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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
0-19395
(Commission File number)
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SABA SOFTWARE, INC.
(Exact Name of Company as Specified in Its Charter)
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DELAWARE 94-3267638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 BRIDGE PARKWAY,
REDWOOD SHORES, CA 94065-1166
Address of principal executive offices) (Zip Code)
(650) 696-3840
(Company's telephone number, including area code)
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 March 31, 2001, 44,993,153 shares of the Company's Common Stock, $.001
par value, were outstanding.
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SABA SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED FEBRUARY 28, 2001
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).......................................................... 1
Condensed Consolidated Balance Sheets as of February 28, 2001 and
May 31, 2000............................................................................ 1
Condensed Consolidated Statements of Operations for the three and nine months ended
February 28, 2001 and February 29, 2000................................................. 2
Condensed Consolidated Statements of Cash Flows for the nine months ended
February 28, 2001 and February 29, 2000................................................. 3
Notes to Condensed Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 21
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Securities Holders 22
Item 5 Other Information 22
Item 6. Exhibits and Reports on Form 8-K.......................................................... 22
SIGNATURES........................................................................................... 23
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
FEBRUARY 28, MAY 31,
2001 2000
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 19,768 $ 74,033
Short-term investments ................................ 24,226 4,893
Accounts receivable, net .............................. 18,541 9,876
Prepaid expenses and other current assets ............. 1,327 1,078
--------- ---------
Total current assets .............................. 63,862 89,880
Property and equipment, net .............................. 8,221 6,860
Other assets ............................................. 1,076 965
--------- ---------
Total assets ...................................... $ 73,159 $ 97,705
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 3,510 $ 4,906
Accrued expenses ...................................... 14,806 8,061
Deferred revenue ...................................... 16,677 10,973
Current portion of capital lease obligations .......... 1,561 850
--------- ---------
Total current liabilities ......................... 36,554 24,790
Deferred revenue ......................................... 741 1,125
Notes payable and other long-term liabilities ............ 1,658 1,036
Capital lease obligations, less current portion .......... 2,099 2,050
--------- ---------
Total liabilities ................................. 41,052 29,001
Stockholders' equity
Preferred stock ..................................... -- --
Common stock ........................................ 45 44
Additional paid-in capital .......................... 163,790 161,078
Deferred stock compensation ......................... (11,720) (24,541)
Notes receivable from stockholders .................. (860) (1,042)
Accumulated deficit ................................. (119,208) (66,864)
Accumulated other comprehensive income .............. 60 29
--------- ---------
Total stockholders' equity ........................ 32,107 68,704
--------- ---------
Total liabilities and stockholders' equity ........ $ 73,159 $ 97,705
========= =========
See accompanying notes.
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SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
License ........................................ $ 6,896 $ 2,600 $ 17,024 $ 4,520
Services ....................................... 7,627 2,602 20,570 5,886
-------- -------- -------- --------
Total revenues ............................. 14,523 5,202 37,594 10,406
-------- -------- -------- --------
Cost of revenues:
Cost of license ................................ 12 -- 20 --
Cost of services ............................... 5,674 2,493 16,150 5,221
-------- -------- -------- --------
Total cost of revenues ..................... 5,686 2,493 16,170 5,221
-------- -------- -------- --------
Gross profit ............................... 8,837 2,709 21,424 5,185
Operating expenses:
Research and development ....................... 4,534 4,093 15,542 10,339
Sales and marketing ............................ 13,973 8,371 40,050 16,931
General and administrative ..................... 2,541 1,534 7,629 3,526
Amortization of deferred stock compensation and
other stock charges .......................... 3,273 5,024 12,821 8,535
-------- -------- -------- --------
Total operating costs and expenses ................ 24,321 19,022 76,042 39,331
-------- -------- -------- --------
Loss from operations .............................. (15,484) (16,313) (54,618) (34,146)
Interest income and other, net .................... 406 238 2,274 394
-------- -------- -------- --------
Net loss .......................................... $(15,078) $(16,075) $(52,344) $(33,752)
======== ======== ======== ========
Basic and diluted net loss per share .............. $ (0.35) $ (1.04) $ (1.24) $ (2.33)
======== ======== ======== ========
Shares used in computing basic and diluted net loss
per share ...................................... 42,863 15,521 42,243 14,504
======== ======== ======== ========
See accompanying notes.
