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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
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COMMISSION FILE NUMBER 0-30221
SABA SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3267638
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
2400 BRIDGE PARKWAY
REDWOOD SHORES, CALIFORNIA 94065-1166
(650) 696-3840
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
COMMON STOCK, $.001 PAR VALUE PER SHARE NASDAQ NATIONAL MARKET
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2000 was approximately
$343,670,082 (based on a closing sale price of $21.00 per share as reported for
the NASDAQ Exchange). Shares of common stock beneficially held by each executive
officer and director and by each person who beneficially owns 5% or more of the
outstanding common stock have been excluded since such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the registrant's common stock, $.001 par value per
share, outstanding as of June 30, 2000 was 43,756,790.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 9, 2000 is incorporated by reference in Part
III of this Form 10-K to the extent stated herein. Registrant's Registration
Statement on Form S-1 [Registration No. 333-95761] is incorporated by reference
in Part IV of this Form 10-K to the extent stated herein.
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PART I
ITEM 1: BUSINESS
OVERVIEW
We are a provider of learning management software and services that enable
businesses and governments to create and deploy global networks over the
Internet that connect people to learning. Organizations face a rapidly changing
environment in which a principal source of competitive advantage is the depth
and breadth of the knowledge and competencies possessed by their "extended
enterprise" of employees, customers, partners and suppliers. We provide an
Internet-based software platform and related services that enable businesses to
procure and deliver learning and systematically close knowledge and competency
gaps across their extended enterprises. At the same time, we offer learning
providers an Internet-based global marketing and distribution channel. Building
upon our growing base of learners and learning offerings, we recently launched
the Saba Learning Exchange, an Internet-based business-to-business learning
marketplace. The Saba Learning Exchange is designed to enable businesses,
governments and learning providers to buy and sell learning offerings, such as
on-line and off-line courses and related materials, as well as collaborate
within learning communities.
Our offerings are designed to cost-effectively meet the needs of both
global organizations and learning providers. Organizations implementing our
solutions can establish knowledge and competency goals, assess gaps relative to
these goals, source and distribute learning needed to close these gaps, and
continuously track and measure progress. Our solutions also enable learning
providers to develop, market, sell, deliver and improve their learning
offerings. Learning offerings supported by our solution can be from internal or
external providers and offered in many languages, off-line or on-line, and over
private or public networks. This breadth of functionality allows organizations
that use our solutions to:
- Accelerate responsiveness to changing business needs. An organization's
employees, customers, partners and suppliers can be quickly educated
through the distribution of targeted learning to speed responsiveness to
changing business objectives.
- Enhance customer satisfaction and loyalty. Organizations can provide
relevant and updated product and usage knowledge to customers leading to
improved satisfaction and loyalty.
- Improve recruitment and retention. Learning can be used as a tool to
recruit and retain employees, by offering learners an opportunity to
improve performance and enhance knowledge.
- Align disparate business units. Learning can be used to align disparate
workforces, for example, recently-acquired or merged businesses and
geographically-dispersed business units.
- Ensure regulatory compliance. Targeted knowledge and competencies can be
deployed to ensure compliance with applicable laws, such as those
governing the health care, financial services, transportation and
chemical and energy industries.
As of May 31, 2000, our software was licensed for use by over 2.8 million
people and more than 30,000 third-party learning offerings were accessible on
Saba learning networks. To increase this base of learners and learning offerings
quickly, we intend to continue to target large organizations, including Global
2000 and government organizations, and their learning providers. Our significant
customers include 3Com, Agilent, Anheuser-Busch, Cisco Systems, Continental
Airlines, DaimlerChrysler, EMC, Ford Motor Company, General Electric, Hyundai,
Lucent Technologies and Procter & Gamble. Our content offerings are available
from over 50 learning providers, including ExecuTrain, IBM Catapult,
International Air Transport Association, NETg, PROVANT, SkillSoft and the
Sun-Netscape Alliance. Some of our customers, such as Cisco Systems, act both as
learning content providers and also license learners for their extended
enterprise.
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INDUSTRY BACKGROUND
Traditional Learning Solutions
Organizations face an increasingly competitive environment driven by rapid
and constant change, globalization and technological advancements. To remain
competitive, organizations must continually work on improving the knowledge and
competencies not only of their employees, but also of their customers, partners
and suppliers. By educating their extended enterprise, organizations can improve
performance by, among other things, increasing productivity, reducing the time
and expense associated with bringing new products and services to market, and
improving customer satisfaction and loyalty.
TRAINING Magazine estimates that the training budget of U.S. enterprises
was approximately $63 billion in 1999. We believe that the worldwide education
budget for businesses, as well as for federal and state governments, is
significantly higher. Despite the focus and spending on learning, many
businesses struggle to realize significant strategic benefits from learning
investments due to the significant shortcomings of traditional learning
management solutions. Most of the learning management solutions offered today,
which include systems developed in-house and third party systems intended for
back-office support of employee training, have a number of shortcomings. These
solutions typically:
- Are unable to identify and systematically close knowledge and competency
gaps. Most organizations today lack the systems to identify and assess
knowledge and competency gaps across their extended enterprise. They have
limited ability to identify and offer appropriate learning to address
each individual's needs, track performance improvement at the individual
level or across a department or organization, and generate associated
management reports that effectively measure the return on their learning
investment.
- Are unable to personalize learning. Traditional learning management
systems do not provide the breadth of relevant learning offerings
required to meet the learning needs, language requirements and learning
style of each individual in the extended enterprise. Consequently,
learners are typically limited to "one-size-fits-all" learning offerings.
- Are limited in their ability to source offerings. The learning industry
is highly fragmented with a multitude of content providers and a large
number of buyers within organizations. The lack of a learning marketplace
results in significant time and resources spent on locating relevant
content.
- Are difficult to update. The lack of enterprise-wide learning management
systems makes it difficult for both organizations and learning providers
to disseminate time-sensitive information, such as schedules and updated
learning offerings.
- Are costly and inefficient to deploy and manage across the extended
enterprise. Traditional learning management systems are often costly and
inefficient. They rely on a combination of manual and automated
processes, and are difficult to deploy across geographically dispersed
extended enterprises.
As a result of these shortcomings, individuals within the extended enterprise do
not receive required knowledge or attain necessary competencies in a timely
fashion. Consequently, organizations suffer numerous inefficiencies, such as
delays in time to market, reduced sales force productivity and violations of
safety and other regulations.
The providers of learning offerings have faced significant limitations in
their ability to develop, market, distribute, sell and improve their offerings.
Most learning providers have had limited marketing and distribution channels,
making it difficult to cost-effectively reach new customers and markets. They
have also been unable to estimate and aggregate demand for their content, as
demand within enterprises is highly fragmented, with a multitude of
decision-makers and learning buyers. Therefore, many of these providers have no
choice but to deliver solutions that are typically in the form of
"one-size-fits-all, just-in-case" learning offerings that are not tailored to
the knowledge needs and learning style of the individual learner.
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The Need for an Internet-Based Solution
The rapid adoption of the Internet has created an opportunity to solve many
of the shortcomings in the business learning market. The Internet is one of the
fastest growing global communications mediums in history and is dramatically
changing the way businesses and individuals communicate and share information.
International Data Corporation, or IDC, estimates that the number of Internet
users worldwide will grow from 142 million in 1998 to 502 million in 2003. In
addition, according to Forrester Research, business-to-business electronic
commerce is expected to grow from $43 billion in 1998 to $1.3 trillion in 2003,
underscoring the significance of this marketing and procurement channel.
This rapid growth and deployment of the Internet as a business platform for
worldwide communication and commerce is fundamentally transforming the way
businesses interact with their employees, customers, partners and suppliers,
creating the opportunity to streamline complex processes, lower costs and
improve productivity. The Internet has the potential to significantly improve
the procurement, deployment and management of learning. However, existing
offerings did not take full advantage of the Internet and were not designed to
serve as an integrated solution capable of improving the manner in which
learning is managed across the extended enterprise. As a result, we believe
there is a significant opportunity for a software and services solution that is
designed to leverage the benefits of the Internet to create learning networks to
meet the needs of businesses and their employees, customers, partners and
suppliers, as well as the needs of third-party learning providers.
THE SABA SOLUTION
Our integrated solutions consist of the Saba Learning Enterprise software
application, as well as the Saba Learning Exchange, an Internet-based
business-to-business learning marketplace. Our software platform is
standards-based, content-neutral and designed to enable the procurement,
deployment and management of on-line or off-line learning in many languages
across the extended enterprise.
Saba Learning Enterprise is an Internet-based software application that
allows enterprises to assess the learning needs of individuals and
organizations, select and purchase on-line and off-line learning materials and
programs, track individual learners' progress and manage enterprise-wide
learning initiatives and processes. Saba Learning Enterprise is also an
Internet-based software application that enables learning providers to develop,
market, sell and distribute on-line and off-line learning materials to
organizations worldwide. We also provide a full range of strategic consulting,
business process reengineering, and technical implementation and support
services for our business customers and learning providers.
Our established base of organizations and learning providers form the basis
of Saba Learning Exchange. We believe that the efficiencies created by this
exchange will continue to attract a growing number of organizations and learning
providers. As more organizations use the Saba Learning Exchange to procure,
deploy and manage their learning programs, we believe they will attract more
learning providers to our exchange. As we attract additional learning providers,
we believe that even more organizations will be encouraged to use our services,
resulting in a network effect, where the value of our services to each
participant increases with the addition of new participants.
Benefits to Organizations
Our offerings are designed to meet the learning needs of extended
enterprises. They enable organizations to offer a diverse array of on-line or
off-line learning to achieve a variety of objectives. Examples include quickly
educating a worldwide sales force in conjunction with new product introductions,
disseminating information to ensure compliance with new government regulations,
integrating geographically-dispersed or recently-acquired business units and
enabling customers to achieve higher utility from products and services about
which they are now more knowledgeable.
With our products, organizations can systematically identify and
cost-effectively close knowledge and competency gaps across their extended
enterprises. Our extensive network of learning providers allows organizations to
select and deliver the breadth of learning content required to meet the learning
needs of
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individuals. Additionally, our solutions include standardized tracking and
measurement tools as well as consulting services to better monitor the progress
of individuals and the effectiveness of different learning offerings. This
centralization and automation of the procurement and management of learning
enables organizations to realize a higher return on learning investments through
reduced learning provider search and selection costs, improved distribution of
learning content across the extended enterprise and improved productivity and
performance.
Benefits to Learning Providers
We offer learning providers a powerful marketing and distribution channel
to sell their content and other offerings to organizations worldwide, extending
their reach to new customers and across existing business customers'
enterprises. We provide a range of options to serve the diverse needs of our
learning providers, including: placing simple hyper-links on Saba Learning
Exchange to their own websites, incorporating electronic versions of their
paper-based catalogs on Saba Learning Exchange, delivering their content
electronically to learning organizations and creating fully-hosted,
commerce-enabled electronic storefronts within Saba Learning Exchange. Moreover,
by providing channels for end-user feedback, our learning providers are able to
continuously improve their offerings and reduce their time to market for new
content and services. In addition, our learning providers are able to take
advantage of our management tools that assist them with expanding their
offerings, aggregating demand for their offerings, budgeting, managing customer
profiles, conducting electronic commerce, invoicing, tracking inventory and
measuring and improving resource utilization.
Benefits to Learners
Learners on our software platform are able to improve performance and
increase the value of their intellectual capital by accessing relevant on-line
and off-line learning offerings. Our platform also allows learners to better
understand knowledge requirements and provides them with the means to assess and
close their knowledge gaps. The "around-the-clock" availability of our
Internet-based platform provides learners with the convenience and flexibility
to choose offerings that fit their personal schedules. In addition, customized
learning reduces the wasted time and effort resulting from "one-size-fits-all,
just-in-case" programs.
