<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 0-19395
SABA SOFTWARE, INC.
(Exact Name of Company as Specified in Its Charter)
Delaware 94-3267638
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2400 Bridge Parkway, Redwood Shores, CA 94065-1166
--------------------------------------------------
(Address of Principal Executive Offices)
Company's Telephone Number, Including Area Code: (650) 696-3840
Indicate by check mark whether the Company: (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
On April 30, 2000, 43,587,070 shares of the Company's Common Stock, $.001 par
value, were outstanding.
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SABA SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED FEBRUARY 29, 2000
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of February 29, 2000 and
May 31, 1999
Condensed Consolidated Statements of Operations for the three and nine
months ended February 29, 2000 and February 28, 1999
Condensed Consolidated Statements of Cash Flows for the nine months ended
February 29, 2000 and February 28, 1999
Notes to Condensed Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Part II: Other Information
Item 2: Changes in Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 6: Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
</TABLE>
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PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
February 29, May 31,
(In thousands, except share and per share data) 2000 1999
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,961 $ 10,384
Accounts receivable, net 6,990 1,930
Prepaid expenses and other current assets 1,040 122
-------- --------
Total current assets 31,991 12,436
Property and equipment, net 4,463 1,122
Other assets 1,230 510
-------- --------
Total assets $ 37,684 $ 14,068
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,862 $ 1,667
Accrued compensation and related expenses 2,933 1,132
Accrued expenses 1,398 600
Deferred revenue 9,788 1,197
Current portion of capital lease obligations 802 33
-------- --------
Total current liabilities 18,783 4,629
Deferred revenue 1,230 626
Notes payable and other long-term liabilities 938 329
Capital lease obligations, less current portion 1,938 55
-------- --------
Total liabilities 22,889 5,639
Commitments
Stockholders' equity:
Convertible Preferred stock, $0.001 par value, 19,568,540
shares issued and outstanding at February 29, 2000 and
13,942,771 at May 31, 1999 20 14
Common stock, $0.001 par value, 50,000,000
shares authorized; 18,605,162 shares issued
at February 29, 2000 and 16,326,168 at May 31, 1999 19 16
Additional paid-in capital 84,356 21,925
Deferred stock compensation (22,753) (1,092)
Notes receivable from stockholders (683) --
Accumulated other comprehensive loss 11 --
Treasury stock; none at February 29, 2000 and 3,112,456 shares at
May 31, 1999, at cost -- (11)
Accumulated deficit (46,175) (12,423)
-------- --------
Total stockholders' equity 14,795 8,429
-------- --------
Total liabilities and stockholders' equity $ 37,684 $ 14,068
======== ========
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
February 29, February 28, February 29, February 28,
(In thousands, except per share data) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License $ 2,600 $ 179 $ 4,520 $ 298
Services 2,602 375 5,886 739
-------- -------- -------- --------
Total revenues 5,202 554 10,406 1,037
Cost of revenues:
License -- -- -- --
Services 2,493 347 5,221 635
-------- -------- -------- --------
Total cost of revenues 2,493 347 5,221 635
-------- -------- -------- --------
Gross profit 2,709 207 5,185 402
Operating expenses:
Research and development 4,093 980 10,339 1,914
Sales and marketing 8,371 1,325 16,931 2,792
General and administrative 1,534 385 3,526 791
Amortization of deferred stock compensation 5,024 -- 8,535 --
-------- -------- -------- --------
Total operating expenses 19,022 2,690 39,331 5,497
-------- -------- -------- --------
Loss from operations (16,313) (2,483) (34,146) (5,095)
Interest income and other, net 238 18 394 29
-------- -------- -------- --------
Net loss $(16,075) $ (2,465) $(33,752) $ (5,066)
======== ======== ======== ========
Basic and diluted net loss per share $ (1.04) $ (0.19) $ (2.33) $ (0.39)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 15,521 13,087 14,504 12,960
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.46) $ (1.10)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share 35,089 30,735
======== ========
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(33,752) $(5,066)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 645 59
Amortization of deferred stock compensation 8,078 --
Issuance of common stock for services 457 8
Loss on disposal of assets 19 --
Changes in assets and liabilities:
Accounts receivable (5,060) (1,359)
Prepaid expenses and other current assets (918) (253)
Accounts payable 2,195 231
Accrued compensation and related expenses 1,801 156
Accrued expenses 798 324
Deferred revenue 9,195 1,761
Other liabilities 609 --
-------- -------
Net cash used in operating activities (15,933) (4,139)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,147) (566)
Increase in other assets (560) (88)
-------- -------
Net cash used in investing activities (1,707) (654)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock 30,081 3,936
Proceeds from issuance of common stock 1,281 8
Borrowings under line of credit agreement -- 493
Proceeds from issuance of treasury stock 11 --
Principal payments under capital lease obligations (206) (9)
Collections on notes receivable from stockholders 39 10
Proceeds from borrowings under note payable to
related party -- 1,445
Repayments of note payable to related party -- (120)
-------- -------
Net cash provided by financing activities 31,206 5,763
Effect of exchange rate changes on cash 11 --
-------- -------
Net increase in cash and cash equivalents 13,577 970
Cash and cash equivalents, beginning of period 10,384 41
-------- -------
Cash and cash equivalents, end of period $ 23,961 $ 1,011
======== =======
Supplemental disclosures of non-cash transactions:
Equipment purchased under capital lease obligations $ 2,858 $ --
======== =======
Common stock issued for notes receivable from
stockholders $ 722 $ 54
======== =======
Warrant issued for purchase of Series C convertible
preferred stock for financing $ 160 $ --
======== =======
Conversion of convertible debt into convertible
preferred stock $ -- $ 2,010
======== =======
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Saba Software, Inc. and its subsidiaries (Saba, or the
Company), and, in the opinion of management, reflect all adjustments (consisting
only of normal recurring adjustments) necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows as of and
for the dates and periods presented. The condensed consolidated balance sheet as
of May 31, 1999 has been prepared from the audited consolidated financial
statements of the Company.
These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
included in its Registration Statement and Prospectus on Form S-1, filed with
the Securities and Exchange Commission on January 31, 2000, as amended. The
results of operations for the three and nine months ended February 29, 2000 are
not necessarily indicative of results for the entire fiscal year ending May 31,
2000 or for any future period.
2. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per
Share". Basic earnings per share has been computed using the weighted-average
number of shares of common stock outstanding during the period, less shares that
may be repurchased, and excludes any dilutive effects of options, warrants, and
convertible securities. Potentially dilutive issuances have also been excluded
from the computation of diluted net loss per share, as their inclusion would be
anti-dilutive.
Pro forma net loss per share has been computed as described above and
also gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that automatically converted
to common shares immediately prior to the closing of the Company's initial
public offering in April 2000, using the if-converted method.