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SABA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------ ------------
FEBRUARY 28, FEBRUARY 29,
2001 2000
------------ ------------
Operating activities:
Net loss .................................................................. $(52,344) $(33,752)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ...................................... 2,029 645
Amortization of deferred stock compensation ........................ 12,821 8,078
Issuance of common stock for services .............................. -- 457
Loss on disposal of assets ......................................... -- 19
Changes in operating assets and liabilities
Accounts receivable ............................................ (8,677) (5,060)
Prepaid expenses and other current assets ...................... (249) (918)
Accounts payable ............................................... (1,396) 2,195
Accrued expenses ............................................... 6,745 2,599
Deferred revenue ............................................... 5,320 9,195
Other liabilities .............................................. 622 609
-------- --------
Net cash used in operating activities ..................................... (35,129) (15,933)
-------- --------
Investing activities:
Purchases of available-for-sale short-term investments .................... (35,382) --
Maturities and sales of available-for-sale short-term investments ......... 16,092 --
Purchases of property and equipment ....................................... (1,624) (1,147)
Increase in other assets .................................................. (140) (560)
-------- --------
Net cash used in investing activities ..................................... (21,054) (1,707)
-------- --------
Financing activities:
Proceeds from issuance of preferred stock ................................. -- 30,081
Proceeds from issuance of common stock .................................... 2,713 1,281
Proceeds from issuance of treasury stock .................................. -- 11
Collections on notes receivable from stockholders ......................... 182 39
Principal payments under capital lease obligations ........................ (977) (206)
-------- --------
Net cash provided by financing activities ................................. 1,918 31,206
Effect of exchange rate changes on cash ................................... -- 11
-------- --------
(Decrease) increase in cash and cash equivalents .......................... (54,265) 13,577
Cash and cash equivalents, beginning of period ............................ 74,033 10,384
-------- --------
Cash and cash equivalents, end of period .................................. 19,768 23,961
-------- --------
Short-term investments, end of period ..................................... 24,226 --
======== ========
Total cash, cash equivalents and short-term investments, end of period .... $ 43,994 $ 23,961
======== ========
Supplemental disclosures of non-cash transactions:
Equipment purchased under capital lease obligations ....................... $ 1,737 $ 2,858
======== ========
Common stock issued for notes receivable from stockholders ................ $ -- $ 722
======== ========
Warrant issued for purchase of preferred stock for financing .............. $ -- $ 160
======== ========
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, us or
we), and, in the opinion of management, reflect all adjustments (consisting only
of normal recurring adjustments) necessary to fairly state Saba'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 Saba's audited consolidated financial
statements.
These unaudited condensed consolidated financial statements should be
read in conjunction with Saba's audited consolidated financial statements
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on August 29, 2000 and our unaudited condensed consolidated
financial statements included in our Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission on October 16, 2000 and on January 16,
2001. The results of operations for the three and nine months ended February 28,
2001 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 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 our initial public offering
in April 2000.
The calculations of historical and pro forma basic and diluted net loss
per share are as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2001 2000 2001 2000
------------ ----------- ------------ ------------
HISTORICAL
Net loss................................................... $ (15,078) $ (16,075) $ (52,344) $ (33,752)
========= ========= ========= =========
Weighted-average shares of common stock outstanding........ 44,604 17,935 44,144 15,846
Weighted-average shares of common stock subject
to repurchase........................................... (1,741) (2,414) (1,901) (1,342)
--------- --------- --------- ---------
Weighted-average shares of common stock used in
computing basic and diluted net loss per share.......... 42,863 15,521 42,243 14,504
========= ========= ========= =========
Basic and diluted net loss per share....................... $ (0.35) $ (1.04) $ (1.24) $ (2.33)
========= ========= ========= =========
PRO FORMA
Net loss................................................... $ (16,075) $ (33,752)
========= =========
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per share
(from above)............................................ 15,521 14,504
Adjustment to reflect the effect of the conversion of
preferred stock from the date of issuance............... 19,568 16,231
--------- ---------
Weighted-average shares of common stock used in computing
pro forma basic and diluted net loss per share......... 35,089 30,735
========= =========
Pro forma basic and diluted net loss per share............ $ (0.46) $ (1.10)
========= =========
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3. OTHER COMPREHENSIVE INCOME (LOSS)
Saba reports comprehensive loss in accordance with SFAS No. 130,
"Reporting Comprehensive Income." In fiscal 2000, Saba's components of
comprehensive loss consist of net loss and foreign currency translation
adjustments. For the three and nine months ended February 28, 2001, Saba's
components of comprehensive loss consist of net loss, foreign currency
translation adjustments and net unrealized gain on available-for-sale
securities.
