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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 0-19395
SABA SOFTWARE, INC.
(Exact Name of Company as Specified in Its Charter)
Delaware 94-3267638
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2400 Bridge Parkway, Redwood Shores, CA 94065-1166
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(Address of Principal Executive Offices)
Company's Telephone Number, Including Area Code: (650) 696-3840
Indicate by check mark whether the Company: (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On September 30, 2000, 43,929,396 shares of the Company's Common Stock, $.001
par value, were outstanding.
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SABA SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED AUGUST 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
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Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of August 31, 2000 and
May 31, 2000
Condensed Consolidated Statements of Operations for the three months ended
August 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the three months ended
August 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
</TABLE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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SABA SOFTWARE, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,205 $ 74,033
Short-term investments 17,022 4,893
Accounts receivable, net 15,636 9,876
Prepaid expenses and other current assets 1,731 1,078
--------- ---------
Total current assets 81,594 89,880
Property and equipment, net 7,776 6,860
Other assets 958 965
--------- ---------
Total assets $ 90,328 $ 97,705
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,266 $ 4,906
Accrued expenses 11,667 8,061
Deferred revenue 14,431 10,973
Current portion of capital lease obligations 1,153 850
--------- ---------
Total current liabilities 31,517 24,790
Deferred revenue 900 1,125
Notes payable and other long term liabilities 1,414 1,036
Capital lease obligations, less current portion 2,081 2,050
--------- ---------
Total liabilities 35,912 29,001
Stockholders' equity
Preferred stock - -
Common stock 44 44
Additional paid-in capital 161,122 161,078
Deferred stock compensation (19,540) (24,541)
Notes receivable from stockholders (1,042) (1,042)
Accumulated deficit (85,963) (66,864)
Accumulated other comprehensive loss (205) 29
--------- ---------
Total stockholders' equity 54,416 68,704
--------- ---------
Total liabilities and stockholders' equity $ 90,328 $ 97,705
========= =========
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
2000 1999
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<S> <C> <C>
Revenues:
License $ 4,420 $ 668
Services 5,628 1,039
-------- --------
Total revenues 10,048 1,707
-------- --------
Cost of revenues:
Cost of license 3 -
Cost of services 4,923 956
-------- --------
Total cost of revenues 4,926 956
-------- --------
Gross profit 5,122 751
Operating expenses:
Research and development 5,563 3,522
Sales and marketing 12,229 3,427
General and administrative 2,532 901
Amortization of deferred stock
compensation and other stock charges 5,001 1,385
-------- --------
Total operating costs and expenses 25,325 9,235
-------- --------
Loss from operations (20,203) (8,484)
Interest income and other, net 1,104 48
-------- --------
Net loss $(19,099) $ (8,436)
======== ========
Basic and diluted net loss per share $ (0.46) $ (0.63)
======== ========
Shares used in computing basic and
diluted net loss per share 41,674 13,427
======== ========
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
2000 1999
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<S> <C> <C>
Operating activities:
Net loss $(19,099) $ (8,436)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 580 202
Amortization of deferred stock compensation 5,001 1,385
Changes in operating assets and liabilities
Accounts receivable (5,994) (1,516)
Prepaid expenses and other current assets (653) (9)
Accounts payable (640) (67)
Accrued expenses 3,606 641
Deferred revenue 3,233 1,520
Other liabilities 378 177
-------- --------
Net cash used in operating activities (13,588) (6,103)
-------- --------
Investing activities:
Purchases of short-term investments (12,129) -
Purchases of property and equipment (816) (682)
Increase in other assets (4) (9)
-------- --------
Net cash used in investing activities (12,949) (691)
-------- --------
Financing activities:
Proceeds from issuance of common stock 44 -
Principal payments under capital lease obligations (335) (23)
-------- --------
Net cash used in financing activities (291) (23)
-------- --------
Decrease in cash and cash equivalents (26,828) (6,817)
Cash and cash equivalents, beginning of period 74,033 10,384
-------- --------
Cash and cash equivalents, end of period $ 47,205 $ 3,567
======== ========
Supplemental disclosures of non-cash transactions:
Equipment purchased under capital lease obligations $ 669 $ 300
======== ========
Warrant issued for purchase of Series C convertible
preferred stock for financing $ - $ 160
======== ========
</TABLE>
See accompanying notes.