The calculation of historical basic and diluted net loss per share is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Historical:
Net loss ........................................... $(16,075) $ (2,465) $(33,752) $ (5,066)
======== ======== ======== ========
Weighted average shares of common stock
outstanding ..................................... 17,935 13,203 15,846 12,998
Less: Weighted average shares of common stock
subject to repurchase ........................... (2,414) (116) (1,342) (38)
-------- -------- -------- --------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share ...................... 15,521 13,087 14,504 12,960
======== ======== ======== ========
Basic and diluted net loss per share ............... $ (1.04) $ (0.19) $ (2.33) $ (0.39)
======== ======== ======== ========
Pro forma:
Net loss ........................................... $(16,075) $(33,752)
======== ========
Weighted average shares of common stock used in
computing basic and diluted net loss per share
(from above) .................................... 15,521 14,504
Adjustment to reflect the effect of the
assumed conversion of preferred stock from
the date of issuance ............................ 19,568 16,231
-------- --------
Weighted-average shares used in computing pro
forma basic and diluted net per loss share ...... 35,089 30,735
======== ========
Pro forma basic and diluted net loss per share ........ $ (0.46) $ (1.10)
======== ========
</TABLE>
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3. STOCKHOLDERS' EQUITY
In April 2000, the Company sold 4,600,000 shares of common stock in its
initial public offering and an additional 354,610 shares of common stock in a
concurrent private placement with proceeds, net of commissions, to the Company
of approximately $69.2 million. In conjunction with the initial public offering,
all outstanding shares of the Company's preferred stock converted into shares of
common stock on a one-to-one basis. Proceeds from the initial public offering
include proceeds from shares issued upon exercise of the underwriters'
over-allotment.
4. COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in financial
statements. The only item of other comprehensive income (loss) that the Company
currently reports is foreign translation adjustments, as shown below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(16,075) $(2,465) $(33,752) $(5,066)
Other comprehensive income
(loss):
Foreign currency translation
adjustment 11 -- 11 --
-------- ------- -------- -------
Comprehensive loss $(16,064) $(2,465) $(33,741) $(5,066)
======== ======= ======== =======
</TABLE>
5. Segment Information.
The Company operates primarily in a single operating segment, providing
software and services that connect people to learning over the Internet.
Geographic Information
The Company operates in the United States, Europe and Asia-Pacific. Less
than 10% of revenues were derived from outside the United States in all periods.
At May 31, 1999 and February 29, 2000, less than 10% of the Company's assets
were located outside the United States.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are not
limited to, the commercial viability of Saba Learning Exchange; the availability
of third-party consulting organizations to perform implementation, consulting
and education services; the anticipated growth of the number of our employees;
the planned development of a product framework for integration into our Saba
Learning Network and Saba Learning Provider Network, including the timeframe and
cost thereof; our anticipated expense levels for research and development, sales
and marketing, and general and administrative operations; expectations regarding
liquidity and adequacy of cash resources; and adequacy of current facilities.
Actual results could differ materially from those projected in any
forward-looking statements for the reasons detailed below under the sub-heading
"Factors That May Affect Future Operating Results" and in other sections of this
Report on Form 10-Q. All forward-looking statements included in this Form 10-Q
are based on information available to us on the date of this Report on Form
10-Q, and we assume no obligation to update the forward-looking statements, or
to update the reasons why actual results could differ from those projected in
the forward-looking statements. See "Factors That May Affect Future Operating
Results" below, as well as such other risks and uncertainties as are detailed in
our Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on January 31, 2000, as amended, for a discussion of the factors that
could cause actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Registration Statement on Form S-1, filed with the Securities
and Exchange Commission on January 31, 2000, as amended.
OVERVIEW
General
We are a provider of software and services that enable businesses and
governments to create and deploy global networks over the Internet that connect
people to learning. We provide an Internet-based software platform and related
services that enable organizations to procure and deliver learning and
systematically close knowledge and competency gaps across their extended
enterprises. At the same time, we offer learning providers a global marketing
and distribution channel. We recently launched the Saba Learning Exchange, an
Internet-based business-to-business learning marketplace.
We commenced operations in April 1997 and, through March 1998, focused
substantially all of our efforts on research activities, developing our products
and building our business infrastructure. We shipped our first Saba Learning
Network and Saba Learning Provider Network products and began to generate
revenues from software license
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fees, implementation and consulting services fees and support fees in April
1998. We began to operate Saba Learning Exchange in December 1999. To date, we
have not generated significant revenues from the Saba Learning Exchange.
Sources of Revenues and Revenue Recognition
To date, we have generated revenues primarily from licensing Saba
Learning Network and Saba Learning Provider Network and providing related
services, including implementation, consulting, support and education. In the
future, in addition to such license and services revenues, we intend to pursue
transaction-based and other forms of revenues from Saba Learning Exchange.
Our license agreements generally provide that our customers pay a
license fee based on a specified number of learners and the type of software
modules licensed. Customers can subsequently pay additional license fees to
allow additional learners to use previously licensed modules or to license
additional modules. Customers that license Saba Learning Network and Saba
Learning Provider Network generally enter into one year support agreements
pursuant to which they are entitled to receive software upgrades, error
corrections and telephone and web-based assistance, generally for a fixed fee.
Customers may also purchase implementation, consulting, and education
services from us. Although we generally provide implementation and consulting
services on a time and materials basis, to date, a significant portion of these
services have been provided on a fixed fee basis. Our education services are
offered for a fixed fee. In the future, we expect to rely in significant part on
third-party consulting organizations to perform implementation, consulting and
education services.
We recognize license revenues in accordance with the provisions of
American Institute of Certified Public Accountants, or AICPA, Statement of
Position 97-2, "Software Revenue Recognition", as amended by Statement of
Position 98-4, "Deferral of the Effective Date of Certain Provisions of SOP
97-2". To date, we have sold license and support together as components of
multiple element arrangements. Our agreements provide for support, which
consists of software upgrades, error corrections and telephone and web-based
assistance. We recognize license revenues monthly over the initial support
period, generally one year, if all of the following conditions are met:
- There is persuasive evidence of an arrangement;
- We have delivered the product to the customer;
- Collection of the license fees is probable; and
- The amount of the fee to be paid by the customer is fixed or
determinable.
If an agreement with a customer provides that the customer has the
right, during a specified period, to accept or reject our products, subject to
the foregoing conditions, license revenues are recognized ratably over the
remainder of the support period beginning upon the
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earlier of customer acceptance or the expiration of the acceptance period.
License and services revenues deferred to future periods are reflected as
deferred revenues on our balance sheet. As of February 29, 2000, deferred
revenues included approximately $2.8 million of amounts recorded in accounts
receivable and software license and support fees collected from customers in
advance of revenue recognition. We invoice customers for license and support
fees in accordance with individual contract terms. Payment terms for license
fees and first year support fees generally require payment from the customer
within 30 days of the effective date of the contract.
The AICPA has also issued Statement of Position 98-9 that was effective
for us for transactions entered into beginning January 1, 2000. Implementation
of this statement did not materially affect our results of operations during the
three and nine months ended February 29, 2000.
Software support revenues are recognized monthly over the term of the
support contract, typically one year. Revenues from other professional services
are recognized as the services are provided.
Cost of Revenues
Our cost of revenues includes cost of our license revenues and cost of
our services revenues. Our cost of license revenues include the cost of manuals
and product documentation, production media and shipping costs. Our cost of
services revenues include salaries and related expenses for our professional
services organization. Because our cost of services revenues is greater than
cost of license revenues, cost of revenues as a percentage of total revenues may
fluctuate based on the mix of products and services sold.
Operating Expenses
Our operating expenses are classified into three general operational
categories: sales and marketing, research and development and general and
administrative. In addition, our operating expenses include amortization of
deferred stock compensation.
We classify all charges to the research and development, sales and
marketing and general and administrative expense categories based on the nature
of the expenses. Each of these three categories include commonly recurring
expenses such as salaries, employee benefits, travel and entertainment costs,
and allocated communication, rent and depreciation costs. We allocate these
expenses to each of the functional areas that derive a benefit from such
expenses based upon their respective headcount. The research and development
category of operating expense also includes purchased technology. The sales and
marketing category of operating expenses also includes sales commissions, and
expenses related to public relations and advertising, trade shows and marketing
collateral materials. The general and administrative category of operating
expenses also includes administrative and professional services fees.