STRATEGY
We intend to increase the number of learners and providers using our
Internet-based platform in order to create the leading global network that
connects people to learning. Key elements of our strategy include:
Increasing the number of our Global 2000 and government customers
Global 2000 and government organizations have large budgets dedicated to
the education and development of their employees, customers, suppliers and
partners. We believe that continuing to add these "anchor tenants" to our
customer base will strengthen our leadership position, provide significant
follow-on revenue opportunities and enhance the attractiveness of the Saba
Learning Exchange for learning providers. We intend to continue to add these
large organizations by establishing strategic relationships, adding to our
direct sales force and enhancing the value of our offerings to these customers.
Extending penetration within our existing customer base and their affiliates
Our existing customers have broad extended enterprises that include
customers, suppliers and partners that are directly or indirectly experiencing
the benefits of our products and services. We believe that this exposure, which
allows potential customers to benefit first hand from our products and services,
creates demand, generates recognition within a customer's industry and
accelerates adoption of our products. We intend to capitalize on this exposure
to expand our customer base. Additionally, we intend to increase penetration
within our existing customer base by cross-selling our products and services to
other divisions and geographic regions within these customers, increasing the
number of learning offerings on our network.
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In order to increase the number of learning offerings on Saba Learning
Exchange, we intend to increase the number of learning providers in our network.
We believe that the expansion of our learning provider base will strengthen our
market position, provide us with a significant source of competitive advantage
and increase the value that we provide to our customer base. We intend to target
providers of diverse and high quality content, including high technology
companies, independent training providers and colleges and universities.
Expanding Saba Learning Exchange
We intend to expand Saba Learning Exchange to become the leading global
business-to-business learning marketplace. Saba Learning Exchange is designed to
be an open-architecture, flexible, scalable, global, Internet-based learning
platform supporting multiple languages, currencies and data formats. Through the
expansion of Saba Learning Exchange, learning providers have access to a large
number of buyers, buyers have access to a wide selection of learning offerings
and both buyers and sellers have the ability to collaborate. We believe Saba
Learning Exchange will allow us to attract additional learning providers and
that even more organizations will be encouraged to use our services, resulting
in a network effect, where the value of our services to each participant
increases with the addition of new participants.
Expanding our international presence
We plan to capitalize on international opportunities by establishing
additional international sales offices, expanding our network of international
learning content providers and, where appropriate, establishing strategic
alliances to enter new geographic markets. We currently have international sales
offices in Australia, Canada, France, Germany, India and the United Kingdom.
Many of our customers are large multinational organizations that are deploying
our solution globally, and we are creating both regional and international
exchanges to benefit them. Currently, our platform enables learning in English,
French, German, Norwegian and Spanish, and we intend to adapt it for other
languages. We also plan to leverage our existing customer base and the benefits
of our solutions to further our international expansion.
Developing new uses and markets for the Saba platform
We intend to utilize our open, scalable, standards-based architecture to
develop new applications and address new markets for our learning platform. Our
architecture will allow us to take advantage of emerging technologies to further
extend the reach of our platform. For instance, our architecture allows for the
possible distribution of learning content through the growing number of emerging
Internet-enabled appliances such as personal digital assistants, cellular
telephones, pagers, television set-top boxes and on-line kiosks. We also intend
to continue to develop our products to enable us to address markets beyond
learning.
PRODUCTS AND SERVICES
Saba Learning Enterprise
Saba Learning Enterprise enables businesses to cost-effectively close
critical knowledge and competency gaps. Anyone within an organization who
oversees the learning of others inside or outside the organization can use this
product to establish knowledge and competency goals, assess gaps relative to
these goals, source and distribute learning needed to close these gaps and
continuously track and measure progress. The underlying business objectives may
include speed to market, regulatory compliance, recruitment and retention of
employees, and management of change. Examples of specific initiatives include:
- sales executives using Saba Learning Enterprise to set product knowledge
certification requirements for the direct sales force and resellers;
- maintenance executives setting and updating knowledge requirements for
technicians as products change; and
- supply chain executives setting and managing supplier training
requirements on design guidelines and quality.
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Saba Learning Enterprise provides management with broad reporting and
procurement capabilities and pre- and post-learning competency assessment. Saba
Learning Enterprise leads managers through a simple process to help them set
knowledge targets and close knowledge gaps across the extended enterprise. Using
a standard Internet browser, a manager can establish knowledge targets by role
and by competency for any group of learners. The manager can then select and
make available a range of offerings to learners by subscribing to them, while
simultaneously forecasting the costs associated with such learning. Learners can
use Saba Learning Enterprise to assess their knowledge relative to targets and
identify knowledge gaps. They can select from, register for and participate in
on-line or off-line offerings and keep track of their progress and test results.
Concurrently, the manager can track and report on each individual's progress.
Finally, management can use Saba Learning Enterprise to compare actual versus
budgeted learning expenditures and to assess the return on learning investments.
Saba Learning Enterprise also enables both internal and third-party
learning providers to cost-effectively develop, market, sell, and distribute
consistent learning on a worldwide basis. Third-party content providers can use
our product to gain access to a large number of customers and manage their
offerings. Learning providers within organizations, such as corporate
universities, can distribute offerings across their extended enterprises.
Additionally, they may market and sell learning outside of their extended
enterprises, if they choose to do so, thereby converting what has traditionally
been viewed as a cost center into a source of revenue.
Saba Learning Enterprise categorizes each offering in the learning
provider's catalog in several ways: by competency, certification, role,
industry, language, geography and delivery method. Additionally, providers can
control the distribution of their offerings by limiting access to authorized
learners. For example, distribution of information and training for new products
can be limited to the sales force. Learning providers can assess demand, market
to organizations using our platform, transact with electronic commerce
capability, manage assets and inventory such as classrooms and supplies to meet
demand for off-line learning, deliver on-line learning, and take advantage of
multiple reporting capabilities to better manage their business. Our products
can also be used by independent learning providers to establish electronic
storefronts that can be accessed through their websites or through Saba Learning
Exchange.
Saba Learning Exchange
Saba Learning Exchange is our global business-to-business learning
marketplace that is designed to meet the learning needs of learning providers
and learning organizations. Saba Learning Exchange has broad functionality,
including:
- search capability for the thousands of publicly available offerings by
competency, certification, role, industry, geography, language, provider
and delivery method;
- access to private learning networks and offerings via secure pass codes;
- community features such as chat rooms and discussion groups for buyers,
users and providers of learning solutions; and
- electronic commerce capabilities.
Managers within organizations can use Saba Learning Exchange to find
offerings that close knowledge and competency gaps in the groups of people they
manage. Learning providers can use Saba Learning Exchange to market learning. We
believe that we will attract additional learning providers to Saba Learning
Exchange as we add to our base of over two million licensed learners. As we
attract additional learning providers and they bring more offerings to Saba
Learning Exchange, we believe that even more organizations will be encouraged to
use Saba Learning Exchange, resulting in a network effect, where the value of
our services to each participant increases with the addition of each new
participant.
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Services
We offer comprehensive services to assist in the successful implementation
of our products. As of May 31, 2000, we employed 142 people worldwide in
services-related activities.
Our global services organization supports multiple consulting functions,
including:
- Strategic consulting. We assist in the definition of areas where learning
has the greatest impact on business results and in the establishment of
strategies to optimize learning investments.
- Implementation consulting. Our implementation services include the
definition of learning objectives, the design of phased plans for
achieving these objectives, technical solution specifications,
establishment of implementation timelines and resource requirements,
installation of Saba solutions, systems configuration, data loading,
custom report and notification design, website development, enterprise
system integration and post-implementation assessment.
- Customer support. We provide several support options so that customers
may utilize their own resources to the degree desired and leverage their
existing investments in customer support. Options include enterprise
support, an end-user help desk and on-site support.
- Education solutions. We provide product training and learning content
conversion to prepare project team members, administrators, and learners
for managing and using Saba products.
As of May 31, 2000, PricewaterhouseCoopers, iXL, General Physics and Debis
System House have consultants trained to assist our customers with their
implementation and customization of Saba Learning Enterprise. We are in the
process of establishing relationships with other systems integrators.
CUSTOMERS
Our customers include a wide spectrum of large, global organizations in the
automotive, consumer, government, financial services, food and beverage, high
technology, manufacturing, telecommunications, transportation and utilities
markets.
ALLIANCES
As of May 31, 2000, we have entered into alliance agreements with content
providers, custom content developers, and learning delivery tool providers in
order to increase the range of content offerings available to licensed learners.
Learning Content Alliance members provide numerous content offerings through
Saba Learning Exchange. Custom Content Alliance developers develop customized
content to meet a particular user's needs. Learning Delivery Tool Alliance
members provide delivery tools such as on-line classrooms or satellite delivery
to content developers and providers.
SALES AND MARKETING
We license our products to organizations primarily through a worldwide
direct sales force. Our direct sales efforts target large organizations
including Global 2000 businesses and government organizations. As of May 31,
2000, we had 131 sales and marketing professionals located in 15 sales offices,
11 of which offices are in the United States.
Our sales process includes pre-sales lead qualification, identification of
key buyers and influencers, working with prospective clients to help shape their
vision of a learning solution and educating them on Saba products and services.
Our sales professionals continue to work with clients after they have selected
Saba products and services and advise them on the entire procurement and
implementation process from due diligence and funding approval through
implementation and post-implementation services.
We focus our marketing efforts on sales lead generation, sales support,
creating market awareness of our solutions and establishing strategic
relationships. Our marketing activities include seminar programs, speaking
engagements, industry trade-shows, website programs, e-mail programs, public
relation events and direct mailings. We have also established an Advisory Board
of industry leaders. Members include senior executives
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from Global 2000 and government organizations, consulting firm principals, and
academics. We believe our Advisory Board will assist us in gaining broad
marketplace acceptance and will enhance our marketing capabilities.
TECHNOLOGY
Our product architecture facilitates the rapid development, deployment, and
customization of Internet-based solutions for organizational learning. Our
products share a common core foundation, based on widely adopted standard
Internet technology that leverages thin client computing and electronic commerce
capabilities over the Internet.
The Core Foundation
Our core foundation consists of a scalable application server and a
database server, and uses standard web-browser clients. The core foundation
accelerates application development by providing transaction management,
persistence management, and resource pooling services so application developers
can focus on building business logic and user interfaces. Key features of this
core foundation include:
- Open interfaces. Published Java application programming interfaces, or
APIs, enable developers to build custom Saba application extensions, and
public database views allow analysts to design custom reports using
standard reporting tools.
- Scalability. Scalability is accomplished using load-balancing techniques,
allowing multiple servers to be deployed to handle peak periods when the
largest number of concurrent users is expected on the system.
- Standard relational database server. We use standard relational database
servers. To enhance performance and ensure that users are served
efficiently, the core foundation executes database-stored procedures to
optimize intense database processing. The core foundation currently
supports Oracle, Microsoft SQL Server and Informix Dynamic Server
databases.
- Java-based application server. The business and application logic reside
on a Java application server. This Java-based architecture allows us to
deploy a site across a farm of servers with diverse operating
environments, such as Microsoft Windows NT, Sun Solaris or HP UX.
- Electronic commerce enabled. The core foundation includes interfaces to
external electronic payment services, enabling real-time electronic
commerce.
- Multiple language support. The core foundation is designed to support
multiple languages. Currently supported languages include English,
French, German, Norwegian and Spanish.
- Workflow monitoring of learning object changes. A workflow component
applies business rules when learning objects change. For example, e-mail
can automatically be sent to students when details about their class
change.