The following table sets forth the calculation of comprehensive loss
for all periods presented (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss ............................... $(15,078) $(16,075) $(52,344) $(33,752)
Foreign currency translation gain (loss) 577 11 (12) 11
Unrealized gain on investments ......... 4 -- 43 --
-------- -------- -------- --------
Comprehensive loss ..................... $ (14,49) $(16,064) $(52,313) $(33,741)
======== ======== ======== ========
4. SEGMENT INFORMATION
Saba 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
31% and 21% of revenues were derived from outside North America in the three and
nine months ended February 28, 2001, respectively. In the three and nine months
ended February 29, 2000, less than 10% of revenues were derived outside North
America. At February 28, 2001, 14% of Saba's assets were located outside North
America as compared to less than 10% at February 29, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical in nature are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, hopes, intentions, beliefs and strategies regarding the future.
Such forward-looking statements include, but are not limited to, statements
regarding revenues from the Saba Learning Exchange; expected operating expenses,
non-cash expenses and losses; reduction in operating expenses in response to
economic conditions; the expansion of our business, operations and personnel;
the United States economy; the non-sustainability of prior growth rates,
research and development, sales and marketing, and general and administrative
expenses; the length of our sales cycles; the sufficiency of our cash resources
and credit facilities and our ability to raise additional funds; the lack of a
material impact of SFAS No. 133 on us; our ability to hedge exposure to foreign
currency risks; the concentration of our revenues from Saba Learning Enterprise;
our release of enhanced and improved versions of our products and services; the
use of our cash resources and credit facilities; and our intent to pursue
acquisitions. These forward-looking statements involve risks and uncertainties
including, but not limited to, the commercial viability of Saba Learning
Exchange; our limited operating history; the severity and duration of the
downturn in the United States economy; changes in the sales cycle; demand and
pricing of our products and services; the effectiveness of and our ability to
execute our business strategy; customer retention; personnel recruitment and
retention; our ability to manage growth; competitive products and services; the
complexities of conducting business globally; the acceptance, use and
improvement of the Internet; Internet security; government regulation;
technological change; our ability to release enhanced versions of our products;
product defects; infringement of third party rights; ability to enforce
proprietary rights; natural or technical disasters; our dependence on third
parties; access to capital; acquisition challenges; and year 2000 problems.
Actual results could differ materially from those projected in any
forward-looking statements as a result of these risks and uncertainties, or for
the reasons detailed below under the caption "Factors That May Affect Future
Operating Results" and in other sections of this Report on Form 10-Q, and in our
reports on Form 10-Q, 8-K and 10-K as filed with the Securities and Exchange
Commission from time to time. All forward-looking statements included in this
Report on Form 10-Q are based on information available to us
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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.
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 and our unaudited condensed consolidated
financial statements included in our Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission on October 16, 2000 and on January 16,
2001.
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 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 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 Transactions."
Prior to November 30, 1999, we had not established vendor-specific objective
evidence of fair value 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 term of
our contracts and therefore, recognize revenue ratably over the initial term,
generally twelve months, beginning upon contract signing. 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 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.
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If an agreement includes both license and service elements, the license
fee is recognized beginning on delivery of the software. 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 includes the cost of
software manuals and documentation, production media and shipping costs. Our
cost of services revenues includes 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 will fluctuate based on the mix of software and services sold.