In connection with the granting of stock options to, and restricted
stock purchases by, our employees, we recorded deferred stock compensation
totaling approximately $31.0 million as of February
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29, 2000. This amount represents the difference between the exercise or purchase
price, as applicable, and the deemed fair value of our common stock for
financial accounting purposes on the date these stock options were granted or
purchase agreements for restricted stock were signed. This amount is included as
a component of stockholders' equity and is being amortized by charges to
operations over the vesting period of the options or restricted stock. As of
April 30, 2000, we recorded an additional $7.2 million of deferred stock
compensation for stock options granted subsequent to February 29, 2000. The
amortization of the remaining deferred stock compensation will result in
additional charges to operations through fiscal 2004.
History of Losses
We have incurred significant losses and negative cash flows from
operations since our inception. As of February 29, 2000, we had an accumulated
deficit of $46.2 million. Although our revenues have increased on a quarterly
basis since May 31, 1998, we have not achieved profitability and cannot be
certain that we will be able to sustain these growth rates or realize sufficient
revenues to achieve profitability. We expect to continue to incur significantly
greater operating expenses. We also expect to incur substantial non-cash
expenses relating to stock based compensation. As a result, we expect to incur
significant losses for the foreseeable future and will need to generate
significantly higher revenues in order to achieve profitability. If we achieve
profitability, we may not be able to sustain it.
We had 357 full-time employees as of February 29, 2000. We intend to
hire a significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth, we must invest in scalable operational systems, procedures and
controls. We must also be able to recruit qualified candidates to manage our
expanding operations. We expect future expansion to continue to challenge our
ability to hire, train, manage and retain our employees. Additional personnel
will increase our operating expenses in the foreseeable future.
Limited Operating History
We have a limited operating history that makes it difficult to forecast
our future operating results. We believe that period-to-period comparisons of
our operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early state of development,
particularly companies in new and rapidly evolving markets, such as electronic
commerce and Internet software. We may not be successful in addressing these
risks and difficulties. Although we have experienced significant growth in
revenues in recent periods, we do not believe that prior growth rates are
sustainable or indicative of our future operating results.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
Revenues
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Total revenues increased to $10.4 million for the nine months ended
February 29, 2000 from $1.0 million for the nine months ended February 28, 1999.
For the three months ended February 29, 2000, total revenues increased to $5.2
million from $554,000 for the three months ended February 28, 1999. The growth
in revenues period-over-period reflects our relatively early stage of
development and is primarily attributable to our expanding sales force. We do
not expect revenues to increase at the same rate in the future. During the three
and nine months ended February 29, 2000, Ford accounted for more than 10% of our
revenues.
License revenues increased to $4.5 million, or 43% of total revenues,
for the nine months ended February 29, 2000, from $298,000, or 29% of total
revenues, for the nine months ended February 28, 1999. For the three months
ended February 29, 2000, license revenues increased to $2.6 million from
$179,000 for the three months ended February 28, 1999. These increases in the
amount of license revenues are primarily attributable to an increase in sales of
licenses to new customers resulting from increased headcount in our sales force.
Services revenues increased to $5.9 million, or 57% of total revenues,
for the nine months ended February 29, 2000, from $739,000 or 71% of total
revenues, for the nine months ended February 28, 1999. For the three months
ended February 29, 2000, services revenues increased to $2.6 million from
$375,000 for the three months ended February 28, 1999. The increases in the
dollar amounts of services revenues is primarily attributable to increased
implementation and consulting services performed in connection with increased
license sales and to support services sold to our new customers.
Deferred license and services revenues reflected on our balance sheet
were $11.0 million at February 29, 2000 as compared to $1.8 million at February
28, 1999.
The mix of license and services revenues as a percentage of total
revenues has varied significantly due to our relatively early stage of
development.
Cost of Revenues
Total cost of revenues increased to $5.2 million for the nine months
ended February 29, 2000, from $635,000 for the nine months ended February 28,
1999. For the three months ended February 29, 2000, total cost of revenues
increased to $2.5 million from $347,000 for the three months ended February 28,
1999. To date, our cost of product license revenues has been insignificant. The
increase in the amount of cost of revenues is primarily attributable to the
hiring of additional employees to support increased customer demand for our
implementation and consulting services. Cost of services revenues represented
89% of services revenues for the nine months ended February 29, 2000 and 86% of
services revenues for the nine months ended February 28, 1999. For each of the
three months ended February 29, 2000 and February 28, 1999, cost of services
revenues represented 96% and 93%, respectively, of services revenues. The
increase in the cost of services as a percentage of services revenues is
primarily attributable to lower utilization rates of new employees as they
complete required training on Saba products and implementation methodologies.
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Cost of services exclude $1.5 million of amortization of deferred stock
compensation for the nine months ended February 29, 2000 and $1.2 million for
the three months ended February 29, 2000.
Operating Expenses
Research and development. Research and development expenses increased to
$10.3 million for the nine months ended February 29, 2000, from $1.9 million for
the nine months ended February 28, 1999. For the three months ended February 29,
2000, research and development expenses increased to $4.1 million from $980,000
for the three months ended February 28, 1999. The increases are primarily
attributable to increases in the number of employees engaged in research and
development and, for the nine month period, a $1.3 million cash payment to a
third-party related to the purchase of an early stage product framework that had
not yet reached technological feasibility. The product framework is intellectual
property obtained from a third party, which includes technical and design
documents, flow charts, and diagrams. We intend to develop the product framework
for integration into our Saba Learning Network and Saba Learning Provider
Network. The planned development of the product framework is projected to take
12 to 24 months and intended to be completed during fiscal 2001. The total
internal cost is currently expected to range from $4 million to $6 million.
Changes in market conditions, resource allocations and internal initiatives
could impact our decision to continue development of the product framework. The
development of software products, including this product framework, involves
substantial risk. We may not be able to successfully complete the development of
the product framework in the projected timeframe, if at all, or at the expected
cost.
Research and development expenses exclude $2.5 million of amortization
of deferred stock compensation for the nine months ended February 29, 2000 and
$1.5 million for the three months ended February 29, 2000. To date, all software
development costs have been expensed in the period incurred. We believe that
continued investment in research and development is critical to attaining our
strategic objectives, and we anticipate that research and development expenses
will continue to increase in absolute dollars as a result of our internal
product development.
Sales and marketing. Sales and marketing expenses increased to $16.9
million for the nine months ended February 29, 2000, from $2.8 million for the
nine months ended February 28, 1999. For the three months ended February 29,
2000, sales and marketing increased to $8.4 million from $1.3 million for the
three months ended February 28, 1999. These increases are primarily attributable
to increases in the number of employees in our sales and marketing
organizations, and related costs, such as increased sales commissions and costs
associated with the establishment of sales offices in additional domestic and
international locations. Sales and marketing expenses exclude $2.6 million of
amortization of deferred stock compensation for the nine months ended February
29, 2000 and $1.3 million for the three months ended February 29, 2000. We
anticipate that the amount of sales and marketing expenses will continue to
increase in absolute dollars due to the planned growth of our sales force and to
expected additional
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increases in advertising and marketing programs and other promotional
activities.
General and administrative. General and administrative expenses
increased to $3.5 million for the nine months ended February 29, 2000, from
$791,000 for the nine months ended February 28, 1999. For the three months ended
February 29, 2000, general and administrative expenses increased to $1.5 million
from $385,000 for the three months ended February 28, 1999. The increases are
primarily attributable to increases in the number of executive, finance and
administrative employees from 8 at February 28, 1999 to 42 at February 29, 2000.