- Integration with legacy enterprise applications. The core foundation is
capable of exchanging data with external legacy systems. We provide
connectors to popular human resources and financial systems.
Research and Development
Our research and development operations are divided into two departments:
one focusing on our software platform and applications, and one focusing on Saba
Learning Exchange. These two departments share resources and collaborate on
design and development. These departments are further divided into teams that
are responsible for platform and infrastructure development, application
development, user interface and application design, enterprise connectivity,
Internet applications and design, quality assurance, documentation, and release
management. As of May 31, 2000, we had 135 research and development employees.
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Our development methodology provides guidelines for planning, controlling
and implementing projects. To continue to address market requirements, we
involve our consulting, support, and sales teams, as well as our customers, in
the product development cycle. We conduct our development efforts at multiple
sites in the United States and India, which enables development 24 hours per
day.
COMPETITION
The market for our products and services is intensely competitive, dynamic
and subject to rapid technological change. The intensity of competition and the
pace of change are expected to increase in the future. Competitors vary in size
and in the scope and breadth of the products and services they offer. Although
we believe that we offer the most comprehensive Internet-based learning
platform, 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 and could potentially decide to evolve their marketplaces to
include learning content 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.
We expect additional competition from other established and emerging
companies as the market for Internet-based, business-to-business learning
solutions continues to evolve. 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.
We believe the principal competitive features affecting our market include:
- breadth and depth of the solution;
- a significant installed base of Global 2000 and government customers;
- the ability to support on-line as well as off-line content offerings;
- product quality and performance;
- product features and functions;
- customer service and support;
- ease of implementation;
- core technology; and
- price to performance ratio.
Although we believe that our solutions currently compete favorably with
respect to these factors, our market is relatively new and is changing rapidly.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
technical, service, support, marketing and other resources.
PROPRIETARY RIGHTS
Proprietary rights are important to our success and our competitive
position. To protect our proprietary rights, we rely on copyright, trademark,
and trade secret laws, confidentiality procedures and contractual provisions.
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We license rather than sell our software products and require our customers
to enter into written license agreements that impose restrictions on the use of
the software. Therefore, we cannot assure you that this user agreement will
afford us adequate protection. In addition, we seek to avoid disclosure of our
trade secrets through a number of means, including but not limited to, requiring
those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code. We
seek to protect our software, documentation and other written materials under
trade secret and copyright laws that afford only limited protection.
In addition, we have filed eight provisional patent applications in the
United States. We cannot assure you that any formal or approved patent
applications will result from these provisional applications, that any patents
issued will protect our intellectual property or that any issued patents will
not be challenged by third parties. Furthermore, other parties may independently
develop similar or competing technologies or design around any patents that may
be issued to us. It is possible that any patent issued to us may not provide any
competitive advantages, that we may not develop future proprietary products or
technologies that are patentable, and that the patents of others may seriously
limit our ability to do business. In this regard, we have not performed any
comprehensive analysis of patents of others that may limit our ability to do
business.
We have applied for registration of several trademarks, including "Saba,"
in the United States and in various foreign countries and will seek to register
additional trademarks as appropriate. There can be no assurance that we will be
successful in obtaining the trademarks for which we have applied. Even if these
applications are approved, the trademarks may be successfully challenged by
others or invalidated. If the applications are not approved because third
parties own the trademarks, the use of the trademarks will be restricted unless
we enter into arrangements with the third parties that may be unavailable on
commercially reasonable terms.
We cannot assure you that any of our proprietary rights with respect to our
products or services will be viable or of value in the future since the
validity, enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States,
and effective copyright, trademark and trade secret protection may not be
available in those jurisdictions. Our means of protecting our proprietary rights
may not be adequate to protect us from the infringement or misappropriation of
such rights by others.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights, particularly in the
software and Internet-related industries. We could become subject to
intellectual property infringement claims as the number of our competitors grows
and our products and services overlap with competitive offerings. These claims,
even if not meritorious, could be expensive to defend and could divert
management's attention from operating our company. If we become liable to third
parties for infringing their intellectual property rights, we could be required
to pay a substantial award of damages and to develop noninfringing technology,
obtain a license or cease selling the products that contain the infringing
intellectual property. We may be unable to develop noninfringing technology or
obtain a license on commercially reasonable terms, if at all.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-K 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 Enterprise, including the timeframe and cost thereof; our
anticipated expense levels for
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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
and in other sections of this Annual Report on Form 10-K. All forward-looking
statements included in this Annual Report on Form 10-K are based on information
available to us on the date of this Annual Report on Form 10-K, 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 the factors that may affect future operating results below, as
well as such other risks and uncertainties as are detailed in our filings with
the Securities and Exchange Commission and press releases from time-to-time for
a discussion of the factors that could cause actual results to differ materially
from the forward-looking statements.
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 Enterprise 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 Enterprise 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 non-cash expenses relating to the amortization of deferred
compensation that will contribute to our net losses. As of May 31, 2000, we had
an aggregate of $24.5 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 RESULTS COULD CAUSE OUR STOCK PRICE TO EXPERIENCE
SIGNIFICANT FLUCTUATIONS OR DECLINES
Our 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
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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 Enterprise 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 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, OUR MAIN PRODUCT SABA LEARNING
ENTERPRISE OR OUR RELATED SERVICE OFFERINGS, WOULD SERIOUSLY HARM OUR REVENUES
AND OPERATING MARGINS
Saba Learning Enterprise and related services accounted for substantially
all of our revenues in fiscal 2000. We anticipate that revenues from our Saba
Learning Enterprise 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 Enterprise or 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 Enterprise 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
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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
Because many of our Saba Learning Enterprise 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 462 employees at May 31, 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.
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
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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 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 10% of our revenues in 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.
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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 Learning 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.
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:
- user privacy;
- taxation;
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- 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 Enterprise 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 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
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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 THAT 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 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
issued 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 that
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
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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 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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CERTAIN EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER SABA TO THE DETRIMENT OF
MINORITY STOCKHOLDERS
As of June 30, 2000, our executive officers, directors and principal
stockholders (i.e., greater than 5% stockholders) together beneficially owned
approximately 63% 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 the 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 and
including shares eligible for sale upon the expiration on October 5, 2000 of
agreements not to sell such shares entered into between the underwriters of our
initial public offering and certain stockholders) 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.
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 our strategic interests. 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.
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FINANCIAL RESULTS FOR ANY PARTICULAR PERIOD WILL NOT PREDICT RESULTS FOR FUTURE
PERIODS
Because of the uncertain nature of the rapidly changing market we serve,
period-to-period comparisons of operating results are not likely to be
meaningful. In addition, you should not rely on the results for any period as an
indication of future performance. In particular, we are subject to employer
payroll taxes, both domestic and foreign, when our employees exercise their
non-qualified stock options. These taxes are assessed on each employee's gain,
which is the difference between the price of our common stock on the date of
exercise and the exercise price. During a particular period, these taxes could
be material. These taxes are recorded as a charge to operations in the period
such options are exercised based on actual gains realized by employees. In
addition, we receive tax deductions for gains realized by employees on the
exercise of non-qualified stock options for which the benefit is recorded as
additional paid-in capital. However, because we are unable to predict the future
price of our common stock and the number of optionees who may exercise during
any particular period, we cannot predict what, if any, expense will be recorded
in a future period and the impact on our future financial results.
EXECUTIVE OFFICERS
Our executive officers and their ages and positions as of May 31, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Bobby Yazdani............................. 37 Chief Executive Officer, President and
Chairman of the Board of Directors
Terry Carlitz............................. 48 Chief Financial Officer and Director
Chris Helgeson............................ 43 Vice President, Research and Development
Stuart Jacobson........................... 42 Vice President, Sales and Alliances
Brook Manville............................ 49 Chief Learning Officer and Chief Customer
Evangelist
David Martin.............................. 36 Vice President, Marketing
Michael Toepel............................ 38 Vice President, Services
Peter Williams............................ 38 Vice President, Corporate Development,
General Counsel and Secretary
</TABLE>
Bobby Yazdani founded Saba and has been our President and Chief Executive
Officer since our inception in April 1997. From 1988 until founding Saba, Mr.
Yazdani served in various positions at Oracle, most recently as Senior Director.
Mr. Yazdani holds a B.A. from the University of California, Berkeley.
Terry Carlitz has served as our Chief Financial Officer and a director
since joining us in July 1999. From May 1998 until July 1999, Ms. Carlitz served
as Senior Vice President, Finance and Operations and Chief Financial Officer of
SPL WorldGroup, a provider of information technology consulting and enterprise
solutions. From February 1995 until May 1998, Ms. Carlitz served as Vice
President, Finance and Chief Financial Officer of Infinity Financial Technology,
a developer of trading and financial risk management software, throughout its
initial public offering and subsequent merger with SunGard Data Systems. From
February 1993 until February 1995, Ms. Carlitz served as Director, Business
Development and Strategic Investments of Apple. Ms. Carlitz holds a B.S. from
San Jose State University and an M.B.A. from Stanford University.
Chris Helgeson has served as our Vice President, Research and Development
since joining us in June 1999. From September 1998 until May 1999, Mr. Helgeson
served as Chief Technical Officer of Business Projects, a provider of
Internet-based collaboration software. From October 1996 until August 1998, Mr.
Helgeson served as Vice President, Engineering and Vice President, Technology of
Carnelian, a provider of Internet-based publishing and delivery software. From
June 1995 until September 1996, Mr. Helgeson served as Vice President,
Engineering of Verity, a provider of knowledge retrieval software. Mr. Helgeson
holds a B.S. and B.A. from the University of California, Berkeley.
Stuart Jacobson has served as our Vice President, Sales and Alliances since
joining us in January 1999. From May 1998 until December 1999, Mr. Jacobson
served as a consultant to various software companies.
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<PAGE> 22
From August 1994 until April 1998, Mr. Jacobson served as Executive Vice
President of Novadigm, a provider of automated software management solutions.
Mr. Jacobson holds a B.A. from Lewis & Clark College.
Brook Manville has served as our Chief Learning Officer and Chief Customer
Evangelist since joining us in August 1999. From January 1988 until July 1999,
Mr. Manville was employed by McKinsey & Company, a management consulting firm,
where he was a partner from July 1994 until July 1999. Mr. Manville holds a B.A.
from Yale University, an M.A. from Oxford University, and a Ph.D. from Yale
University.
David Martin has served as our Vice President, Marketing since joining us
in November 1997. From November 1995 until October 1997, Mr. Martin served as a
Vice President of SuccessFactors.com, a provider of enterprise competency
management software. From October 1990 until November 1995, Mr. Martin served as
a Vice President of Oracle. Mr. Martin holds a B.S. from the Massachusetts
Institute of Technology.
Michael Toepel has served as our Vice President, Services since joining us
in August 1999. From January 1998 until June 1999, Mr. Toepel served as
President and Chief Executive Officer of Bay Logics, a provider of
infrastructure asset management software. From February 1994 until January 1998,
Mr. Toepel served as Vice President, Sales and Marketing at SMG, a provider of
real estate asset management software. Mr. Toepel holds a B.A. from the
University of Texas at Austin and an M.B.A. from the University of Texas at
Austin Graduate School of Business.
Peter Williams has served as Vice President, Corporate Development and
General Counsel of Saba since joining us in October 1999 and has served as our
Secretary since our inception in April 1997. Mr. Williams was a partner at
Morrison & Foerster LLP, an international law firm, from January 1995 until
March 2000. Mr. Williams holds B.A. degrees from the University of California,
Los Angeles and a J.D. from Santa Clara University.
