenses, including variable compensation as a result of lower revenue partially offset by higher recruiting and staff development expenses.

Research and development expenses increased slightly during the three and nine months ended October 30, 2012, compared to the respective prior year periods, primarily due to an increase in personnel-related expenses, including stock-based compensation as we continued to invest in new product innovation and expand our product portfolio.

General and administrative expenses increased during the three and nine months ended October 30, 2012, compared to the respective prior year periods, primarily due to increases in personnel-related expenses including stock-based compensation and higher recruiting expenses.

Amortization of intangible assets declined slightly during the three and nine months ended October 30, 2012, compared to the respective prior year periods, primarily due to certain intangible assets being fully amortized in the prior year periods.

Restructuring, acquisitions and other charges increased during the three and nine months ended October 30, 2012, compared to the respective prior year periods, due to increases in severance and related charges as a result of our effort to maintain cost efficiencies, increases in non-recurring professional services, including legal and consulting fees, and non-recurring facility-related charges.

Other Expense and Income Tax Provision The following table summarizes other expense, net and income tax provision for the periods indicated (in thousands, except percentages): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 $ Change % Change 2012 2011 $ Change % Change Interest income $ 46 $ 34 $ 12 35 % $ 144 $ 105 $ 39 37 % Interest expense (7,338 ) (6,830 ) (508 ) 7 % (22,004 ) (20,222 ) (1,782 ) 9 % Loss on early extinguishment of debt - - - - (154 ) - (154 ) n/m Amend and extend transaction fees - - - - (577 ) (1,487 ) 910 -61 % Total other expense, net $ (7,292 ) $ (6,796 ) $ (496 ) 7 % $ (22,591 ) $ (21,604 ) $ (987 ) 5 % Percentage of revenues n/m n/m n/m n/m Income tax provision (2,137 ) 952 (3,079 ) -323 % (2,973 ) 492 (3,465 ) -704 % Effective tax rate -106 % 23 % 131 % 14 % 16 -------------------------------------------------------------------------------- Table of Contents Interest expense increased due to higher rates on our term loans as a result of the 2nd Amendment to our credit facility, partially offset by declines in overall balances due to repayments.

During the nine months ended October 31, 2012, we repurchased $7.7 million of senior subordinated notes for a total cost of $7.9 million, resulting in a loss on early extinguishment of $0.2 million.

During the nine months ended October 31, 2012, we incurred $0.6 million in fees associated with the 2nd Amendment, as compared to $1.5 million paid in conjunction with the 1st Amendment to our credit facility in the prior year period.

Our effective income tax rates for the three and nine months ended October 31, 2012, differ from the federal statutory rate of 35% primarily due to the impacts of permanently reinvested foreign earnings, the domestic production deduction, and state taxes. During periods where we experience losses, these items will generally increase the effective income tax rate above the statutory rate, whereas they will reduce the effective income tax rate below the statutory rate during periods when we have income. See Note 7 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this report for further information regarding income taxes and their impact on our results of operations and financial position.

Liquidity and Capital Resources The following table summarizes our cash flows for the periods indicated (in thousands): Nine Months Ended October 31, 2012 2011 Cash flows provided by operating activities $ 3,591 $ 1,014 Cash flows used in investing activities (6,066 ) (3,382 ) Cash flows used in financing activities (12,362 ) (44,456 ) To date, we have financed our operations and met our capital requirements through cash flows from operations. Our liquidity requirements are significant, primarily due to debt service obligations. We believe that current cash and cash equivalents, and cash flows from operations will satisfy our working capital and capital expenditure requirements for the twelve months ending October 31, 2013.

As of October 31, 2012, we had $94.6 million in cash and cash equivalents.