The increases were also attributable to an increase in the amount of
administrative and professional services fees, including temporary staffing,
legal and accounting fees. General and administrative expenses exclude $1.9
million of amortization of deferred stock compensation for the nine months ended
February 29, 2000 and $537,000 for the three months ended February 29, 2000. We
expect that the absolute dollar amount of general and administrative expenses
will continue to increase in future periods as we add personnel to support the
expansion of our operations, incur additional expenses related to the
anticipated growth of our business both domestically and internationally, and
fulfill our responsibilities as a public company.
Amortization of deferred stock compensation. During the nine months
ended February 29, 2000, we recorded deferred stock compensation of $29.8
million and amortization of $8.5 million. During the three month period ended
February 29, 2000, we recorded deferred stock compensation of $6.3 million and
amortization of $5.0 million. This amortization includes $457,000 of deferred
compensation expense recorded as a result of option grants to advisory board
members.
Interest income and other, net. Interest income and other, net consists
of interest income, interest expense and other non-operating expenses. Interest
income and other, net increased to $394,000 for the nine months ended February
29, 2000, from $29,000 for the nine months ended February 28, 1999, and to
$238,000 for the three months ended February 29, 2000 from $18,000 for the three
months ended February 28, 1999. The increases are attributable primarily to
interest income from average invested cash proceeds from financing activities,
partially offset by interest expense related to equipment loans, the proceeds of
which were used to purchase computer equipment and office furniture and
equipment.
Our results of operations could vary significantly from quarter to
quarter. We expect to incur significant sales and marketing expenses to promote
our products and services. Therefore, our quarterly operating results are likely
to be particularly affected by the number of customers licensing our products
during any quarter as well as sales and marketing, research and development and
other expenses for a particular period. If revenues fall below our expectations,
we will not be able to reduce our spending rapidly in response to the shortfall.
We anticipate that our sales will continue to have long sales cycles. Therefore,
the timing of future customer contracts could be difficult to predict, making it
very difficult to predict revenues between quarters, and our operating results
may vary significantly.
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Other factors that could affect our quarterly operating results include
those described below and under the caption "Factors that may Affect Future
Operating Results."
- dependence of our revenues on a small number of large orders;
- our ability to attract new customers;
- any changes in revenue recognition policies and provisions and
interpretations of these provisions;
- our ability to license additional products to current customers;
- the announcement or introduction of new products or services by us or
our competitors;
- changes in the pricing of our products and services or those of our
competitors;
- variability in the mix of our products and services revenues in any
quarter;
- technical difficulties or service interruptions of our computer
network systems or the Internet generally; and
- the amount and timing of operating costs and capital expenses relating
to expansion of our business.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
sale of equity securities, through which we have raised net proceeds of $52.1
million through February 29, 2000, equipment leases and other debt. As of
February 29, 2000, we had outstanding equipment leases and notes payable of $3.1
million and $24.0 million of cash and cash equivalents.
Cash used in operating activities was $15.9 million during the nine
months ended February 29, 2000 and $4.1 million during the nine months ended
February 28, 1999. The cash used during these periods was primarily attributable
to net losses of $33.8 million during the nine months ended February 29, 2000
and $5.1 million during the nine months ended February 28, 1999.
Investments in property and equipment, excluding equipment acquired
under capital leases, were $1.1 million during the nine months ended February
29, 2000 and $566,000 during the nine months ended February 28, 1998.
Cash provided by financing activities was $31.2 million during the nine
months ended February 29, 2000 and $5.8 million during the nine months ended
February 28, 1998 resulting primarily from net proceeds from the sale of
preferred stock and, to a lesser extent, from bank borrowings. These amounts
were partially offset by payments on capital lease obligations and notes
payable.
As of February 29, 2000, we did not have any material commitments for
capital expenses. Our principal commitments consisted of obligations under
capital and operating leases.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our presently anticipated working capital,
capital expense and business expansion requirements for at least the next 12
months. However, we may choose to raise additional funds within the next 12
months to support expansion,
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develop new or enhanced applications and services, respond to competitive
pressures, acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. Our future liquidity and capital requirements will
depend on numerous factors, including the success of our existing and new
product and service offerings and competing technological and market
developments. We may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that additional funding, if needed, will be available on terms
acceptable to us, if at all.
YEAR 2000
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, computer systems and software used by many
companies and organizations in a wide variety of industries, including
technology, transportation, utilities, finance and telecommunications, may have
produced erroneous results or failed unless they had been modified or upgraded
to process date information correctly. We use software, computer technology and
other services internally developed and provided by third-party vendors that may
fail due to the Year 2000 phenomenon even after January 1, 2000. This failure
may involve significant time and expense, and uncorrected problems could
seriously harm our business. In addition, the potential failure of our customers
to ensure that their operations are Year 2000 compliant could have an adverse
effect on them, which in turn could limit their ability to use our products and
services or process our invoices in a timely manner. Furthermore, customers or
potential customers may delay purchasing our products and services to the extent
such customers or potential customers are required to devote resources to
resolving the Year 2000 problem.
MARKET AND CURRENCY RISK
We develop and market our products in North America, Europe and the
Asia-Pacific region. As a result, our financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. To date, a majority of our sales have been made
in U.S. dollars. A strengthening of the dollar could make our products less
competitive in foreign markets. In addition, our interest income is sensitive to
changes in the general level of U.S. interest rates. However, due to the
short-term nature of our investments, we believe that there is no material risk
exposure.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". We are required to adopt SFAS No. 133, as
amended, for the year ending May 31, 2002. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative financial instruments and do not currently engage in hedging
activities, adoption of SFAS No. 133 is expected to have no material impact on
our financial condition or results of operations. We may,
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however, as our foreign operations increase, hedge our exposure to foreign
currency risk in the future.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 regarding recognition, presentation and disclosure
of revenues. We believe that SAB No. 101 does not have any material effect on
our accounting practices or financial results.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated by such forward-looking statements as a result of certain
factors including those set forth below.
WE HAVE A LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE RISKS ENCOUNTERED BY
EARLY-STAGE COMPANIES
We were founded in April 1997, shipped our first products in April 1998
and began to operate Saba Learning Exchange in December 1999. Because we have a
limited operating history, you should consider and evaluate our operating
prospects in light of the risks and uncertainties frequently encountered by
early-stage companies in rapidly evolving markets. For us, these risks include:
- risks that our revenue forecasts may be incorrect because of our
limited sales to date and our long sales process;
- risks associated with our dependence on Saba Learning Network and Saba
Learning Provider Network, and related services, for substantially all
of our revenues for the foreseeable future;
- risks that our strategy of establishing Saba Learning Exchange may not
be successful; and
- risks that fluctuations in our quarterly operating results will be
significant relative to our revenues.
These risks and other risks are described in more detail below. Our future
growth will depend substantially on our ability to address these and the other
risks described in this section. If we do not successfully address these risks,
our business would be significantly harmed.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND CANNOT ASSURE YOU THAT WE
WILL ACHIEVE PROFITABILITY
We have incurred significant losses and negative cash flows from
operations since our inception. Although our revenues have increased
continuously on a quarterly basis since inception, we have not achieved
profitability and cannot be certain that we will be able to sustain these growth
rates or realize sufficient revenues to achieve profitability. We expect to
derive substantially all of our revenues for the foreseeable future from the
licensing of our Saba Learning Network and Saba Learning Provider Network, and
providing related services. Over the longer term, we expect to derive revenues
from Saba Learning Exchange, which is based on an evolving and unproven business
model. Moreover, we also expect to continue to incur significantly greater sales
and marketing, research and development, and general and administrative
expenses. In the future, we expect to incur substantial
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non-cash expenses relating to the amortization of deferred compensation that
will contribute to our net losses. As of February 29, 2000, we had an aggregate
of $22.8 million of deferred compensation to be amortized. As a result of all of
the foregoing, we expect to incur significant losses for the foreseeable future
and will need to generate significantly higher revenues in order to achieve
profitability. If we achieve profitability, we may not be able to sustain it.