EMPLOYEES
As of May 31, 2000, we had a total of 462 employees, including 135 in
research and development, 131 in sales and marketing, 142 in services and 54 in
administration and finance. Of these employees, 371 were located in North
America and 91 were located outside of North America. None of our employees is
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relations with our employees to be good. Our
future success depends on our continuing ability to attract and retain highly
qualified technical, sales and senior management personnel.
ITEM 2: PROPERTIES
FACILITIES
Our principal executive offices occupy approximately 48,000 square feet in
Redwood Shores, California under a lease that expires in April 2014. We have
additional leased facilities in the Atlanta, Boston, Chicago, Columbus, Dallas,
Denver, Detroit, Philadelphia, Princeton, and Washington D.C. metropolitan areas
and in Australia, Canada, Germany, India and the United Kingdom. We believe that
our facilities are adequate to meet our needs for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In March 2000, prior to its initial public offering, Saba submitted the
following matters to a vote of its security holders through an Action by Written
Consent. Holders of the required majority of Saba'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.
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<PAGE> 23
- To amend the 1997 Stock Incentive Plan to increase the number of
authorized shares to be issued by 1,000,000 to a total authorized reserve
of 10,815,550 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.
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<PAGE> 24
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since our initial public offering on April 7, 2000, our common stock has
traded on the Nasdaq National Market under the symbol "SABA." The following
table sets forth the range of high and low closing sales prices of our common
stock for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 2000 HIGH LOW
----------------------- ------ ------
<S> <C> <C>
Fourth Quarter (from April 7, 2000)......................... $33.00 $13.50
</TABLE>
Saba had approximately 231 shareholders of record as of May 31, 2000. Saba
has not declared or paid any cash dividends on its common stock and presently
intends to retain its future earnings, if any, to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
For the period from June 1, 1999 to May 31, 2000, Saba issued and sold the
following unregistered securities:
1. During the period, Saba granted stock options to employees,
directors and consultants under its 1997 Stock Incentive Plan (the "Stock
Plan") covering an aggregate of 7,687,641 shares of Saba's common stock, at
exercise prices ranging from $0.30 to $12.00 with a weighted average
exercise price of $3.52 per share.
2. During the period, Saba issued and sold an aggregate of 5,093,910
shares of its common stock to 81 employees, directors and consultants for
an aggregate amount of $1,279,681 upon exercise of stock options granted
pursuant to Saba's Stock Plan.
3. During the period, Saba issued and sold an aggregate of 2,581,147
shares of its common stock to 13 employees, directors (including trusts
affiliated with directors), advisory board members and a former consultant
for an aggregate amount of $2,111,508.
4. During the period, Saba issued and sold an aggregate of 5,598,479
shares of its Series D Preferred Stock, convertible into 5,598,479 shares
of common stock, for an aggregate purchase price of $30,000,010.
5. During the period, Saba issued warrants for a total of 123,930
shares of its common stock for an aggregate exercise price of $324,055.
6. During the period, Saba issued and sold an aggregate of 676,986
shares of its common stock for an aggregate amount of $314,952 upon
exercise of warrants to purchase common stock.
7. During the period, Saba issued and sold 354,610 shares of common
stock to SingTel Ventures [Cayman] Pte. Limited for an aggregate amount of
$5,000,000.
The sale and issuance of securities in the transactions described in
paragraphs 1 through 7 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.
Saba has invested a significant amount of the proceeds generated from the
sale and issuance of securities in the transactions described in paragraphs 1
through 7 above in high quality, short-term debt and equity securities. Saba
intends to use such proceeds for general corporate purposes, including working
capital.
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<PAGE> 25
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The consolidated statement of operations
data for the years ended May 31, 2000 and 1999 and for the period from April 16,
1997 (inception) through May 31, 1998 and the consolidated balance sheet data as
of May 31, 2000, 1999 and 1998 are derived from our Consolidated Financial
Statements that have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this document, and are qualified by reference to
such Consolidated Financial Statements and the Notes thereto. The historical
results are not necessarily indicative of future results.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16,
1997
(INCEPTION)
YEARS ENDED MAY 31, THROUGH
-------------------- MAY 31,
2000 1999 1998
-------- -------- -----------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $ 17,992 $ 1,939 $ 40
Gross profit (loss)....................................... 8,972 675 (32)
Total operating expenses.................................. 64,444 11,572 1,531
Loss from operations...................................... (55,472) (10,897) (1,563)
Net loss.................................................. (54,441) (10,852) (1,571)
Basic and diluted net loss per share(1)................... (2.94) (0.84) (0.17)
Shares used in computing basic and diluted net loss per
share(1)................................................ 18,548 12,987 9,439
Pro forma basic and diluted net loss per share(1)......... (1.66) (0.52)
Shares used in computing pro forma basic and diluted net
loss per share(1)....................................... 32,741 20,881
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
---------------------------
2000 1999 1998
------- ------- -----
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $78,926 $10,384 $ 41
Working capital (deficiency)................................ 65,090 7,807 (481)
Total assets................................................ 97,705 14,068 239
Long-term obligations, less current portion................. 3,086 384 578
Total stockholders' equity (deficit)........................ 68,704 8,429 (974)
</TABLE>
---------------
(1) See note 2 of notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in computing
per share amounts.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-K 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 Enterprise, 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 and in
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<PAGE> 26
other sections of this Annual Report on Form 10-K. All forward-looking
statements included in this Annual Report on Form 10-K are based on information
available to us on the date of this Annual Report on Form 10-K, 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 the factors that may affect future operating results below, as
well as such other risks and uncertainties as are detailed in our filings with
the Securities and Exchange Commission and press releases from time-to-time for
a discussion of the factors that could cause actual results to differ materially
from the forward-looking statements.
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this document.
OVERVIEW
General
We are a leading provider of learning management 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
Enterprise products and began to generate revenues from software license 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
Enterprise 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
the 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 Enterprise 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 and Statement
of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions. To date, we have sold licenses and support
together as components of multiple element arrangements. Our agreements provide
for support, which consists of software upgrades, error corrections and
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<PAGE> 27
telephone and web-based assistance. We recognize license revenues monthly over
the 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 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 consolidated balance
sheets. As of May 31, 2000, deferred revenues included approximately $4.3
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. Deferred revenues include support fees billed annually in
advance as well as license contracts with billing cycles of 90 days or less.
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.
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 and other stock charges.
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 includes 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 $38.4 million as of May 31, 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. The amortization of the remaining deferred stock
compensation will result in additional charges to operations through fiscal
2004.
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History of Losses
We have incurred significant losses and negative cash flows from operations
since our inception. As of May 31, 2000, we had an accumulated deficit of $66.9
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 over the next 12 months. We also expect to incur substantial non-cash
expenses relating to deferred stock 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 462 full-time employees as of May 31, 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
YEARS ENDED MAY 31, 2000, 1999 AND 1998
The following discussion includes, with respect to fiscal 1998 data, data
from the period commencing on April 16, 1997 (inception) through May 31, 1997.
Revenues
Total revenues in fiscal 2000 increased to $18.0 million from $1.9 million
in fiscal 1999 and from $40,000 in fiscal 1998. In fiscal 2000, no customer
accounted for more than 10% of our revenues. In fiscal 1999, Baan, Norwest and
Documentum each accounted for more than 10% of our revenues and collectively
comprised approximately 66% of our revenues.
License revenues in fiscal 2000 increased to $7.9 million, or 44% of total
revenues from $612,000, or 32% of total revenues, in fiscal 1999 and from
$7,000, or 18% of total revenues, in fiscal 1998. The increase in the amount of
license revenues in fiscal 2000 from fiscal 1999 is attributable to new sales to
major customers and increased market acceptance of our Saba Learning Enterprise
product. The increase in fiscal 1999 from fiscal 1998 is attributable to a full
year of sales of licenses for our products in fiscal 1999 after their commercial
release in late fiscal 1998.
Services revenues in fiscal 2000 increased to $10.1 million, or 56% of
total revenues, from $1.3 million, or 68% of total revenues, in fiscal 1999 and
from $33,000 or 83% of total revenues, in fiscal 1998. The increases in dollar
amount of services revenues are primarily attributable to increased
implementation and consulting services performed in connection with increased
license sales and to support services sold to our customers.
Deferred license and services revenues reflected on our consolidated
balance sheet were $12.1 million at May 31, 2000.
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Cost of Revenues
Total cost of revenues in fiscal 2000 increased to $9.0 million from $1.3
million in fiscal 1999 and from $72,000 in fiscal 1998. These increases are
primarily attributable to the hiring of additional employees to support
increased customer demand for our implementation and consulting services.
Operating Expenses
Research and development. Research and development expenses in fiscal 2000
increased to $15.8 million from $3.6 million in fiscal 1999 and from $694,000 in
fiscal 1998. These increases are primarily attributable to the hiring of
additional employees to support the development of new products.
Sales and marketing. Sales and marketing expenses in fiscal 2000 increased
to $26.9 million from $6.3 million in fiscal 1999 and from $535,000 in fiscal
1998. These increases resulted primarily from building a direct sales force and
investing in sales and marketing infrastructure, including personnel-related
expense, travel expenses and related facility and equipment costs, as well as
increased marketing activities and commissions on software licenses.
General and administrative. General and administrative expenses in fiscal
2000 increased to $6.4 million from $1.4 million in fiscal 1999 and from
$302,000 in fiscal 1998. These increases are primarily attributable to an
increase in the number of executive, finance and administrative employees to
support the growth of our business.
Amortization of deferred stock compensation and other stock charges. We
recorded deferred stock compensation of $37.1 million in fiscal 2000 and $1.3
million in fiscal 1999. Of this deferred stock compensation, $13.6 million was
amortized in fiscal 2000 and $189,000 was amortized in fiscal 1999. Also
included in amortization of deferred stock compensation and other stock charges
in fiscal 2000 is $1.7 million in other stock charges primarily attributable to
the value of stock options granted to our 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 $1.0 million in fiscal 2000 from $45,000 in fiscal 1999 and from an
expense of $8,000 in fiscal 1998. These changes from expense to income are
attributable primarily to interest income on higher average cash balances
relating to financing activities, partially offset by interest expense on
capital equipment purchases.
Provision for Income Taxes
From inception through May 31, 2000, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
May 31, 2000, we had approximately $64.2 million of combined federal and state
net operating loss carryforwards to offset future taxable income. The federal
and state tax net operating loss carryforwards are available to reduce future
taxable income and expire at various dates into fiscal 2020. Given our limited
operating history, our losses incurred to date and the difficulty in accurately
forecasting our future results, management does not believe that the realization
of the related deferred income tax asset meets the criteria required by
generally accepted accounting principles. Therefore, we have recorded a 100%
valuation allowance against the deferred income tax asset. See note 9 of the
notes to our consolidated financial statements.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth consolidated statement of operations data
for each of the eight quarters in the period ended May 31, 2000. This
information has been derived from our unaudited consolidated financial
statements that, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information. You should read this information in
conjunction with our audited consolidated financial statements and related notes
appearing elsewhere in this
28
<PAGE> 30
Annual Report on Form 10-K. We have experienced and expect to continue to
experience fluctuations in operating results from quarter to quarter. We
incurred net losses in each quarter since inception and expect to continue to
incur losses in the foreseeable future. You should not draw any conclusions
about our future results from the results of operations for any quarter, as
quarterly results are not indicative of the results for a full fiscal year or
any other period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 29, MAY 31,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- ------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................................. $ 15 $ 104 $ 179 $ 314 $ 668 $ 1,252 $ 2,600 $ 3,337
Services................................ 141 223 375 588 1,039 2,245 2,602 4,249
----- ------- ------- ------- ------- ------- -------- --------
Total revenues.................... 156 327 554 902 1,707 3,497 5,202 7,586
----- ------- ------- ------- ------- ------- -------- --------
Cost of revenues.......................... 98 190 347 629 956 1,772 2,493 3,799
----- ------- ------- ------- ------- ------- -------- --------
Gross profit.............................. 58 137 207 273 751 1,725 2,709 3,787
Operating Expenses:
Research and development................ 225 709 980 1,713 3,522 2,724 4,093 5,500
Sales and marketing..................... 234 1,233 1,325 3,527 3,427 5,133 8,371 10,009
General and administrative.............. 146 260 385 646 901 1,091 1,534 2,835
Amortization of deferred stock
compensation and other stock
charges............................... -- -- -- 189 1,385 2,126 5,024 6,769
----- ------- ------- ------- ------- ------- -------- --------
Total operating expenses.......... 605 2,202 2,690 6,075 9,235 11,074 19,022 25,113
----- ------- ------- ------- ------- ------- -------- --------
Loss from operations...................... (547) (2,065) (2,463) (5,802) (8,484) (9,349) (16,313) (21,326)
Interest income (expense), net............ 17 (6) 18 16 48 108 238 637
----- ------- ------- ------- ------- ------- -------- --------
Net loss.................................. $(530) $(2,071) $(2,465) $(5,786) $(8,436) $(9,241) $(16,075) $(20,689)
===== ======= ======= ======= ======= ======= ======== ========
</TABLE>
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.