Approximately 20% of our cash and cash equivalents were held by foreign subsidiaries as of that date. Our intent is to permanently reinvest our earnings from certain foreign operations. We do not anticipate a need to repatriate dividends from foreign operations that are permanently reinvested in order to fund operations. If such funds were repatriated to the United States, we would be required to accrue and pay applicable U.S. and foreign taxes. At some point in the future, we may require additional funds for either operating or strategic purposes or to refinance our existing indebtedness and may seek to raise additional funds through public or private debt or equity financing. If we are required to seek additional financing in the future through public or private debt or equity financing, there is no assurance that this additional financing will be available or, if available, will be upon reasonable terms and not legally or structurally senior to or on parity with our existing debt obligations.

Summary of Cash Flows During the nine months ended October 31, 2012, cash and cash equivalents decreased by $15.2 million. The decrease was the result of cash used in investing and financing activities of $6.1 million and $12.4 million, respectively, partially offset by cash generated from operations of $3.6 million.

Operating Activities: Cash flows from operations for the nine months ended October 31, 2012 increased by $2.6 million, compared to the prior year period.

The increase was the result of lower net income offset by lower taxes paid and improved timing of receipts from our customers and payments to our vendors.

Investing Activities: Net cash used in investing activities for the nine months ended October 31, 2012 increased by $2.7 million, compared to the prior year period. The increase was the result purchases of intangible assets, primarily a technology licensing agreement, partially offset by decreases in capital expenditures.

Financing Activities: Net cash used in financing activities for the nine months ended October 31, 2012 decreased by $32.1 million, compared to the prior year period. The decrease was the result of lower net debt purchases partially offset by higher debt issuance costs compared to the prior year period. Net debt repurchases were $7.9 million for the nine months ended October 31, 2012, compared to $42.5 million for the prior year period. Debt issuance costs paid in conjunction with the 2nd Amendment during the nine months ended October 31, 2012 were $3.8 million, as compared to $1.9 million paid in conjunction with the 1st Amendment in the prior year period.

Contractual Obligations and Commitments The following table summarizes of our various contractual commitments as of October 31, 2012, including the redemption of $25.0 million of senior subordinated notes (the loss on early extinguishment of $0.8 million is not included in the schedule below) on November 2, 2012 as discussed in Note 9 of the notes to our unaudited condensed consolidated financial statements.

17-------------------------------------------------------------------------------- Table of Contents Payments Due by Period Total Remainder of 2013 1-3 years 3-5 years Thereafter Operating leases $ 12,730 $ 710 $ 5,158 $ 3,382 $ 3,480 Credit Facility: 2016 Tranche B Term Loans: due March 10, 2016 117,399 - - 117,399 - 2016 Extended Term Loans: due March 10, 2016 191,101 - - 191,101 - Senior Subordinated Notes: due March 15, 2016 126,542 25,000 - 101,542 - Interest payments on long-term debt 84,530 3,487 48,967 32,076 - $ 532,302 $ 29,197 $ 54,125 $ 445,500 $ 3,480 This table excludes our unrecognized tax benefit totaling $3.2 million as of October 31, 2012 because we have determined that the timing of payments with respect to this liability cannot be reasonably estimated.

Senior Secured Credit Agreement In March 2006, we entered into a senior secured credit agreement (the "Credit Facility"), which was amended in March 2011 and April 2012. As of October 31, 2012, the aggregate principal amount outstanding under our Credit Facility was $308.5 million, which consisted of $191.1 million of 2016 Extended Term Loans and $117.4 million of the 2016 Tranche B Term Loans. The 2016 Extended Term Loans bear interest at a rate equal to LIBOR plus 4.00%. That rate was 4.25% as of October 31, 2012. The 2016 Tranche B Term Loans bear interest at a rate equal to LIBOR plus 4.00% with a 1.00% LIBOR floor. That rate was 5.00% as of October 31, 2012. The Extended Revolving Credit Commitments, of which none was outstanding as of October 31, 2012, bear interest at a rate equal to three-month LIBOR plus 3.75%.

The Credit Facility bears an annual commitment fee on the undrawn portion of that facility commencing on the date of execution and delivery of the senior secured credit agreement. As a result of the cancellation of the non-extended 2012 revolving credit commitment totaling $55.0 million during the quarter ended October 31, 2011, the annual commitment fee is limited to the undrawn portion of the Extended Revolving Credit Commitments, which was equal to $20.0 million as of October 31, 2012. Effective February 1, 2011, the annual commitment fee is 0.375% per annum.