FLUCTUATIONS OF OUR QUARTERLY RESULTS COULD CAUSE OUR STOCK PRICE TO EXPERIENCE
SIGNIFICANT FLUCTUATIONS OR DECLINES
Our quarterly operating results have varied significantly in the past
and will likely fluctuate significantly in the future. We believe that
quarter-to-quarter comparisons of our revenues and operating results are not
necessarily meaningful and should not be relied on as indicators of future
performance. Our operating expenses are based on our expectations of future
revenues and are relatively fixed in the short term. We plan to increase our
operating expenses to expand our sales and marketing operations, fund greater
levels of research and development, develop new alliances, increase our services
and support capabilities and improve our operational and financial systems. If
our revenues do not increase along with these expenses, our business would be
seriously harmed and net losses in a given quarter would be even larger than
expected. It is possible that in some future quarter our operating results may
be below the expectations of public market analysts or investors, which could
cause the market price of our common stock to fall.
Our quarterly revenues are especially subject to fluctuation because
they depend on the sale of a small number of relatively large orders,
principally orders for Saba Learning Network and Saba Learning Provider Network,
and related services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in any
given quarter. We generally recognize revenues derived from sales of product
licenses and annual support over a twelve-month period and from sales of
services as the services are provided. Therefore, if we do not book a sufficient
number of large orders in a particular quarter, our revenues in future periods
could be lower than expected. We have not fully developed our business model for
Saba Learning Exchange, including the structure and amount of the fees we intend
to charge. As this business model evolves, the potential for fluctuations in our
quarterly results could increase. Furthermore, our quarterly revenues may be
affected significantly by other revenue recognition policies and procedures.
These policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted.
OUR LENGTHY SALES CYCLE COULD CAUSE DELAYS IN REVENUE GROWTH
The period between our initial contact with a potential customer and the
purchase of our products and services is often long. A customer's decision to
purchase our products and services requires the commitment to improve learning,
involves a significant allocation of resources, and is influenced by a
customer's budgetary cycles. To successfully sell our products and services, we
generally must educate our potential customers regarding the use and benefits of
our products and services, which can require significant time and resources.
Many of
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our potential customers are large enterprises that generally take longer to make
significant business decisions. Our typical sales cycle has been approximately 6
to 12 months. The delay or failure to complete sales in a particular quarter
could reduce our revenues in that quarter, as well as subsequent quarters over
which revenues for the sale would likely be recognized. If our sales cycle
unexpectedly lengthens in general or for one or more large orders, it would
adversely affect the timing of our revenues and our revenue growth. If we were
to experience a delay of several weeks on a large order, it could harm our
ability to meet our forecasts for a given quarter.
A DECLINE IN THE PRICE OF, OR DEMAND FOR, EITHER OF OUR MAIN PRODUCTS, SABA
LEARNING NETWORK OR SABA LEARNING PROVIDER NETWORK, OR OUR RELATED SERVICE
OFFERINGS, WOULD SERIOUSLY HARM OUR REVENUES AND OPERATING MARGINS
Saba Learning Network and Saba Learning Provider Network, and related
services, accounted for substantially all of our revenues in fiscal 1999 and for
the nine months ended February 29, 2000. We anticipate that revenues from our
Saba Learning Network and Saba Learning Provider Network, and related services,
will continue to constitute substantially all of our revenues for the
foreseeable future. Consequently, a decline in the price of, or demand for, Saba
Learning Network or Saba Learning Provider Network, or their respective failure
to achieve broad market acceptance, would seriously harm our business.
OUR STRATEGY OF ESTABLISHING SABA LEARNING EXCHANGE IS UNPROVEN AND MAY NOT BE
SUCCESSFUL
We need to more fully establish and enhance Saba Learning Exchange,
where organizations and learning providers can transact business and
collaborate. Our success depends on a significant number of organizations
implementing Saba Learning Network and Saba Learning Provider Network, and
conducting business with learning providers over the Internet through Saba
Learning Exchange. If this business strategy is flawed, or if we are unable to
execute it effectively, our revenues will be seriously harmed. We began
operating Saba Learning Exchange in December 1999. Accordingly, we have limited
experience developing and operating Saba Learning Exchange. To date, only a
limited number of learning providers and organizations are connected to Saba
Learning Exchange. It is possible that we, together with the organizations and
learning providers who comprise this exchange, will not be able to effectively
operate this exchange, both in terms of technical performance as well as
commercial viability. It is possible that an insufficient number of
organizations and/or learning providers will join and remain in Saba Learning
Exchange, and that we will be unable to generate significant revenues from Saba
Learning Exchange. Unless a critical mass of organizations and learning
providers join Saba Learning Exchange, our solutions may not achieve widespread
market acceptance and our business would be seriously harmed. To date, we have
not generated significant revenues from Saba Learning Exchange.
THE FAILURE TO MAINTAIN OUR RELATIONSHIP WITH CURRENT AND FUTURE CUSTOMERS COULD
REDUCE THE VIABILITY OF OUR SABA LEARNING EXCHANGE
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Because many of our Saba Learning Network customers are Global 2000
organizations, a relatively small number of these organizations account for a
substantial portion of the learners on the Saba platform. In addition, the
quantity of learning offerings made available by our learning providers through
Saba Learning Exchange varies significantly. The concentration of learners
within these organizations and learning offerings offered by these key learning
providers exposes us to the risk that the loss of even a small number of
organizations or learning providers could reduce the viability of Saba Learning
Exchange. This would substantially hinder our ability to generate revenues from
Saba Learning Exchange as well as our other products.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
QUALIFIED PERSONNEL WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS AND
ACHIEVE OUR OBJECTIVES
We believe our future success will depend upon our ability to retain our
key management personnel including Bobby Yazdani, our President and Chief
Executive Officer. These employees are not subject to employment contracts. We
may not be successful in attracting, assimilating and retaining our key
employees in the future.
Our future success and our ability to expand our operations will also
depend in large part on our ability to attract and retain additional qualified
technical, sales and marketing personnel. Competition for these types of
employees is intense due to the limited number of qualified professionals and
the high demand for them, particularly in the San Francisco Bay Area, where our
headquarters is located. We have in the past experienced difficulty in
recruiting qualified personnel. Failure to attract, assimilate and retain
personnel, particularly technical, sales and marketing personnel, would have a
material adverse effect on our business and potential growth.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
We have experienced a period of rapid and substantial growth that has
placed, and if such growth continues, will continue to place, a strain on our
administrative infrastructure. We have increased the number of our employees
from approximately 40 employees at May 31, 1998 to approximately 140 employees
at May 31, 1999 and 357 employees at February 29, 2000. In addition, we intend
to hire a significant number of employees in the future. This expansion is
placing a significant strain on our managerial and financial resources. To
manage the expected growth of our operations and personnel, we will be required
to:
- improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
- install enhanced management information systems; and
- hire, train, retain, motivate and manage our employees.
We may not be able to install adequate management information and
control systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. If we are unable to manage growth effectively, our business
would be seriously harmed.