We are subject to employer payroll taxes, both domestic and foreign, on
employee exercises of non-qualified stock options. These taxes would be recorded
as a charge to operations in the period such options are exercised based on
actual gains realized by employees, measured by the difference between the price
of our common stock on the date of exercise and the exercise price. We would
receive tax deductions for gains realized by employees on the exercise of
non-qualified stock options for which the benefit is recorded as additional
paid-in capital. Our results of operations and cash flows could vary
significantly from quarter to quarter depending on the number of non-qualified
stock options exercised by employees in any quarter and, consequently, the
amount of taxes assessed.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this Annual Report on Form 10-K:
- 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;
29
<PAGE> 31
- technical difficulties or service interruptions of our computer network
systems or the Internet generally; and
- the amount and timing of operating costs and capital expenditures
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 $119.8
million through May 31, 2000, equipment leases and other debt. As of May 31,
2000, we had outstanding equipment leases and notes payable of $2.9 million,
$74.0 million of cash and cash equivalents and $4.9 million in short-term
investments.
Cash used in operating activities was $26.0 million during fiscal 2000,
$7.8 million during fiscal 1999 and $1.0 million during fiscal 1998. The cash
used during these periods was primarily attributable to net losses of $54.4
million during the fiscal 2000, $10.9 million during fiscal 1999 and $1.6
million during fiscal 1998. Fiscal 2000 cash used in operating activities was
offset by $13.6 million in amortization of deferred stock compensation and an
increase in deferred revenue of $10.3 million.
Cash used in investing activities is primarily attributable to purchases of
property and equipment, excluding equipment acquired under capital leases, of
$3.6 million during fiscal 2000, $1.1 million during fiscal 1999 and $70,000
during fiscal 1998. Fiscal 2000 cash used in investing also includes $4.9
million in purchases of short-term investments.
Cash provided by financing activities was $98.4 million during fiscal 2000,
$19.4 million during fiscal 1999 and $1.1 million during fiscal 1998 resulting
primarily from net proceeds from the sale of stock and, to a lesser extent, from
borrowings under capital lease obligations. These amounts were partially offset
by payments on capital lease obligations and notes payable.
As of May 31, 2000, we did not have any material commitments for capital
expenses. Our principal commitments consisted of obligations under capital and
operating leases of $3.5 million and $37.2 million, respectively.
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, 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.
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, the 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
30
<PAGE> 32
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, 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.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB 25 for certain issues, including the definition of an
employee, the treatment of the acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 is expected to have no material impact on
our financial condition or results of operations.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services to customers primarily in the United States and, to
a lesser extent, in Europe and elsewhere throughout the world. 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. Sales
are primarily made in U.S. Dollars; however, as we continue to expand our
operations, more of our contracts may be denominated in German Marks, Australian
Dollars, British Pounds and French Francs. A strengthening of the U.S. Dollar
could make our products less competitive in foreign markets. Our interest income
is sensitive to changes in the general level of U.S. interest rates. Due to the
nature of our cash equivalents and short-term investments, which are primarily
money market funds and commercial paper, we have concluded that there is no
material market risk exposure.
31
<PAGE> 33
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SABA SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Stockholders' Equity (Deficit)... 36
Consolidated Statements of Cash Flows....................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
32
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Saba Software, Inc.
We have audited the accompanying consolidated balance sheets of Saba
Software, Inc. as of May 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended May 31, 2000 and 1999 and for the period from April 16, 1997 (inception)
through May 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Saba Software,
Inc. at May 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for the years ended May 31, 2000 and 1999 and for the period
from April 16, 1997 (inception) through May 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
June 23, 2000
33
<PAGE> 35
SABA SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MAY 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 74,033 $ 10,384
Short-term investments.................................... 4,893 --
Accounts receivable (net of allowance of $454 at May 31,
2000 and $124 at May 31, 1999)......................... 9,876 1,930
Prepaid expenses and other current assets................. 1,078 122
-------- --------
Total current assets.............................. 89,880 12,436
Property and equipment, net................................. 6,860 1,122
Other assets................................................ 965 510
-------- --------
Total assets...................................... $ 97,705 $ 14,068
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,906 $ 1,667
Accrued compensation and related expenses................. 6,110 1,132
Accrued expenses.......................................... 1,951 600
Deferred revenue.......................................... 10,973 1,197
Current portion of capital lease obligations.............. 850 33
-------- --------
Total current liabilities......................... 24,790 4,629
Deferred revenue............................................ 1,125 626
Notes payable and other long-term liabilities............... 1,036 329
Capital lease obligations, less current portion............. 2,050 55
-------- --------
Total liabilities................................. 29,001 5,639
Commitments
Stockholders' equity:
Preferred stock, issuable in series: $0.001 par value;
authorized: 5,000,000 shares at May 31, 2000 and
14,700,000 shares at May 31, 1999; issued and
outstanding: none at May 31, 2000 and 13,942,771 shares
at May 31, 1999........................................ -- 14
Common stock, $0.001 par value; authorized: 100,000,000
shares at May 31, 2000 and 50,000,000 shares at May 31,
1999; issued: 43,595,977 shares at May 31, 2000 and
16,326,168 shares at May 31, 1999...................... 44 16
Additional paid-in capital................................ 161,078 21,925
Deferred stock compensation............................... (24,541) (1,092)
Notes receivable from stockholders........................ (1,042) --
Treasury stock; none at May 31, 2000 and 3,112,456 shares
at May 31, 1999, at cost............................... -- (11)
Accumulated deficit....................................... (66,864) (12,423)
Accumulated other comprehensive loss...................... 29 --
-------- --------
Total stockholders' equity........................ 68,704 8,429
-------- --------
Total liabilities and stockholders' equity........ $ 97,705 $ 14,068
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 36
SABA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16,
1997
(INCEPTION)
YEARS ENDED MAY 31, THROUGH
-------------------- MAY 31,
2000 1999 1998
-------- -------- -----------
<S> <C> <C> <C>
Revenues:
License................................................. $ 7,857 $ 612 $ 7
Services................................................ 10,135 1,327 33
-------- -------- -------
Total revenues.................................. 17,992 1,939 40
Cost of revenues:
Cost of license......................................... 2 -- --
Cost of services........................................ 9,018 1,264 72
-------- -------- -------
9,020 1,264 72
-------- -------- -------
Gross profit (loss)....................................... 8,972 675 (32)
Operating expenses:
Research and development................................ 15,839 3,627 694
Sales and marketing..................................... 26,940 6,319 535
General and administrative.............................. 6,361 1,437 302
Amortization of deferred stock compensation and other
stock charges........................................ 15,304 189 --
-------- -------- -------
Total operating expenses........................ 64,444 11,572 1,531
-------- -------- -------
Loss from operations...................................... (55,472) (10,897) (1,563)
Interest income and other, net............................ 1,367 93 7
Interest expense.......................................... (336) (48) (15)
-------- -------- -------
Net loss.................................................. $(54,441) $(10,852) $(1,571)
======== ======== =======
Basic and diluted net loss per share...................... $ (2.94) $ (0.84) $ (0.17)
======== ======== =======
Shares used in computing basic and diluted net loss per
share................................................... 18,548 12,987 9,439
======== ======== =======
Pro forma basic and diluted net loss per share............ $ (1.66) $ (0.52)
======== ========
Shares used in computing pro forma basic and diluted net
loss per share.......................................... 32,741 20,881
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
35
<PAGE> 37
SABA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
-------------------- ------------------- PAID-IN STOCK FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
----------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders..................... -- $ -- 7,500,000 $ 8 $ 7 $ -- $ --
Issuance of common stock for
in-process research and
development.................. -- -- 5,876,016 6 144 -- --
Purchase of treasury stock..... -- -- -- -- -- -- --
Issuance of common stock for
cash and notes receivable.... -- -- 2,163,158 2 106 -- (32)
Issuance of convertible
preferred stock for cash and
notes, net of issuance
costs........................ 749,996 1 -- -- 352 -- (25)
Collection under notes
receivable................... -- -- -- -- -- -- 47
Issuance of common stock in
connection with exercise of
stock options................ -- -- 260,000 -- 13 -- --
Issuance of common stock
options for services......... -- -- -- -- 5 -- --
Net loss and comprehensive
loss......................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- -------- -------
Balances at May 31, 1998....... 749,996 1 15,799,174 16 627 -- (10)
Issuance of common stock for
cash and notes receivable.... -- -- 526,994 -- 35 -- (54)
Collections under notes
receivable................... -- -- -- -- -- -- 64
Issuance of preferred stock for
cash, net of issuance
costs........................ 5,713,143 6 -- -- 3,953 -- --
Conversion of convertible debt
into preferred stock......... 2,870,854 3 -- -- 2,007 -- --
Issuance of preferred stock for
cash, net of issuance
costs........................ 4,608,778 4 -- -- 14,014 -- --
Issuance of common stock
options and warrants for
services..................... -- -- -- -- 8 -- --
Deferred stock compensation.... -- -- -- -- 1,281 (1,281) --
Amortization of deferred stock
compensation................. -- -- -- -- -- 189 --
Net loss and comprehensive
loss......................... -- -- -- -- -- -- --
----------- ---- ---------- --- -------- -------- -------
Balances at May 31, 1999....... 13,942,771 14 16,326,168 16 21,925 (1,092) --
<CAPTION>
ACCUMULATED TOTAL
TREASURY STOCK OTHER STOCKHOLDERS'
------------------- ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT DEFICIT LOSS (DEFICIT)
---------- ------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
founders..................... -- $ -- $ -- $-- $ 15
Issuance of common stock for
in-process research and
development.................. -- -- -- -- 150
Purchase of treasury stock..... (5,876,016) (150) -- -- (150)
Issuance of common stock for
cash and notes receivable.... 2,266,842 113 -- -- 189
Issuance of convertible
preferred stock for cash and
notes, net of issuance
costs........................ -- -- -- -- 328
Collection under notes
receivable................... -- -- -- -- 47
Issuance of common stock in
connection with exercise of
stock options................ -- -- -- -- 13
Issuance of common stock
options for services......... -- -- -- -- 5
Net loss and comprehensive
loss......................... -- -- (1,571) -- (1,571)
---------- ----- -------- --- --------
Balances at May 31, 1998....... (3,609,174) (37) (1,571) -- (974)
Issuance of common stock for
cash and notes receivable.... 496,718 26 -- -- 7
Collections under notes
receivable................... -- -- -- -- 64
Issuance of preferred stock for
cash, net of issuance
costs........................ -- -- -- -- 3,959
Conversion of convertible debt
into preferred stock......... -- -- -- -- 2,010
Issuance of preferred stock for
cash, net of issuance
costs........................ -- -- -- -- 14,018
Issuance of common stock
options and warrants for
services..................... -- -- -- -- 8
Deferred stock compensation.... -- -- -- -- --
Amortization of deferred stock
compensation................. -- -- -- -- 189
Net loss and comprehensive
loss......................... -- -- (10,852) -- (10,852)
---------- ----- -------- --- --------
Balances at May 31, 1999....... (3,112,456) (11) (12,423) -- 8,429
</TABLE>
36
<PAGE> 38
SABA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
-------------------- ------------------- PAID-IN STOCK FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
----------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash and notes receivable.... -- $ -- 1,083,128 $ 1 $ 2,038 $ -- $(1,083)
Issuance of common stock for
services..................... -- -- 20,000 -- 199 -- --
Collections under notes
receivable................... -- -- -- -- -- -- 41
Issuance of preferred stock for
cash, net of issuance
costs........................ 5,625,769 6 -- -- 30,075 -- --
Issuance of common stock in
connection with exercise of
stock options, net of
repurchases.................. -- -- 1,066,545 1 167 -- --
Issuance of common stock in
connection with exercise of
warrants..................... -- -- 576,986 1 312 -- --
Issuance of common stock
options and warrants for
services..................... -- -- -- -- 1,715 -- --
Issuance of common stock in
initial public offering, net
of issuance costs of
$1,616....................... -- -- 4,600,000 5 62,549 -- --
Issuance of common stock
private placement concurrent
with initial public
offering..................... -- -- 354,610 -- 5,000 -- --
Conversion of preferred stock
into common stock upon
initial public offering...... (19,568,540) (20) 19,568,540 20 -- -- --
Deferred stock compensation.... -- -- -- -- 37,098 (37,098) --
Amortization of deferred stock
compensation................. -- -- -- -- -- 13,649 --
Net loss....................... -- -- -- -- -- -- --
Foreign currency translation
adjustments.................. -- -- -- -- -- -- --
----------- ---- ---------- --- -------- -------- -------
Comprehensive loss.............