All of our obligations under the Credit Facility are secured by: • a perfected lien on and pledge of (1) the capital stock and intercompany notes of each existing and future direct and indirect domestic subsidiary of the company, (2) all the intercompany notes of the company and (3) 65% of the capital stock of each existing and future direct and indirect first-tier foreign subsidiary of the company, and • a perfected first priority lien, subject to agreed-upon exceptions, on, and security interest in, substantially all of the tangible and intangible properties and assets of the company and each guarantor.

18 -------------------------------------------------------------------------------- Table of Contents Senior Subordinated Notes We have outstanding $126.5 million principal amount of senior subordinated notes as of October 31, 2012, which bear interest at a rate of 10.375%, payable semi-annually on March 15 and September 15, and which mature on March 15, 2016.

Each of our domestic subsidiaries that guarantees our obligations under our Credit Facility will jointly, severally and unconditionally guarantee the notes on an unsecured senior subordinated basis. We do not have any domestic subsidiaries and, accordingly, there are no guarantors. The notes are our unsecured, senior subordinated obligations, and the guarantees, if any, will be unsecured, senior subordinated obligations of the guarantors. The notes are governed by the terms and conditions of an indenture dated March 10, 2006 ("Indenture"). The notes are subject to redemption at our option pursuant to the terms and conditions specified in the Indenture, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

During the nine months ended October 31, 2012, we repurchased $7.7 million of senior subordinated notes for a total cost of $7.9 million, resulting in a loss on early extinguishment of $0.2 million. On November 2, 2012, we redeemed $25.0 million of aggregate principal of the senior subordinated notes at a redemption price equal to 103.458% of the principal amount in accordance with the terms of our optional redemption right under the Indenture. The total consideration was $25.8 million, which will result in a loss on early extinguishment of $0.8 million during the quarter ending January 31, 2013. We may from time to time repurchase the senior subordinated notes in open market or privately negotiated purchases or redeem the senior subordinated notes pursuant to the terms of the Indenture.

Covenant Compliance Our Credit Facility and Indenture contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries' ability to, among other things: • incur additional indebtedness or issue certain preferred shares; • pay dividends on, redeem or repurchase our capital stock or make other restricted payments; • make investments; • make capital expenditures; • create certain liens; • sell certain assets; • enter into agreements that restrict the ability of our subsidiaries to make dividend or other payments to us; • guarantee indebtedness; • engage in transactions with affiliates; • prepay, repurchase or redeem the notes; • create or designate unrestricted subsidiaries; and • consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.

We are required to satisfy and maintain specified financial ratios and other financial condition tests under the Credit Facility and Indenture as described below. We were in compliance with all of the covenants under the Credit Facility and Indenture as of October 31, 2012. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests in the future. A breach of any of these covenants would result in a default (which, if not cured, could mature into an event of default) and in certain cases an immediate event of default under our Credit Facility. Upon the occurrence of an event of default under our Credit Facility, all amounts outstanding under our Credit Facility could be declared to be (or could automatically become) immediately due and payable and all commitments to extend further credit could be terminated.

19-------------------------------------------------------------------------------- Table of Contents Under the Indenture, our ability to incur additional debt and make certain restricted payments, subject to specified exceptions, is tied to an Adjusted EBITDA (as defined below) to fixed charges (as defined below) ratio of at least 2.0x. We may incur certain debt and make certain restricted payments and certain permitted investments without regard to the ratio, such as our ability to incur up to an aggregate principal amount of $625.0 million under our senior secured credit agreement (subject to reduction for mandatory prepayments under our senior secured credit agreement and inclusive of amounts outstanding under our senior secured credit agreement from time to time; as of October 31, 2012, we had $308.5 million outstanding under our term loan and none outstanding under our revolving credit facility), to acquire persons engaged in a similar business that become restricted subsidiaries and to make other investments equal to the greater of $25.0 million or 2% of our consolidated assets. "Fixed charges" is defined in the Indenture as consolidated Interest Expense less interest income, adjusted for acquisitions, and further adjusted for non-cash interest expense.