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SABA SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Saba Software, Inc. and its subsidiaries (Saba, or the
Company), and, in the opinion of management, reflect all adjustments (consisting
only of normal recurring adjustments) necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows as of and
for the dates and periods presented. The condensed consolidated balance sheet as
of May 31, 2000 has been prepared from the audited consolidated financial
statements of the Company.
These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
included in its Annual Report on Form 10-K filed with the Securities and
Exchange Commission on August 29, 2000. The results of operations for the three
months ended August 31, 2000 are not necessarily indicative of results for the
entire fiscal year ending May 31, 2001 or for any future period.
2. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share". Basic earnings per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares that may be repurchased, and excludes any dilutive
effects of options, warrants, and convertible securities. Potentially dilutive
issuances have also been excluded from the computation of diluted net loss per
share, as their inclusion would be anti-dilutive.
Pro forma net loss per share has been computed as described above and
also gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that automatically converted
to common shares immediately prior to the closing of the Company's initial
public offering in April 2000, using the if-converted method.
The calculations of historical and pro forma basic and diluted net loss
per share are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended August 31,
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2000 1999
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<S> <C> <C>
HISTORICAL
Net loss $(19,099) $ (8,436)
======== ========
Weighted-average shares of common stock outstanding 43,772 13,558
Weighted-average shares of common stock subject to repurchase (2,098) (131)
-------- --------
Weighted-average shares of common stock used in
computing basic and diluted net loss per share 41,674 13,427
======== ========
Basic and diluted net loss per share $ (0.46) $ (0.63)
======== ========
PRO FORMA
Net loss $ (8,436)
========
Weighted-average shares of common stock
outstanding used in computing basic and diluted
net loss per share (from above) 13,427
Adjustment to reflect the effect of the conversion of
preferred stock from the date of issuance 13,943
--------
Weighted-average shares of common stock used in
computing pro forma basic and diluted net loss per share 27,370
========
$ (0.31)
========
</TABLE>
3. OTHER COMPREHENSIVE INCOME
Saba reports comprehensive income (loss) in accordance with SFAS No. 130,
"Reporting Comprehensive Income." In fiscal 2000 and for the three months ended
August 31, 2000, Saba's components of comprehensive income (loss) consist of net
loss and foreign currency translation adjustments. 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.
4. SEGMENT INFORMATION.
The Company operates primarily in a single operating segment, providing
software and services that increase human and business performance through human
capital development and management.
Geographic Information
Saba operates in North America, Europe and Asia-Pacific. Approximately 13%
of revenues were derived from outside North America in the three months ended
August 31, 2000 and approximately 10% of revenues were derived from outside
North
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America in fiscal 2000. At August and May 31, 2000, less than 10% of Saba's
assets were located outside North America.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are not
limited to, the commercial viability of Saba Learning Exchange; the availability
of third-party consulting organizations to perform implementation, consulting
and education services; the anticipated growth of the number of our employees;
our anticipated expense levels for research and development, sales and
marketing, and general and administrative operations; expectations regarding
liquidity and adequacy of cash resources; and adequacy of current facilities.
Actual results could differ materially from those projected in any
forward-looking statements for the reasons detailed below under the sub-heading
"Factors That May Affect Future Operating Results" and in other sections of this
Report on Form 10-Q. All forward-looking statements included in this Form 10-Q
are based on information available to us on the date of this Report on Form
10-Q, and we assume no obligation to update the forward-looking statements, or
to update the reasons why actual results could differ from those projected in
the forward-looking statements. See "Factors That May Affect Future Operating
Results" below, as well as such other risks and uncertainties as are detailed in
our Annual Report on Form 10-K filed with the Securities and Exchange Commission
on August 29, 2000 for a discussion of the factors that could cause actual
results to differ materially from the forward-looking statements.
The following discussion should be read in conjunction with our audited
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on August 29, 2000.