----------- ---- ---------- --- -------- -------- -------
Balances at May 31, 2000....... -- $ -- 43,595,977 $44 $161,078 $(24,541) $(1,042)
=========== ==== ========== === ======== ======== =======
<CAPTION>
ACCUMULATED TOTAL
TREASURY STOCK OTHER STOCKHOLDERS'
------------------- ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT DEFICIT LOSS (DEFICIT)
---------- ------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for
cash and notes receivable.... 1,618,019 $ 6 $ -- $-- $ 962
Issuance of common stock for
services..................... -- -- -- -- 199
Collections under notes
receivable................... -- -- -- -- 41
Issuance of preferred stock for
cash, net of issuance
costs........................ -- -- -- -- 30,081
Issuance of common stock in
connection with exercise of
stock options, net of
repurchases.................. 1,494,437 5 -- -- 173
Issuance of common stock in
connection with exercise of
warrants..................... -- -- -- -- 313
Issuance of common stock
options and warrants for
services..................... -- -- -- -- 1,715
Issuance of common stock in
initial public offering, net
of issuance costs of
$1,616....................... -- -- -- -- 62,554
Issuance of common stock
private placement concurrent
with initial public
offering..................... -- -- -- -- 5,000
Conversion of preferred stock
into common stock upon
initial public offering...... -- -- -- -- --
Deferred stock compensation.... -- -- -- -- --
Amortization of deferred stock
compensation................. -- -- -- -- 13,649
Net loss....................... -- -- (54,441) -- (54,441)
Foreign currency translation
adjustments.................. -- -- -- 29 29
---------- ----- -------- --- --------
Comprehensive loss............. (54,412)
---------- ----- -------- --- --------
Balances at May 31, 2000....... -- $ -- $(66,864) $29 $ 68,704
========== ===== ======== === ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 39
SABA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16,
1997
(INCEPTION)
YEARS ENDED MAY 31, THROUGH
-------------------- MAY 31,
2000 1999 1998
-------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(54,441) $(10,852) $(1,571)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,086 106 10
Amortization of deferred stock compensation............... 13,649 189 --
Issuance of warrant and common stock to third-parties..... 1,754 8 5
Write-off of in-process research and development.......... -- -- 150
Loss on disposal of property and equipment................ 19 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (7,946) (1,846) (84)
Prepaid expenses and other current assets............... (956) (93) (29)
Accounts payable........................................ 3,239 1,466 201
Accrued compensation and related expenses............... 4,978 937 195
Accrued expenses........................................ 1,351 574 26
Deferred revenue........................................ 10,275 1,742 81
Other liabilities....................................... 1,036 -- --
-------- -------- -------
Net cash used in operating activities....................... (25,956) (7,769) (1,016)
INVESTING ACTIVITIES:
Purchases of short-term investments......................... (4,893) -- --
Purchases of property and equipment, net.................... (3,641) (1,069) (70)
Increase in other assets.................................... (295) (181) --
-------- -------- -------
Net cash used in investing activities....................... (8,829) (1,250) (70)
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred stock... 30,081 17,977 328
Proceeds from issuance of common stock...................... 68,991 7 217
Proceeds from issuance of treasury stock.................... 11 -- --
Borrowings under line of credit agreement................... -- 542 --
Repayments of borrowings under line of credit agreement..... -- (542) --
Proceeds from issuance of convertible debt.................. -- 1,445 565
Principal payments under capital lease obligations.......... (390) (11) --
Collections on notes receivable from stockholders........... 41 64 47
Repayments of notes payable................................. (329) (120) (30)
-------- -------- -------
Net cash provided by financing activities................... 98,405 19,362 1,127
Effect of exchange rate changes on cash..................... 29 -- --
-------- -------- -------
Increase in cash and equivalents............................ 63,649 10,343 41
Cash and equivalents, beginning of period................... 10,384 41 --
-------- -------- -------
Cash and equivalents, end of period......................... $ 74,033 $ 10,384 $ 41
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Equipment purchased under capital lease obligations......... $ 3,202 $ 75 $ 25
======== ======== =======
Common stock issued for notes receivable from
stockholders.............................................. $ 1,083 $ 54 $ 57
======== ======== =======
Common stock issued for in-process research and
development............................................... $ -- $ -- $ 150
======== ======== =======
Warrant issued for purchase of convertible preferred stock
in connection with financing.............................. $ 160 $ -- $ --
======== ======== =======
Note payable issued in connection with the purchase of
treasury stock............................................ $ -- $ -- $ 150
======== ======== =======
Conversion of convertible debt into convertible preferred
stock..................................................... $ -- $ 2,010 $ --
======== ======== =======
Conversion of preferred stock into common stock............. $ 50,421 $ -- $ --
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 336 $ 17 $ --
======== ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
38
<PAGE> 40
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Saba Software, Inc. ("Saba") provides Internet-based solutions that enable
businesses and governments to create and deploy global networks that connect
people to learning. Saba provides an Internet-based platform and related
services that deliver a comprehensive learning solution to organizations and
their "extended enterprise" of employees, customers, partners and suppliers.
Saba's solutions enable organizations to procure and deliver learning and
systematically close knowledge and competency gaps across their extended
enterprises. In addition, Saba offers learning providers a global marketing and
distribution channel. Saba recently launched the Saba Learning Exchange, an
Internet-based business-to-business learning marketplace.
Saba was incorporated in the state of Delaware in April 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Saba and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ materially
from those estimates.
Cash Equivalents and Short-term Investments
Cash equivalents consist of highly liquid short-term investments with
insignificant interest rate risk and original maturities from date of purchase
of three months or less. Short-term investments consist principally of taxable,
short-term money market instruments with maturities between 90 days and one
year. Cash equivalents and short-term investments are stated at amounts that
approximate fair value based on quoted market prices. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, management determines the
appropriate classification of debt and equity securities at the time of purchase
and re-evaluates the designation as of each balance sheet date. At May 31, 2000,
Saba classified all of its debt and equity securities as available-for-sale
pursuant to SFAS No. 115.
The available-for-sale securities are recorded as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
Cash equivalents.......................................... $20,416 $ --
Short-term investments.................................... 4,893 --
------- ------
$25,309 $ --
======= ======
</TABLE>
Unrealized gains and losses at May 31, 2000 and realized gains and losses
for the year then ended were not significant. Accordingly, Saba has not made a
provision for such amounts in its consolidated balance sheet. The cost of
securities sold is based on the specific identification method.
39
<PAGE> 41
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentrations of Credit Risk
Financial instruments that potentially subject Saba to concentrations of
risk include cash, cash equivalents, short-term investments and accounts
receivable. Management believes the financial risks associated with these
financial instruments are minimal.
Saba conducts business with companies in various industries primarily in
the United States. Saba generally does not require collateral. Revenues from
licensing Saba Learning Enterprise and related services accounted for
substantially all of Saba's revenues in fiscal 2000 and 1999. An allowance is
maintained for potential credit losses, and to date, such losses have been
within management's expectations. Saba recorded charges to operations that
increased its allowance for uncollectible accounts by $348,000 in fiscal 2000
and $133,000 in fiscal 1999.
Amounts written-off as reductions to the allowance totaled $18,000 in
fiscal 2000 and $9,000 in fiscal 1999.
At May 31, 2000, there were no customers with a balance greater than 10% of
accounts receivable. At May 31, 1999, five customers accounted for a total of
80% of accounts receivable.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful life of the related assets,
generally three to five years. Assets acquired under capital lease obligations
are amortized over the assets' estimated useful lives. Leasehold improvements
are amortized over the shorter of the estimated useful life of the asset or the
life of the lease.
Software Development Costs
Saba accounts for software development costs in accordance with SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, whereby costs for the development of new software products
and substantial enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time any
additional costs are capitalized. Technological feasibility is established upon
completion of a working model. Through May 31, 2000, software development costs
incurred subsequent to the establishment of technological feasibility have not
been significant, and all software development costs have been charged to
research and development expense in the accompanying consolidated statements of
operations.
Income Taxes
Saba accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires the use of the liability method. Under this
method, deferred tax assets and liabilities are measured based on differences
between financial reporting and tax bases of assets and liabilities measured
using enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Stock Options and Equity Instruments Exchanged for Services
Saba accounts for employee stock options using the intrinsic value method
in accordance with Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees and has adopted the disclosure-only
alternative of SFAS No. 123, Accounting for Stock Based Compensation. The value
of options, warrants and restricted stock exchanged for services rendered by
non-employees or assets acquired are valued using the Black-Scholes option
pricing model. To calculate the expense or asset value, Saba uses either the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
40
<PAGE> 42
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share
Basic and diluted net loss per share information for all periods is
presented under the requirements of SFAS No. 128, Earnings per Share. Basic net
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding for the period, less shares subject to repurchase.
Diluted net loss per share reflects the potential dilution of securities by
adding other common stock equivalents, including stock options, shares subject
to repurchase, warrants and convertible preferred stock, in the weighted-average
number of common shares outstanding for a period, if dilutive. All potentially
dilutive securities have been excluded from the computation, as their effect is
anti-dilutive.
Pro forma net loss per share has been computed as described above and also
give effect to the conversion of preferred stock not include above that
automatically converted upon completion of Saba's initial public offering of
common stock.