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OUR REVENUES DEPEND ON A SMALL NUMBER OF LARGE SALES, AND IF WE FAIL TO COMPLETE
ONE OR MORE LARGE SALES OR TO COLLECT ACCOUNTS RECEIVABLE FROM THESE LARGE
SALES, OUR OPERATING RESULTS WILL BE HARMED
To date, we have received a significant portion of our revenues from
large sales to a small number of customers. During the nine months ended
February 28, 1999, our largest customer Ford Motor Company accounted for more
than 10% of our total revenues. During fiscal 1999, Baan, Documentum and Wells
Fargo each accounted for more than 10% of our total revenues and collectively
comprised approximately 66% of our total revenues. In addition, at February 29,
2000, one customer accounted for a total of 12% of our accounts receivable and
at May 31, 1999, five customers accounted for a total of 80% of our accounts
receivable. Our operating results may be harmed if we are not able to complete
one or more substantial sales to any large customer or we are unable to collect
accounts receivable from any of our large customers in any future period.
INTENSE COMPETITION IN OUR TARGET MARKET COULD IMPAIR OUR ABILITY TO GROW AND TO
ACHIEVE PROFITABILITY
The market for our products and services is intensely competitive,
dynamic and subject to rapid technological change. The intensity of the
competition and the pace of change are expected to increase in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered. We encounter competition with respect to different aspects
of our solution from a variety of sources including:
- companies that operate Internet-based marketplaces for the sale of
on-line learning;
- companies that operate Internet-based marketplaces for the sale of
goods and services that may decide to evolve their marketplaces to
include learning offerings;
- Internet portals that offer learning content;
- companies that market and license training management systems;
- enterprise software vendors that offer human resources information
systems training modules; and
- potential customers' internal development efforts.
Because there are relatively low barriers to entry in the electronic
commerce market, which comprises a portion of our business model, we expect
competition from a variety of established and emerging companies.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional products and
services on terms favorable to us. Our current and potential competitors may
develop and market new technologies that render our existing or future products
and services obsolete, unmarketable or less competitive. Our
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current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with other learning solution
providers, thereby increasing the availability of their services to address the
needs of our current and prospective customers. We may not be able to compete
successfully against our current and future competitors, and competitive
pressures that we encounter may seriously harm our business.
IF WE ARE UNABLE TO MANAGE THE COMPLEXITY OF CONDUCTING BUSINESS GLOBALLY, OUR
INTERNATIONAL REVENUES MAY SUFFER
International revenues accounted for 7% of our revenues in each of
fiscal 1999 and the first nine months of fiscal 2000. We intend to expand our
international presence in the future. Conducting business outside of the United
States is subject to certain risks, including:
- changes in regulatory requirements and tariffs;
- language barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and greater difficulty in collecting accounts
receivable;
- reduced protection of intellectual property rights;
- potentially harmful tax consequences;
- fluctuating exchange rates;
- price controls and other restrictions on foreign currency;
- difficulties in obtaining import and export licenses;
- the burden of complying with a variety of foreign laws; and
- political or economic constraints on international trade or
instability.
We might not successfully market, sell or distribute our products and
services in foreign markets and we cannot be certain that one or more of such
factors will not materially adversely affect our future international
operations, and consequently, our business and future growth.
OUR REVENUES MAY DECREASE IF USE OF THE INTERNET IN THE MARKETS WE TARGET DOES
NOT GROW AS PROJECTED
The use of the Internet as a means to interconnect organizations and
learning providers and to create Saba Leaning Exchange is integral to our
business model. Our business strategy is, in part, to create a global,
business-to-business learning marketplace for organizations and learning
providers to transact business and collaborate. However, the use of the Internet
as a means of transacting business is relatively new and has not been accepted
by all customers in the markets we have targeted. The failure of the Internet to
continue to develop as a commercial or business medium or of significant numbers
of organizations and learning providers to transact business and collaborate on
the Internet would harm our revenues and earnings. The acceptance and use of the
Internet to transact business and collaborate is dependent upon a number of
factors, such as the growth and use of the Internet in general, the relative
ease of conducting business on the Internet, the efficiencies and improvements
that conducting commerce on the Internet provides, the resolution of concerns
about transaction security and taxation of transactions on the Internet.
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A FAILURE TO EXPAND AND IMPROVE THE INFRASTRUCTURE OF THE INTERNET COULD
CONSTRAIN THE FUNCTIONALITY OF OUR PRODUCTS AND SERVICES AND THUS LIMIT OUR
REVENUES
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, the
Internet infrastructure may not be able to support this growth and reliability
may decline. If outages or delays on the Internet occur frequently or increase
in frequency, overall Internet usage including usage of our products and
services could grow more slowly or decline. Our ability to increase the speed
and scope of our services to customers is ultimately limited by, and depends
upon, the speed and reliability of both the Internet and our customers' internal
networks. Consequently, the emergence and growth of the market for our products
and services depends upon improvements being made to the entire Internet as well
as to our individual customers' networking infrastructures to alleviate
overloading and congestion. If these improvements are not made, the ability of
our customers to use our products and services will be hindered, and our
business may suffer.
A BREACH OF INTERNET COMMERCE SECURITY MEASURES COULD REDUCE DEMAND FOR OUR
PRODUCTS AND SERVICES
A requirement of the continued growth of Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of Saba Learning Exchange or our customers' networks, or well
publicized security breaches affecting the Internet in general, could
significantly harm our growth and revenues. We cannot be certain that advances
in computer capabilities, new discoveries in the field of cryptography, or other
developments will not result in a compromise or breach of the algorithms we use
to protect content and transactions on Saba Learning Exchange or within our
customers' networks or proprietary information in our databases. Anyone who is
able to circumvent our security measures could misappropriate proprietary and
confidential information or could cause interruptions in our operations. We may
be required to expend significant capital and other resources to protect against
such security breaches or to address problems caused by such breaches. Concerns
over the security of the Internet and other on-line transactions and the privacy
of users may also deter people from using the Internet to conduct transactions
that involve transmitting confidential information.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES THAT
COULD REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES OR INCREASE THE COST OF DOING
BUSINESS, THEREBY ADVERSELY AFFECTING OUR FINANCIAL RESULTS
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, export control laws and laws or regulations directly applicable to
Internet commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may become
applicable to us or may be adopted in the future with respect to the Internet
covering issues such as:
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- user privacy;
- taxation;
- content;
- right to access personal data;
- copyrights;
- distribution; and
- characteristics and quality of services.
The applicability of existing laws governing issues such as property
ownership, copyrights, and other intellectual property issues, encryption,
taxation, libel, export or import matters and personal privacy to the Internet
is uncertain. The vast majority of these laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Such uncertainty could reduce demand for our services or increase
the cost of doing business due to increased costs of litigation or increased
service delivery costs.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE, WE MUST
CONTINUALLY ENHANCE OUR PRODUCTS AND SERVICES
We must continue to enhance and improve the performance, functionality
and reliability of our products and services. The software and electronic
commerce industries are characterized by rapid technological change, changes in
user requirements and preferences, frequent new product and services
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our products and services obsolete. In
the past, we have discovered that some of our customers desire additional
performance and functionality not currently offered by our products. Our success
will depend, in part, on our ability to both internally develop and license
leading technologies to enhance our existing products and services, develop new
products and services that address the increasingly sophisticated and varied
needs of our customers, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of our technology and other proprietary technology involves
significant technical and business risks. We may fail to use new technologies
effectively or to adapt our proprietary technology and systems to customer
requirements or emerging industry standards. If we are unable to adapt to
changing market conditions, customer requirements or emerging industry
standards, we may not be able to increase our revenues and expand our business.