Operating Expenses
Our operating expenses are classified into three general operational
categories: research and development, sales and marketing and general and
administrative. In addition, our operating expenses include amortization of
deferred stock compensation and other stock related 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 allowances for uncollectible accounts receivable and
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 February 28, 2001. 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 stock options or restricted stock. During the three and
nine months ended February 28, 2001, we amortized $3.3 million and $12.8
million, respectively, of deferred stock compensation and we had cumulatively
amortized $26.7 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 February 28, 2001, we had an accumulated
deficit of $119.2 million. Although our revenues have increased on a quarterly
basis since May 31, 1998, we have not achieved profitability and cannot be
certain that we will be able to sustain these growth rates or realize sufficient
revenues to achieve profitability. Although we may attempt from time to time to
reduce operating expenses in response to the downturns in the United States
economy, we generally expect 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 535 full-time employees at February 28, 2001. 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 also increase our operating expenses in the foreseeable future.
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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, electronic commerce and Internet software.
We may not be successful in addressing these risks and difficulties. Although we
have experienced significant growth in revenues in recent periods, we do not
believe that prior growth rates are sustainable or indicative of our future
operating results.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
Revenues
Total revenues increased to $14.5 million for the three months ended
February 28, 2001 from $5.2 million for the three months ended February 29,
2000. For the nine months ended February 28, 2001, revenues increased to $37.6
million from $10.4 million for the nine months ended February 29, 2000. The
growth in revenues period-over-period reflects our relatively early stage of
development and is primarily attributable to our expanding sales force and
increased average first year contract value. We do not expect revenues to
increase at the same rate in the future. During the three and nine months ended
February 28, 2001 and February 29, 2000, no customer represented more than 10%
of our revenues.
License revenues increased to $6.9 million, or 47% of total revenues,
for the three months ended February 28, 2001, from $2.6 million, or 50% of total
revenues, for the three months ended February 29, 2000. For the nine months
ended February 28, 2001, license revenues increased to $17.0 million from $4.5
million for the nine months ended February 29, 2000. The increases in the dollar
amounts of license revenues in both the three- and nine-month periods are
primarily attributable to increases in sales of licenses to new customers
resulting from increased headcount in our sales force.
Services revenues increased to $7.6 million, or 53% of total revenues,
for the three months ended February 28, 2001, from $2.6 million or 50% of total
revenues, for the three months ended February 29, 2000. For the nine months
ended February 28, 2001, services revenues increased to $20.6 million from $5.9
million for the nine months ended February 29, 2000. The increases in the dollar
amounts of services revenues are primarily attributable to increased
implementation and billable consulting headcount providing services in
connection with increased license sales and support services sold to our new
customers.
Deferred license and services revenues reflected on our consolidated
balance sheet were $17.4 million at February 28, 2001 as compared to $12.1
million at May 31, 2000. Our consolidated balance sheet at February 28, 2001
reflects a reduction in our accounts receivable, and a corresponding reduction
in our deferred revenue, of $3.5 million of uncollectible deferred revenue from
signed contracts. Because we generally recognize license revenues ratably over
the initial term of our contracts, the reduction did not have any impact on our
results of operations as such amounts were not yet recognized into revenue.
The mix of license and services revenues as a percentage of total
revenues has varied significantly due to our relatively early stage of
development.
We have seen a rapid and increasingly severe downturn in the United
States economy during the second and third quarters of fiscal 2001. While we
expect this economic downturn to continue well into the fourth quarter of fiscal
2001, there can be no certainty as to the severity or duration of this downturn.
We also cannot predict the extent and timing, if any, of the impact of the
economic downturn in the United States on economies in other countries and
geographic regions in which we conduct business. If the economic conditions in
the United States continue or worsen or if wider or global economic slowdowns
occur, the demand for our products and services may be reduced. Not only may
these economic slowdowns reduce our customers' and prospects' budgets for our
products and services, but also they may adversely affect our customers' ability
to pay for our products and services. Accordingly, these economic slowdowns may
have a material adverse impact on our business, operating results and financial
condition.
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Cost of Revenues
Total cost of revenues increased to $5.7 million for the three months
ended February 28, 2001, from $2.5 million for the three months ended February
29, 2000. For the nine months ended February 28, 2001, total cost of revenues
increased to $16.2 million from $5.2 million for the nine months ended February
29, 2000. To date, our cost of software license revenues has been insignificant.
The increases in the amounts of cost of revenues are primarily attributable to
the hiring of additional employees to support increased customer demand for our
implementation, consulting and support services. Cost of services revenues
represented 74% of services revenues for the three months ended February 28,
2001 and 96% of services revenues for the three months ended February 29, 2000.