Under the Credit Facility, we are required to maintain a rolling twelve-month consolidated Adjusted EBITDA to consolidated Interest Expense (as defined below) ratio of a minimum of 2.00x at the end of each quarter. "Consolidated Interest Expense" is defined in the senior secured credit agreement as consolidated cash interest expense less cash interest income and is further adjusted for certain non-cash interest expenses and other items. We are also required to maintain a rolling twelve-month consolidated Total Debt (as defined below) to consolidated Adjusted EBITDA ratio of a maximum of 5.00x at the end of each quarter beginning with the fiscal year ending January 31, 2011. Under the terms of the senior secured credit agreement, as amended and restated, the maximum total leverage ratio stepped up to 5.50x beginning with the fiscal quarter ending April 30, 2011 through the test period ended July 31, 2012 and stepped down to 5.00x thereafter. "Consolidated Total Debt" is defined in the senior secured credit agreement as total debt other than certain indebtedness and is reduced by the amount of cash and cash equivalents on our consolidated balance sheet in excess of $5.0 million. As of October 31, 2012, our consolidated Total Debt was $345.5 million, consisting of total debt other than certain indebtedness totaling $435.0 million, net of cash and cash equivalents in excess of $5.0 million totaling $89.6 million.

The breach of financial covenants in our Credit Facility (i.e., those that require the maintenance of ratios based on Adjusted EBITDA) would force us to seek a waiver or amendment with the lenders under our Credit Facility, and no assurance can be given that we will be able to obtain any necessary waivers or amendments on satisfactory terms, if at all. The lenders would likely condition any waiver or amendment, if given, on additional consideration from us, such as a consent fee, a higher interest rate, principal repayment or more restrictive covenants and limitations on our business. Any such breach, if not waived by the lenders, would result in an event of default under that agreement, in which case the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the Indenture.

Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") is a non-GAAP financial measure used to determine our compliance with certain covenants contained in our Credit Facility. "Adjusted EBITDA" represents EBITDA further adjusted to exclude certain defined unusual items and other adjustments permitted in calculating covenant compliance under our Credit Facility. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors and lenders regarding our compliance with the financial covenants under our Credit Facility.

Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in our Credit Facility allows us to add back certain defined non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating GAAP net income (loss). Our Credit Facility requires that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, Adjusted EBITDA can be disproportionately affected by a particularly strong or weak quarter and may not be comparable to Adjusted EBITDA for any subsequent four-quarter period or any complete fiscal year.

20-------------------------------------------------------------------------------- Table of Contents The following is a reconciliation of net income, a GAAP measure of our operating results, to Adjusted EBITDA as defined in our debt agreements (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2012 2011 2012 2011 Net income $ 4,143 $ 3,202 $ 707 $ 2,906 Non-operating expense, net (1) 7,292 6,796 22,591 21,604 Income tax (benefit) provision (2,136 ) 952 (2,973 ) 492 Amortization expense (2) 9,077 9,219 27,336 31,271 Stock-based compensation 379 396 1,388 888 Restructuring, acquisition and other charges(3) 1,265 662 3,274 2,331 Sub-total 20,020 21,227 52,323 59,492 Depreciation (2) 646 734 1,953 2,171 Adjusted EBITDA $ 20,666 $ 21,961 $ 54,276 $ 61,663 (1) Non-operating expense, net includes interest income, interest expense including amortization of debt issuance costs, and amend and extend transaction fees.

(2) Depreciation and amortization expense includes depreciation of fixed assets and amortization of intangibles.

(3) Restructuring, acquisition, and other charges include charges related to restructuring plans; acquisitions-related costs; and other charges including sponsor and administration fees, costs related to issuance of debt, and severance, facility and other charges that are not part of restructuring and not part of ongoing operations.

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