OVERVIEW
General
We are a provider of software and services that enable businesses and
governments to create and deploy global networks over the Internet that increase
human and business performance through human capital development and management.
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 software application 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 Saba Learning Exchange.
Our 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
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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 we primarily provide 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 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. We also provide
professional services on a time and materials basis. We recognize revenues on
time and materials contracts as the services are provided.
We recognize license revenues in accordance with the provisions of American
Institute of Certified Public Accountants 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, we 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 we generally provide
for additional software platforms during the initial year of our contracts and
therefore, recognize 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. We invoice 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 date, 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 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.
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 software
manuals and 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 software and services sold.
Operating Expenses
Our operating expenses are classified into three general operational
categories: sales and marketing, research and development and general and
administrative. In addition, our operating expenses include amortization of
deferred stock compensation.
We classify all charges to the research and development, sales and
marketing and general and administrative expense categories based on the nature
of the expenses. Each of these three categories include commonly recurring
expenses such as salaries, employee benefits, travel and entertainment costs,
and allocated communication, rent and depreciation costs. We allocate these
expenses to each of the functional areas that derive a benefit from such
expenses based upon their respective headcount. The research and development
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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 had recorded deferred stock compensation
totaling approximately $38.4 million as of August 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. During the three months ended
August 31, 2000, we amortized $5.0 million of deferred stock compensation and we
had amortized $18.8 million of the $38.4 million recorded. The amortization of
the remaining deferred stock compensation will result in additional charges to
operations through fiscal 2004.
History of Losses
We have incurred significant losses and negative cash flows from
operations since our inception. As of August 31, 2000, we had an accumulated
deficit of $86.0 million. Although our revenues have increased on a quarterly
basis since May 31, 1998, we have not achieved profitability and cannot be
certain that we will be able to sustain these growth rates or realize sufficient
revenues to achieve profitability. We expect to continue to incur significantly
greater operating expenses. We also expect to incur substantial non-cash
expenses relating to stock based compensation. As a result, we expect to incur
significant losses for the foreseeable future and will need to generate
significantly higher revenues in order to achieve profitability. If we achieve
profitability, we may not be able to sustain it.
We had 505 full-time employees at August 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 human
capital development and management and electronic commerce and Internet
software. We may not be successful in addressing these risks and difficulties.
Although we have experienced significant growth in revenues in recent periods,
we do not believe that prior growth rates are sustainable or indicative of our
future operating results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
Revenues
Total revenues increased to $10.0 million for the three months ended
August 31, 2000 from $1.7 million for the three months ended August 31, 1999.
The growth in revenues year-over-year reflects our relatively early stage of
development and is primarily attributable to our expanding sales force. We do
not expect revenues to increase at the same rate in the future. During the three
months ended August 31, 2000 and 1999, no customer represented more than 10% of
our revenues.
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License revenues increased to $4.4 million, or 44% of total revenues,
for the three months ended August 31, 2000, from $668,000, or 39% of total
revenues, for the three months ended August 31, 1999. The increase in the amount
of license revenues is primarily attributable to an increase in sales of
licenses to new customers resulting from increased headcount in our sales force.
Services revenues increased to $5.6 million, or 56% of total revenues,
for the three months ended August 31, 2000, from $1.0 million or 61% of total
revenues, for the three months ended August 31, 1999. The increase in the dollar
amount of services revenues is primarily attributable to increased
implementation and consulting services performed in connection with increased
license sales and to support services sold to our new customers.
Deferred license and services revenues reflected on our consolidated
balance sheet were $15.3 million at August 31, 2000 as compared to $12.1 million
at May 31, 2000.
The mix of license and services revenues as a percentage of total
revenues has varied significantly due to our relatively early stage of
development.
Cost of Revenues
Total cost of revenues increased to $4.9 million for the three months
ended August 31, 2000, from $956,000 for the three months ended August 31, 1999.
To date, our cost of software license revenues has been insignificant. The
increase in the amount of cost of revenues is primarily attributable to the
hiring of additional employees to support increased customer demand for our
implementation and consulting services. Cost of services revenues represented
87% of services revenues for the three months ended August 31, 2000 and 92% of
services revenues for the three months ended August 31, 1999. The decrease in
the cost of services as a percentage of services revenues is primarily
attributable to improved utilization rates of new employees as they complete
required training on Saba products and implementation methodologies.