The calculations of historical and pro forma basic and diluted net loss per
share are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1997
YEARS ENDED MAY 31, (INCEPTION)
------------------------ THROUGH
2000 1999 MAY 31, 1998
---------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C>
HISTORICAL
Net loss............................................... $(54,441) $(10,852) $(1,571)
======== ======== =======
Weighted-average shares of common stock outstanding.... 20,207 13,051 9,439
Weighted-average shares of common stock subject to
repurchase.......................................... (1,659) (64) --
-------- -------- -------
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per
share............................................... 18,548 12,987 9,439
======== ======== =======
Basic and diluted net loss per share................... $ (2.94) $ (0.84) $ (0.17)
======== ======== =======
PRO FORMA
Net loss............................................... $(54,441) $(10,852)
======== ========
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per
share
(from above)........................................ 18,548 12,987
Adjustment to reflect the effect of the conversion of
preferred stock from the date of issuance........... 14,193 7,894
-------- --------
Weighted-average shares of common stock outstanding
used in computing pro forma basic and diluted net
loss per share...................................... 32,741 20,881
======== ========
Pro forma basic and diluted net loss per share......... $ (1.66) $ (0.52)
======== ========
</TABLE>
Revenue Recognition
License agreements generally provide that 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 Enterprise 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, usually for
a fixed fee.
Although Saba primarily provides implementation and consulting services on
a time and materials basis, a significant portion of these services have been
provided on a fixed fee basis. For fixed-price contracts
41
<PAGE> 43
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
involving significant professional services, revenues are recognized using the
percentage of completion method using the ratio of labor hours incurred to total
expected labor hours as the measure of progress towards completion. Saba also
provides professional services on a time and materials basis. Saba recognizes
revenues on time and materials contracts as the services are provided.
Saba recognizes license revenues in accordance with the provisions of
American Institute of Certified Public Accountants, or AICPA, Statement of
Position ("SOP") 97-2, Software Revenue Recognition as amended by SOP 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2 and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transitions. Prior to November 30, 1999, Saba had not established vendor
specific objective evidence for support and therefore, recognized revenues from
license agreements ratably over the contract period if there was persuasive
evidence of an arrangement, the software was delivered, collection was probable,
and the fee was fixed or determinable. Subsequent to November 30, 1999 Saba
generally provides for additional software platforms during the initial year of
its contracts and therefore, recognizes revenue ratably over the initial twelve
months beginning upon contract signing. If an acceptance period is required,
license revenues are recognized ratably over the term of the contract beginning
upon the earlier of customer acceptance or the expiration of the acceptance
period. Contract terms typically range from one to four years. Saba invoices
customers for license and support fees in accordance with individual contract
terms. Payment terms generally require payment of the license fees and first
year support fees from the customer 30 days from the effective date of the
contract. For contracts that provide for additional rights beyond the initial
delivery, revenue is recognized ratably over that period.
If an agreement includes both license and service elements, the license fee
is recognized beginning on delivery of the software, provided services do not
include significant customization or modification of the base product, and the
payment terms for licenses are not subject to additional acceptance criteria. In
cases where license fee payments are contingent on the acceptance of services,
recognition of revenues is deferred for both the license and the service
elements until the acceptance criteria are met. Support revenues are recognized
ratably over the term of the support contract, typically one year.
Accounts receivable includes amounts earned but unbilled as of May 31, 2000
of $544,000 and $14,000 as of May 31, 1999. Deferred revenue consists of license
fees to be recognized in future periods, prepaid fees for services and support
agreements.
Advertising Expense
Advertising costs are expensed as incurred. Saba incurred $122,000 in
advertising costs in fiscal 2000, $110,000 in fiscal 1999 and $14,000 in fiscal
1998.
Other Comprehensive Income
Saba reports comprehensive income (loss) in accordance with SFAS No. 130,
Reporting Comprehensive Income. Prior to fiscal 2000, Saba had no material
components of other comprehensive income (loss) and, accordingly, net loss was
equal to comprehensive loss in all periods. In fiscal 2000, Saba's components of
comprehensive income (loss) consist of net loss and foreign currency translation
adjustments.
Internal-Use Software
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires that entities capitalize certain
costs related to internal use software once certain criteria have been met. Saba
implemented SOP 98-1 in fiscal 2000. Adoption of SOP 98-1 did not have a
material impact on Saba's consolidated financial position or results of
operations.
42
<PAGE> 44
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. Saba is required to adopt SFAS No. 133, as amended
by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Instruments -- deferral of the effective date of FASB Statement No. 133 and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133, for fiscal 2002. Management
believes the adoption of SFAS 133, as amended, will not have a material effect
on Saba's consolidated financial position or results of operations.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101") and amended it in March and June 2000. Saba is required to adopt the
provisions of SAB 101 in its fourth quarter of fiscal 2001. Saba is currently
reviewing the provisions of SAB 101 and has not fully assessed the impact of its
adoption. While SAB 101 does not supercede the software industry specific
revenue recognition guidance, which the Company believes it is in compliance
with, the SEC Staff has recently informally indicated its views related to SAB
101 that may change current interpretations of software revenue recognition
requirements. Such SEC interpretations could result in many software companies,
including Saba, recording a cumulative effect of a change in accounting
principles retroactive to June 1, 2000.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
Computer equipment........................................ $ 4,732 $ 805
Office furniture and fixtures............................. 1,897 334
Leasehold improvements.................................... 1,421 99
------- ------
8,050 1,238
Less accumulated depreciation and amortization............ (1,190) (116)
------- ------
$ 6,860 $1,122
======= ======
</TABLE>
4. RELATED PARTY TRANSACTIONS
In August 1997, Saba issued 5,876,016 shares of its common stock to HTR,
Inc. in exchange for intellectual property. In connection with the acquisition
of HTR, Inc. by a third party in October 1997, Saba repurchased all 5,876,016
shares in exchange for a promissory note in the principal amount of $150,000,
which was secured by a pledge of 7,500 shares of Saba's common stock held by
Saba's President. At the time of the initial issuance to HTR, Inc., a director
of Saba was also an affiliate of HTR, Inc. During the period from inception
through May 31, 1998, $16,000 in services revenues were recognized from HTR,
Inc.
5. CONVERTIBLE DEBT
Saba issued 6% convertible debt to third parties for cash proceeds totaling
$1.4 million in fiscal 1999 and $565,000 in fiscal 1998. The convertible debt
converted into 2,870,854 shares of Series B convertible preferred stock in
August 1998 at a conversion price of $0.70 per share.
43
<PAGE> 45
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE
In November 1998, Saba entered into an equipment line of credit with a
bank, which provided for borrowings of up to $750,000. The note executed under
the agreement accrued interest at 7.75% per annum and was to be repaid in
monthly installments of principal and interest over 36 months. In fiscal 1999,
all amounts outstanding under the line of credit were repaid.
In March 1999, Saba entered into an operating lease agreement for office
space beginning in May 1999 and executed non-interest bearing notes payable to
the lessor totaling $329,000 under this agreement for the deposit on the
building. Principal under the notes was repaid in fiscal 2000.
7. LEASE COMMITMENTS
Saba leases its office facilities under various noncancelable operating
leases that expire at various dates through 2014. During fiscal 1999 and 2000,
Saba also financed the acquisition of furniture and equipment under capital
leases. Borrowings under capital leases are due in monthly installments through
January 2004 plus interest at rates that range from 8.6% to 13.8% and are
secured by the underlying assets. At May 31, 2000, there was $150,000 available
for future purchases of furniture and equipment under these capital leases. At
May 31, 2000 and 1999, the original cost of the assets under capital leases was
$3.7 million and $75,000, respectively, and the accumulated amortization was
$773,000 and $15,000, respectively. Future minimum lease payments under these
leases are as follows as of May 31, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
YEAR ENDING MAY 31:
2001..................................................... $1,173 $ 2,374
2002..................................................... 1,173 2,731
2003..................................................... 1,062 2,842
2004..................................................... 121 2,896
2005..................................................... -- 2,834
Thereafter............................................... -- 23,476
------ -------
3,529 $37,153
=======
Less amounts representing interest....................... (629)
------
Present value of minimum lease payments.................. 2,900
Less current portion of minimum lease payments........... (850)
------
$2,050
======
</TABLE>
Rent expense was $2.7 million in fiscal 2000, $473,000 in fiscal 1999 and
$59,000 in fiscal 1998.
In May 2000, Saba entered into an additional lease line of credit agreement
with a computer manufacturer that provides for borrowings of up to $700,000 to
finance equipment purchases. Borrowings are due in monthly installments and are
secured by the underlying assets. The interest rate implicit in the lease line
is 16.1%. There were no amounts outstanding under this agreement at May 31,
2000.
In June 2000, Saba negotiated an equipment lease line which will provide
for an additional $1.9 million of borrowings with an existing lender. The terms
of this additional equipment lease line are similar to the terms of existing
equipment lease lines.
44
<PAGE> 46
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consisted of the following prior to its conversion at
Saba's initial public offering of common stock:
<TABLE>
<CAPTION>
SHARES ISSUED
SERIES AND OUTSTANDING
------ ---------------
<S> <C>
A............................................. 749,996
B............................................. 8,583,997
C............................................. 4,636,068
D............................................. 5,598,479
----------
19,568,540
==========
</TABLE>
Significant terms of the preferred stock were as follows:
Each share of preferred stock was convertible, at the option of the holder,
into the number of shares of common stock determined by dividing the original
issue price by the conversion price applicable to each share on the conversion
date.
Each share of preferred stock had voting rights equivalent to the number of
shares of common stock into which it is convertible.
Each share of Series A, B, C and D preferred stock was entitled to a
non-cumulative dividend of $0.0384, $0.056, $0.2441 and $0.4287 per share,
respectively, when and if declared by the Board of Directors. No such dividend
was ever declared or paid.
In January 2000, Saba's Board of Directors approved an amendment to Saba's
Certificate of Incorporation to change the authorized capital stock to 5,000,000
shares of preferred stock and 100,000,000 shares of common stock. This amendment
was effective as of the closing of Saba's initial public offering.
Common Stock
In fiscal 2000, seven company executives and one advisory board member
executed full-recourse promissory notes for purchases of 2,230,000 shares of
restricted common stock. The notes bear interest at interest rates that range
from 5.5% to 6.6% per annum, are payable over terms that range from one to four
years and are secured by the shares of common stock underlying the notes as well
as the assets owned by the note holders.
In April 2000, Saba sold 4,600,000 shares of common stock in its initial
public offering, including the underwriters over-allotment, and an additional
354,610 shares of common stock in a concurrent private placement with proceeds,
net of commissions, to Saba 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.
Warrants
In connection with the issuance of convertible debt, Saba issued warrants
to purchase 349,573 shares of common stock in fiscal 1999 and 87,125 shares of
common stock in fiscal 1998 at an exercise price of $0.70 per share to
individuals and firms who participated in the debt financing. The warrants were
immediately exercisable and expired on the earlier of five years from the date
of issuance or the closing date of Saba's initial public offering. The fair
value of these warrants was insignificant at the issuance date. These warrants
were exercised in fiscal 2000 prior to Saba's initial public offering.
45
<PAGE> 47
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also during fiscal 1999, Saba issued warrants to purchase 35,000 shares of
common stock at an exercise price of $0.10 per share and 16,000 shares at an
exercise price of $0.70 per share for services rendered. The warrants were
immediately exercisable and expired on the closing date of Saba's initial public
offering. The fair value of these warrants was insignificant at the issuance
date. These warrants were exercised in fiscal 2000 prior to Saba's initial
public offering.
In June 1999, Saba issued warrants to purchase 80,296 shares of series C
convertible preferred stock at $3.05 per share to a lessor in connection with
obtaining a lease line of credit. The warrants expire on April 7, 2003. The
warrants were immediately exercisable and remain outstanding at May 31, 2000.