DELAYS IN RELEASING ENHANCED VERSIONS OF OUR PRODUCTS COULD ADVERSELY AFFECT OUR
COMPETITIVE POSITION
As part of our strategy, we expect to regularly release new versions of
our Saba Learning Network, Saba Learning Provider Network and Saba Learning
Exchange. Even if our new versions contain the features and functionality our
customers want, in the event we are unable to timely introduce these new product
releases, our competitive position may be harmed. We cannot assure you that we
will be able to successfully complete the development of currently planned or
future
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products in a timely and efficient manner. Due to the complexity of these
products, internal quality assurance testing and customer testing of
pre-commercial releases may reveal product performance issues or desirable
feature enhancements that could lead us to postpone the release of these new
versions. In addition, the reallocation of resources associated with any
postponement would likely cause delays in the development and release of other
future products or enhancements to our currently available products. Any delay
in releasing other future products or enhancements of our products could cause
our stock price to decline.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER SHIPMENTS
AND OUR BUSINESS AND REPUTATION WOULD BE HARMED
Products as complex as ours often contain unknown and undetected errors
or performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial shipment of new products
or enhancements to existing products. Although we attempt to resolve all errors
that we believe would be considered serious by our customers before shipment to
them, our products are not error-free. These errors or performance problems
could result in lost revenues or delays in customer acceptance and would be
detrimental to our business and reputation. As is typical in the software
industry, with each release we have discovered errors in our products after
introduction. We may not be able to detect and correct errors before releasing
our product commercially. We cannot assure you that undetected errors or
performance problems in our existing or future products will not be discovered
in the future or that known errors considered minor by us will not be considered
serious by our customers, resulting in a decrease in our revenues.
IF THIRD PARTIES CLAIM THAT WE INFRINGE THEIR PATENTS, IT MAY RESULT IN COSTLY
LITIGATION
We cannot assure you that third parties will not claim our current or
future products or services infringe their rights. Any such claims, with or
without merit, could cause costly litigation that could consume significant
management time. As the number of product and services offerings in our market
increases and functionalities increasingly overlap, companies such as ours may
become increasingly subject to infringement claims. Such claims also might
require us to enter into royalty or license agreements. If required, we may not
be able to obtain such royalty or license agreements, or obtain them on terms
acceptable to us.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, AND OUR
COMPETITORS MAY BE ABLE TO OFFER SIMILAR PRODUCTS AND SERVICES WHICH WOULD HARM
OUR COMPETITIVE POSITION
Our success depends upon our proprietary technology. We rely primarily
on copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to establish and protect our proprietary rights. As part
of our confidentiality procedures, we enter into non-disclosure agreements with
our employees. Despite these precautions, third parties could copy or otherwise
obtain and use our technology without authorization, or develop similar
technology independently. In addition, we have filed eight provisional
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<PAGE> 26
patent applications in the U.S. We cannot assure you that any formal or approved
patent applications will result from these provisional applications, that any
patents that may issue will protect our intellectual property or that any issued
patents will not be challenged by third parties. Furthermore, effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. We cannot assure you that the protection of our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology, duplicate our products and services or design around any
patents or other intellectual property rights we hold.
WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK-UP SYSTEM, AND A DISASTER COULD
SEVERELY DAMAGE OUR OPERATIONS
We currently do not have a disaster recovery plan in effect and do not
have fully redundant systems for our services at an alternate site. A disaster
could severely harm our business because our services could be interrupted for
an indeterminate length of time. Our operations depend upon our ability to
maintain and protect our computer systems in our principal facilities in Redwood
Shores, California, which are located on or near known earthquake fault zones.
Although these systems are designed to be fault tolerant, they are vulnerable to
damage from fire, floods, earthquakes, power loss, telecommunications failures
and other events. Additionally, we do not carry sufficient business insurance to
compensate us for our losses that could occur.
WE MUST OUTSOURCE THE MANAGEMENT AND MAINTENANCE OF SABA LEARNING EXCHANGE TO
THIRD PARTIES AND WILL DEPEND UPON THEM TO PROVIDE ADEQUATE MANAGEMENT AND
MAINTENANCE SERVICES
We are currently negotiating with third parties to expand, manage and
maintain the computer and communications equipment and software needed for the
day-to-day operations of Saba Learning Exchange. Services provided by any of
these third parties will likely include managing the Saba Learning Exchange web
server, maintaining communications lines and managing network data centers,
which are the locations on our network where data is stored. If we are unable to
successfully contract with one or more third parties for these services, we
would have to perform these functions ourselves. We may not successfully obtain
or perform these services on a timely and cost-effective basis. If the
installation of the computer and communications equipment and software needed
for the day-to-day operations of Saba Learning Exchange is successfully
completed by one or more third parties, we will be entirely dependent on that
party or parties to manage, maintain and provide security for Saba Learning
Exchange.
WE MAY NOT BE ABLE TO SECURE NECESSARY FUNDING IN THE FUTURE
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use our available cash resources and credit facilities primarily to expand sales
and marketing activities, fund research and development, fund continued
operations, and possibly make future acquisitions. We believe that our existing
capital resources will be sufficient to meet our capital requirements for the
next twelve months. However, if our capital requirements increase
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materially from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock. Additional financing may not be available when needed on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to develop or enhance our
products and services, take advantage of future opportunities or respond to
competitive pressures.
WE INTEND TO PURSUE ACQUISITIONS, AND OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED IF WE FAIL TO ADEQUATELY INTEGRATE ACQUIRED BUSINESSES
As part of our overall business strategy, we intend to pursue
acquisitions of complementary businesses or technologies that would provide
additional product or service offerings, additional industry expertise or an
expanded geographic presence. Any future acquisition could result in the use of
significant amounts of cash, potentially dilutive issuances of equity
securities, or the incurrence of debt or amortization of expenses related to
goodwill and other intangible assets, any of which could materially adversely
affect our business. In addition, acquisitions involve numerous risks,
including:
- difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- the diversion of management's attention from other business concerns;
- risks of entering markets in which we have no or limited prior
experience; and
- the potential loss of key employees of the acquired company.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY
The market price for our common stock may be affected by a number of
factors, including those described above and the following:
- the announcement of new products and services or product and service
enhancements by us or our competitors;
- quarterly variations in our results of operations or those of our
competitors;
- changes in earnings estimates or recommendations by securities
analysts that may follow our stock;
- developments in our industry; and
- general market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of
our competitors.
In addition, stock prices for many companies in the technology and
emerging growth sectors have experienced wide fluctuations that have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations, as well as general economic, political and market conditions, may
materially adversely affect the market price of our common stock.
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<PAGE> 28
CERTAIN EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER SABA TO THE DETRIMENT OF
MINORITY STOCKHOLDERS
Our executive officers, directors and principal stockholders (i.e.,
greater than 5% stockholders) together beneficially own approximately 60% of our
outstanding common stock. As a result, these stockholders, if they act together,
will be able to control our management and affairs and all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing our change in control and might affect the
market price of our common stock.
OUR BUSINESS MIGHT BE HARMED IF THE SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT
OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR PURCHASING PATTERNS AS A
RESULT OF THE YEAR 2000 PROBLEM
Although January 1, 2000 has occurred, our information technology
systems could be impaired or cease to operate due to the year 2000 problem.
Additionally, we rely on technology supplied by third parties. These third
parties may experience year 2000 related problems. Any year 2000 problems
experienced by us or any of these third parties could harm our business.
Additionally, the Internet could face serious disruption arising from the year
2000 problem.