Operating Expenses
Research and development. Research and development expenses increased to
$5.6 million for the three months ended August 31, 2000, from $3.5 million for
the three months ended August 31, 1999. The increase is primarily attributable
to increases in the number of employees engaged in research and development. To
date, all software development costs have been expensed in the period incurred.
We believe that continued investment in research and development is critical to
attaining our strategic objectives, and we anticipate that research and
development expenses will continue to increase in absolute dollars as a result
of our internal product development efforts.
Sales and marketing. Sales and marketing expenses increased to $12.2
million for the three months ended August 31, 2000, from $3.4 million for the
three months ended August 31, 1999. This increase is primarily attributable to
increases in the number of employees in our sales and marketing organizations,
and related costs, such as increased sales commissions and costs associated with
the establishment of sales offices in additional domestic and international
locations. We anticipate that the amount of sales and marketing expenses will
continue to increase in absolute dollars due to the planned growth of our sales
force and to expected additional increases in advertising and marketing programs
and other promotional and branding activities.
General and administrative. General and administrative expenses
increased to $2.5 million for the three months ended August 31, 2000, from
$901,000 for the three months ended August 31, 1999. The increase is primarily
attributable to increases in the number of executive, finance and administrative
employees from August 31, 1999 to August 31, 2000. The increases were also
attributable to an increase in the amount of administrative and professional
services fees, including temporary staffing, legal and accounting fees. We
expect that the absolute dollar amount of general and administrative expenses
will continue to increase in future periods as we add personnel to support the
expansion of our operations and incur additional
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expenses related to the anticipated growth of our business, both domestically
and internationally.
Amortization of deferred stock compensation. During the three months
ended August 31, 2000, we did not record any deferred stock compensation with
respect to shares issued in such period. During the three months ended August
31, 2000, we recorded deferred stock amortization of $5.0 million.
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 $1.1 million for the three months ended
August 31, 2000, from $48,000 for the three months ended August 31, 1999. The
increase is attributable primarily to interest income from average invested cash
balances, partially offset by interest expense related to equipment loans, the
proceeds of which were used to purchase computer equipment, leasehold
improvements, software and office furniture and equipment.
Our results of operations could vary significantly from quarter to
quarter. We expect to incur significant sales and marketing expenses to promote
our software products and services. Therefore, our quarterly operating results
are likely to be particularly affected by the number of customers licensing our
software 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.
Other factors that could affect our quarterly operating results include
those described below and under the caption "Factors that may Affect Future
Operating Results."
- dependence of our revenues on a small number of large orders;
- our ability to attract new customers;
- any changes in revenue recognition policies and provisions and
interpretations of these provisions;
- our ability to license additional products to current customers;
- the announcement or introduction of new products or services by us or
our competitors;
- changes in the pricing of our products and services or those of our
competitors;
- variability in the mix of our products and services revenues in any
quarter;
- technical difficulties or service interruptions of our computer
network systems or the Internet generally; and
- the amount and timing of operating costs and capital expenses relating
to expansion of our business.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
sale of equity securities, through which we have raised net proceeds of $119.8
million through August 31, 2000, equipment leases and other debt. As of August
31, 2000, we had outstanding equipment leases and notes payable of $3.2 million,
$47.2 million of cash and cash equivalents and $17.0 million of short-term
investments.
Cash used in operating activities was $13.6 million during the three
months ended August 31, 2000 and $6.1 million during the three months ended
August 31,
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1999. The cash used during these periods was primarily attributable to net
losses of $19.1 million and $8.4 million offset by $5.0 million and $1.4 million
of amortization of deferred stock compensation during the three months ended
August 31, 2000 and 1999, respectively.
Cash used in investing activities during the three months ended August
31, 2000 and 1999 comprised primarily investments in property and equipment and
for the three months ended August 31, 2000, included $12.1 million in purchases
of short-term investments. Investments in property and equipment, excluding
equipment acquired under capital leases, were $816,000 during the three months
ended August 31, 2000 and $682,000 during the three months ended August 31,
1999.