The fair value of the warrants at the date of issuance, approximately $160,000,
is being amortized as additional interest expense over the forty-two month term
of the lease agreement.
In December 1999, Saba issued a warrant to a customer to purchase 23,930
shares of common stock. The warrant was exercisable on January 31, 2000, has a
term of three years, and an exercise price of $13.50 per share. The $99,000 fair
value of the warrant at the date of issuance, determined using the Black-Scholes
option pricing model, was recorded as an offset to revenues earned from the
customer. The warrant remained outstanding at May 31, 2000.
In January 2000, Saba issued a warrant to an existing investor to purchase
100,000 shares of common stock at an exercise price of $0.01 per share. The
warrant was issued in connection with the Series D preferred stock, was
immediately exercisable and expired on January 31, 2000. The $1.2 million value
of the warrant, determined using the Black-Scholes option pricing model, was
accounted for as an increase and immediate reduction of additional paid-in
capital. The warrant was exercised in January 2000.
Employee Stock Purchase Plan
The Board of Directors adopted the 2000 Employee Stock Purchase Plan (the
"ESPP") in January 2000 that was effective upon the completion of Saba's initial
public offering of its common stock. A total of 2,000,000 shares of common stock
was reserved for issuance under the ESPP. Eligible employees may purchase common
stock at 85% of the lesser of the fair market value of Saba's common stock on
the first day of the applicable offering period or the last day of the
applicable six-month purchase period. As of May 31, 2000, no shares had been
issued under the ESPP and the first purchase period ends on December 31, 2000.
Stock Option Plan
Under the 1997 Stock Option Plan (the "1997 Plan"), Saba may grant options
to purchase up to 7,500,000 shares of common stock to employees, directors and
consultants at prices not less than the fair market value at date of grant for
incentive stock options and not less than 85% of fair market value for non-
statutory stock options (110% in certain circumstances). Options generally
expire ten years from the date of grant. Options generally vest over four years.
Some options are exercisable upon grant and are subject to repurchase at the
original exercise price in the case of termination of employment prior to
vesting. Shares subject to repurchase totaled 2,611,813 at May 31, 2000.
In October 1999, January 2000 and March 2000, the Board of Directors
reserved an additional 1,115,550, and 1,200,000 and 1,000,000 shares of common
stock, respectively, for issuance under the 1997 Plan.
In January 2000, the Board of Directors adopted the 2000 Stock Incentive
Plan (the "2000 Plan") and reserved 6,000,000 shares for grant under the 2000
Plan. The terms of the 2000 Plan are substantially similar to the 1997 Plan. The
2000 Plan also provides for automatic grants to non-employee directors.
During fiscal 2000, Saba granted options to advisory board members with
vesting provisions based on service. During the third quarter of fiscal 2000,
Saba recognized $457,000 in expense related to the value of the vested options.
In March 2000, Saba fully accelerated the vesting of these options and
recognized an
46
<PAGE> 48
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional $1.0 million in expense. In fiscal 1999 and 1998, Saba granted
options to non-employees for services performed and to be performed after the
date of the grant. In connection with these option grants, Saba recognized
expense of $8,000 in fiscal 1999 and $5,000 in fiscal 1998, based on the
options' fair value, determined using the Black-Scholes option pricing model.
Details of activity under the 1997 Plan and 2000 Plan are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Granted......................................... 3,225,000 $0.05
Exercised....................................... (260,000) 0.05
----------
Balance, May 31, 1998........................... 2,965,000 0.05
Granted......................................... 3,060,500 0.07
Canceled........................................ (286,000) 0.06
----------
Balance, May 31, 1999........................... 5,739,500 0.06
Granted......................................... 5,138,725 5.08
Exercised....................................... (2,586,170) 1.18
Canceled........................................ (941,939) 1.48
----------
Balance, May 31, 2000........................... 7,387,804 3.38
==========
</TABLE>
Additional information regarding options outstanding as of May 31, 2000 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING --------------------------
EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.05 - 0.07 2,745,517 7.8 $ 0.06 490,101 $ 0.05
0.30 1,390,800 9.2 0.30 5,000 0.30
0.95 662,800 8.7 0.95 40,000 0.95
5.36 706,950 5.6 5.36 -- --
10.00 - 12.00 1,875,937 5.7 10.54 10,000 10.00
20.13 5,800 5.9 20.13 -- --
--------- ---- ------ ------- ------
$0.05 - 20.13 7,387,804 7.4 $ 3.37 545,101 $ 0.30
========= ==== ====== ======= ======
</TABLE>
At May 31, 2000, 6,544,264 shares were available for future grant under the
1997 Plan and 2000 Plan.
Saba recorded deferred stock compensation of approximately $37.1 million
during fiscal 2000 and $1.3 million during fiscal 1999 representing the
difference between the exercise price and the deemed fair value for financial
accounting purposes of Saba's common stock on the grant date for certain stock
options granted to employees. In the absence of a public market for Saba's
common stock, the deemed fair value was based on the price per share of recent
convertible preferred stock financings, less a discount to give effect to the
superior rights of the convertible preferred stock. These amounts are being
amortized by charges to operations over the vesting periods of the individual
stock options using a graded vesting method. Amortization of deferred stock
compensation amounted to approximately $13.6 million for fiscal 2000 and
$189,000 for fiscal 1999.
Pro Forma Disclosures of the Effect of Deferred Stock Compensation
Pro forma information regarding net loss and net loss per share, which is
required by SFAS 123, has been determined as if Saba had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
of these options for fiscal 2000 was estimated at the date of grant using the
Black-Scholes option pricing model, with the following assumptions: expected
life of 60 months, risk-free interest rate of
47
<PAGE> 49
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5.5%, dividend yield of zero, and an assumed volatility of 60%. The fair value
of these options for fiscal 1999 was estimated at the date of grant using the
Minimum Value option pricing model, with the following assumptions: expected
life of 60 months, risk-free interest rate of 5.5% and dividend yield of zero.
The weighted-average fair value of options granted for fiscal 2000 and 1999 was
$1.47 and $0.44, respectively.
Had compensation cost for Saba's stock compensation plans been determined
using the fair value at the grant dates for awards under these plans calculated
using the Black-Scholes option pricing model for fiscal 2000 and Minimum Value
method for fiscal 1999 and 1998, Saba's historical net loss and basic and
diluted net loss per share would have been increased to the pro forma amounts
indicated below (in thousands except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1997
(INCEPTION)
MAY 31, THROUGH
-------------------- MAY 31,
2000 1999 1998
-------- -------- --------------
<S> <C> <C> <C>
Net loss -- pro forma............................ $(54,887) $(10,857) $(1,577)
======== ======== =======
Net loss per share -- pro forma.................. $ (2.96) $ (0.84) $ (0.17)
======== ======== =======
</TABLE>
The pro forma impact of options on the net loss for fiscal 2000 is not
representative of the effects on net income or loss for future years, as future
years will include the effects of additional stock option grants.
Shares of Common Stock Reserved for Future Issuance
Saba has reserved shares of common stock for issuance as follows at May 31,
2000:
<TABLE>
<S> <C>
Stock options outstanding................................ 7,387,804
Stock options available for future grant................. 6,544,264
Warrants to purchase common stock........................ 104,226
----------
14,036,294
==========
</TABLE>
9. INCOME TAXES
There has been no provision for U.S. federal, U.S. state, or foreign income
taxes for any period because Saba has incurred operating losses in all periods
and for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets are as follows:
<TABLE>
<CAPTION>
MAY 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 13,781 $ 3,610
Deferred revenue...................................... 3,316 676
Other reserves and accruals........................... 1,992 569
-------- -------
19,089 4,855
Valuation allowance..................................... (19,089) (4,855)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
48
<PAGE> 50
SABA SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $14.2 million in fiscal 2000 and $4.3 million in fiscal
1999.
A reconciliation of income tax expense at the statutory federal income tax
rate to net income tax expense included in the accompanying consolidated
statements of operations is as follows:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
2000 1999 1998
-------- ------- -----
<S> <C> <C> <C>
U.S. federal taxes (benefit) at statutory rate......... $(17,693) $(3,690) $(534)
Unbenefitted net operating losses...................... 12,436 3,671 470
Stock related charges.................................. 5,203 -- --
Other.................................................. 54 19 64
-------- ------- -----
Total.................................................. $ -- $ -- $ --
======== ======= =====
</TABLE>
As of May 31, 2000, Saba had net operating loss carryforwards for federal
income tax purposes of approximately $35.4 million, which expire in fiscal 2012
to 2020. Saba also had net operating loss carryforwards for state income tax
purposes of approximately $28.8 million expiring in fiscal 2005. Utilization of
the net operating loss carryforwards may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation could result in
the expiration of the net operating loss carryforwards before utilization.
10. RETIREMENT PLAN
Saba has established the Saba Software 401(k) Plan (the "401(k) Plan")
under section 401(k) of the Internal Revenue Code covering substantially all of
its employees. Under the 401(k) Plan, participating employees may defer a
portion of their pretax earnings subject to an annual contribution limit. Saba
may also make matching contributions equal to a discretionary percentage of the
employees' deferral. To date, no matching contributions have been made.
11. SEGMENT INFORMATION
Saba operates primarily in a single operating segment, providing software
and services that connect people to learning over the Internet.
Geographic Information
Saba operates in North America, Europe and Asia-Pacific. Approximately 10%
of revenues were derived from outside North America in fiscal 2000. In fiscal
1999 and 1998, less than 10% of revenues were derived from outside North
America. At May 31, 2000 and 1999, less than 10% of Saba's assets were located
outside the United States.
Major Customers
For fiscal 2000, no customer accounted for 10% of revenues; for fiscal
1999, three customers accounted for 35%, 20% and 11% of revenues and for fiscal
1998, three customers accounted for 39%, 28% and 20% of revenues.
12. LITIGATION
Saba is party to various legal disputes and proceedings arising from the
ordinary course of general business activities. In the opinion of management,
resolution of these matters is not expected to have a material adverse effect on
its consolidated financial position, results of operations or cash flows.
49
<PAGE> 51
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 9, 2000.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 9, 2000.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 9, 2000.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 9, 2000.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Stockholders' Equity (Deficit)... 36
Consolidated Statements of Cash Flows....................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
2. Financial Statement Schedules
All schedules have been omitted as they are either not required or not
applicable, or the required information is included in the consolidated
financial statements or notes thereto.
3. Index to Exhibits
See Index to Exhibits on page 52.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended May 31, 2000.
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SABA SOFTWARE, INC.
By: /s/ BOBBY YAZDANI
------------------------------------
Bobby Yazdani
President and Chief Executive
Officer
Dated: August 29, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Bobby Yazdani, Terry Carlitz and
Peter Williams as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ BOBBY YAZDANI Chairman of the Board of Director, August 29, 2000
------------------------------------------ President and Chief Executive Officer
Bobby Yazdani (Principal Executive Officer)
/s/ TERRY CARLITZ Chief Financial Officer and Director August 29, 2000
------------------------------------------ (Principal Financial and Accounting
Terry Carlitz Officer)
/s/ DOUGLAS ALLRED Director August 29, 2000
------------------------------------------
Douglas Allred
/s/ ROBERT COHN Director August 29, 2000
------------------------------------------
Robert Cohn
/s/ JOSEPH COSTELLO Director August 29, 2000
------------------------------------------
Joseph Costello
/s/ JOE KIANI Director August 29, 2000
------------------------------------------
Joe Kiani
/s/ MICHAEL MORITZ Director August 29, 2000
------------------------------------------
Michael Moritz
</TABLE>
51
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
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.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney. Reference is made to page 51.
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).
52