Further, any year 2000 problems with respect to our products could lead
to claims from our customers asserting liability, including liability for breach
of warranties related to our products, which could result in large settlements
or judgments against us. We have not suffered any material consequences as a
result of a year 2000 problem.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD CAUSE OUR STOCK PRICE TO DECLINE
If our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants)
in the public market, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
THE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD ADVERSELY AFFECT THE
RIGHTS OF THE HOLDERS OF OUR COMMON STOCK
Our Certificate of Incorporation and Bylaws contain provisions that
could make it harder for a third party to acquire us without the consent of our
board of directors. For example, if a potential acquiror were to make a hostile
bid for us, the acquiror would not be able to call a special meeting of
stockholders to remove our board of directors or act by written consent without
a meeting. In addition, our board of directors has staggered terms that make it
difficult to remove them all at once. The acquiror would also be required to
provide advance notice of its proposal to remove directors at an annual meeting.
The acquiror also will not be able to cumulate votes at a meeting, which will
require the acquiror to hold more shares to gain representation on the board of
directors than if cumulative voting were permitted.
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<PAGE> 29
Our board of directors also has the ability to issue preferred stock
that would significantly dilute the ownership of a hostile acquiror. In
addition, Section 203 of the Delaware General Corporation Law limits business
combination transactions with 15% stockholders that have not been approved by
the board of directors. These provisions and other similar provisions make it
more difficult for a third party to acquire us without negotiation. These
provisions may apply even if the offer may be considered beneficial by some
stockholders.
Our board of directors could choose not to negotiate with an acquiror
that it did not feel was in the strategic interests of Saba. If the acquiror was
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition by the anti-takeover measures, you could lose
the opportunity to sell your shares at a favorable price.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements for the reasons described under the caption "Factors That May Affect
Future Operating Results."
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial position and results of operations. Historically, the Company's
primary exposures have related to non-dollar denominated sales and expenses in
Europe and Asia Pacific, including Australia. For the most part, these exposures
consist of intercompany accounts receivable owed to the Company as a result of
local sales of software licenses by the Company's international subsidiaries.
The majority of these exposures are denominated in European currencies,
primarily the Euro.
The Company's cash and cash equivalent balances of $24.0 million at February 29,
2000 consisted primarily of short-term money market instruments with maturity
dates of less than 90 days. The Company does not believe its exposure to
interest rate risk is material given the short-term nature of its portfolio.
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Upon the closing of the Company's initial public offering in April 2000, all
outstanding shares of Saba's Preferred Stock were automatically converted into
19,568,540 shares of Common Stock. Following such closing, Saba filed an
amendment to its Restated Certificate of Incorporation with the Delaware
Secretary of State to authorize 5,000,000 shares of undesignated Preferred
Stock.
For the period from December 1, 1999 to February 29, 2000, the Company issued
and sold the following unregistered securities:
1. During the period, the Company granted stock options to employees, directors
and consultants under its 1997 Stock Incentive Plan (the "Stock Plan") covering
an aggregate of 1,428,750 shares of the Company's common stock, at exercise
prices ranging from $0.95 to $5.36 with a weighted average exercise price of
$3.14 per share.
2. During the period, the Company issued and sold an aggregate of 782,071 shares
of its common stock to 46 employees, directors and consultants for an aggregate
amount of $55,903 upon exercise of stock options granted pursuant to the
Company's Stock Plan.
3. In addition, during the period, the Company issued and sold an aggregate of
450,789 shares of its common stock to 6 employees, directors (including trusts
affiliated with directors) and advisory board members for an aggregate amount of
$981,400.
4. During the period, the Company issued warrants for a total of 123,930 shares
of its Common Stock for an aggregate exercise price of $324,055.
5. During the period, the Company issued and sold an aggregate of 171,354 shares
of its Common Stock for an aggregate amount of $29,953 upon exercise of warrants
to purchase Common Stock.
The sale and issuance of securities in the transactions described in paragraphs
1 through 5 above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule 701
or were deemed to be exempt from registration under the Securities Act by virtue
of Section 4(2) thereof. Appropriate legends were affixed to the stock
certificates issued in the above transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. No underwriters
were employed in any of the above transactions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In March 2000, prior to its initial public offering, the Company
submitted the following matters to a vote of its security holders through an
Action by Written Consent. Holders of the required majority of the
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Company's outstanding Common Stock and Preferred Stock approved each of the
matters.
To approve and adopt a 2000 Employee Stock Purchase Plan and to reserve
a total of 2,000,000 shares of Common Stock thereunder for issuance to
employees.
To amend the 1997 Stock Incentive Plan to increase the number of
authorized shares to be issued by 1,200,000 to a total authorized reserve of
9,815,550 shares.
To approve an amendment to Saba's Restated Certificate of Incorporation
to change the authorized capital to 5,000,000 shares of Preferred Stock and to
100,000,000 shares of Common Stock.
To approve and adopt the Saba Software, Inc. 2000 Stock Incentive Plan,
including the 2000 Non-Employee Director Option Program and to reserve a total
of 6,000,000 shares of Common Stock thereunder for issuance to employees and
non-employee directors.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1* Certificate of Incorporation of the Company as in effect until April 12, 2000.
3.2* Amended and Restated Certificate of Incorporation of the Company as effective as of
April 12, 2000.
3.3* Bylaws of the Company as effective until April 12, 2000.
3.4* Amended and Restated Bylaws of the Company as effective as of April 12, 2000.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
10.1* Form of Indemnification Agreement between the Company and each of its officers and
directors.
10.2* 1997 Stock Incentive Plan.
10.3* Form of 2000 Stock Incentive Plan.
10.4* Form of 2000 Employee Stock Purchase Plan.
10.5* Third Amended and Restated Investors' Rights Agreement.
10.6* Forms of Restricted Stock Purchase Agreements.
10.7* Lease Agreement dated March 16, 1999 between the Company and Westport Joint Venture
for the Company's Redwood Shores, California headquarters.
10.8* Stock Purchase and Master Strategic Relationship Agreement dated March 31, 2000
between the Company and SingTel Ventures (Cayman) Pte Limited.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (Registration No. 333-95761).
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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<PAGE> 32
May 22, 2000 SABA SOFTWARE, INC.
By /s/ BOBBY YAZDANI
---------------------------------
Bobby Yazdani
Chief Executive Officer,
President and Chairman of the
Board of Directors
By /s/ TERRY CARLITZ
---------------------------------
Terry Carlitz
Chief Financial Officer and
Director (Principal Accounting
Officer)
EXHIBIT INDEX TO SABA SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1* Certificate of Incorporation of the Company as in effect until April 12, 2000.
3.2* Amended and Restated Certificate of Incorporation of the Company as effective as of
April 12, 2000.
3.3* Bylaws of the Company as effective until April 12, 2000.
3.4* Amended and Restated Bylaws of the Company as effective as of April 12, 2000.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
10.1* Form of Indemnification Agreement between the Company and each of its officers and
directors.
10.2* 1997 Stock Incentive Plan.
10.3* Form of 2000 Stock Incentive Plan.
10.4* Form of 2000 Employee Stock Purchase Plan.
10.5* Third Amended and Restated Investors' Rights Agreement.
10.6* Forms of Restricted Stock Purchase Agreements.
10.7* Lease Agreement dated March 16, 1999 between the Company and Westport Joint Venture
for the Company's Redwood Shores, California headquarters.
10.8* Stock Purchase and Master Strategic Relationship Agreement dated March 31, 2000
between the Company and SingTel Ventures (Cayman) Pte Limited.
27.1 Financial Data Schedule.
</TABLE>
- -------------------
* Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form S-1 (Registration No. 333-95761).
Page 32
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