Cash used in financing activities was $291,000 during the three months
ended August 31, 2000 and $23,000 for the three months ended August 31, 1999,
resulting primarily from payments on capital lease obligations.
At August 31, 2000, we did not have any material commitments for capital
expenses. Our principal commitments consisted of obligations under capital and
operating leases.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our presently anticipated working capital,
capital expense and business expansion requirements for at least the next 12
months. However, we may choose to raise additional funds within the next 12
months to support expansion, 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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". We are required
to adopt SFAS No. 133, as amended, for the year ending May 31, 2002. SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and do
not currently engage in hedging activities, adoption of SFAS No. 133 is expected
to have no material impact on our financial condition or results of operations.
We may, 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 (SAB) 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.
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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 had no impact on our financial condition
or results of operations.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated by such forward-looking statements as a result of certain
factors including those set forth below.
WE HAVE A LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE RISKS ENCOUNTERED BY
EARLY-STAGE COMPANIES
We were founded in April 1997, shipped our first products in April 1998 and
began to operate Saba Learning Exchange in December 1999. Because we have a
limited operating history, you should consider and evaluate our operating
prospects in light of the risks and uncertainties frequently encountered by
early-stage companies in rapidly evolving markets. For us, these risks include:
- risks that our revenue forecasts may be incorrect because of our limited
sales to date and our long sales cycle;
- 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 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 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 August 31, 2000, we
had an aggregate of $19.5 million of deferred stock 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
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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 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 increase human and
business performance through human capital development and management, 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 and in the three months ended August 31,
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
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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 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 and Saba Learning Enterprise.
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 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 40 employees at May 31, 1998 to 140 employees at May 31, 1999, 462
employees at May 31, 2000 and 505 employees at August 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;
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- 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 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 and off-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 and
13% of our revenues in the three months ended August 31, 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;
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- 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 software products
and services in foreign markets and we cannot be certain that one or more of
such factors will not materially adversely affect our future international
operations, and consequently, our business and future growth.
OUR REVENUES MAY DECREASE IF USE OF THE INTERNET IN THE MARKETS WE TARGET DOES
NOT GROW AS PROJECTED
The use of the Internet as a means to interconnect organizations and
learning providers and to create Saba 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
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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;
- 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.
In addition, we could be liable for the misuse of personal information. The
Federal Trade Commission, the European Union and certain state and local
authorities have been investigating certain Internet companies regarding their
use of personal information. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if these
authorities choose to investigate our privacy practices.
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
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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 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
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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 the computer systems needed for the day to day operation of Saba
Learning Exchange and our application service provider offerings. A number of
these computer systems 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 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 rely on third parties to provide key components of our networks and
systems. For instance, we rely on third-party Internet service providers to host
Saba Learning Exchange and applications for customers who purchase our solutions
on a subscription basis or license our solutions and desire to obtain hosting
services for such solutions. We also rely on third-party communications service
providers for the high-speed connections that link our and our Internet service
providers' Web servers and office systems to the Internet. Any Internet or
communications systems failure or interruption could result in disruption of
our service or loss or compromise of customer orders and data. These failures,
especially if they are prolonged or repeated, would make our services less
attractive to customers and tarnish our reputation.
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
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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.
CERTAIN EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER SABA TO THE DETRIMENT OF
MINORITY STOCKHOLDERS
As of September 15, 2000, our executive officers, directors and principal
stockholders (i.e., greater than 5% stockholders) together beneficially owned
approximately 46% 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
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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.
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
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<PAGE> 23
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.
ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations regarding Qualitative and Quantitative
Disclosures about Market Risk.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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<PAGE> 24
October 16, 2000 SABA SOFTWARE, INC.
By /s/ BOBBY YAZDANI
--------------------------------
Bobby Yazdani
Chief Executive Officer,
President and Chairman of the
Board of Directors
By /s/ TERRY CARLITZ
---------------------------------
Terry Carlitz
Chief Financial Officer and
Director (Principal Accounting
Officer)
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<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