For the nine months ended February 28, 2001, cost of services revenues
represented 79% of services revenues and 89% of services revenues for the nine
months ended February 29, 2000. The decreases 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 and an increased blended rate per hour
on sales of services to our customers.
Operating Expenses
Research and development. Research and development expenses increased
to $4.5 million for the three months ended February 28, 2001, from $4.1 million
for the three months ended February 29, 2000. For the nine months ended February
28, 2001, research and development expenses increased to $15.5 million from
$10.3 million for the nine months ended February 29, 2000. The increases are
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.
Sales and marketing. Sales and marketing expenses increased to $14.0
million for the three months ended February 28, 2001 from $8.4 million for the
three months ended February 29, 2000. For the nine months ended February 28,
2001, sales and marketing expenses increased to $40.1 million from $16.9 million
for the nine months ended February 29, 2000. These increases are primarily
attributable to our Saba marketing brand launch and campaign and 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.
General and administrative. General and administrative expenses
increased to $2.5 million for the three months ended February 28, 2001 from $1.5
million for the three months ended February 29, 2000. For the nine months ended
February 28, 2001, general and administrative expenses increased to $7.6 million
from $3.5 million for the nine months ended February 29, 2000. The increases are
primarily attributable to increases in the number of executive, finance and
administrative employees, as well as increases in allowances for doubtful
accounts and the amount of administrative and professional services fees,
including temporary staffing, legal and accounting fees.
Amortization of deferred stock compensation. During the three and nine
months ended February 28, 2001, we recorded deferred stock amortization of $3.3
million and $12.8 million, respectively. During the three and nine months ended
February 29, 2000, we recorded deferred stock amortization of $5.0 million and
$8.5 million, respectively.
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 $406,000 for the three months ended February
28, 2001, from $238,000 for the three months ended February 29, 2000. For the
nine months ended February 28, 2001, interest income and other, net increased to
$2.3 million from $394,000 for the nine months ended February 29, 2000. These
increases are 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. If revenues fall below our expectations, we will not be able to reduce
our spending rapidly in response to the shortfall. We anticipate that our sales
will continue to have long sales cycles. Therefore, the timing of future
customer contracts could be difficult to predict, making it very difficult to
predict revenues between quarters, and our operating results may vary
significantly.
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Other factors that could affect our quarterly operating results include
those described below and under the caption "Factors That May Affect Future
Operating Results."
o dependence of our revenues on a small number of large orders;
o our ability to attract new customers;
o any changes in revenue recognition policies and provisions and
interpretations of these provisions;
o our ability to license additional products to current customers;
o the announcement or introduction of new products or services by us or
our competitors;
o changes in the pricing of our products and services or those of our
competitors;
o variability in the mix of our products and services revenues in any
quarter;
o technical difficulties or service interruptions of our computer
network systems or the Internet generally; and
o 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 $122.7
million through February 28, 2001, equipment leases and other debt. As of
February 28, 2001, we had outstanding equipment leases of $3.7 million and $44.0
million of cash, cash equivalents and investments.
Cash used in operating activities was $35.1 million during the nine
months ended February 28, 2001 and $15.9 million during the nine months ended
February 29, 2000. The cash used during these periods was primarily attributable
to net losses of $52.3 million and $33.8 million offset by $12.8 million and
$8.1 million of amortization of deferred stock compensation during the nine
months ended February 28, 2001 and February 29, 2000, respectively. Also
contributing to the use of cash in operations were increases in accounts
receivable of $8.7 million and $5.1 million offset by increases in deferred
revenue of $5.3 million and $9.2 million and accrued expenses of $6.7 million
and $2.6 million during the nine months ended February 28, 2001 and February 29,
2000, respectively.
Cash used in investing activities during the nine months ended February
28, 2001 and February 29, 2000 were comprised primarily of investments in
property and equipment and for the nine months ended February 28, 2001, included
$19.3 million in net purchases of investments. Investments in property and
equipment, excluding equipment acquired under capital leases, were $1.6 million
during the nine months ended February 28, 2001 and $1.1 million during the nine
months ended February 29, 2000.
Cash provided by financing activities was $1.9 million during the nine
months ended February 28, 2001 resulting primarily from proceeds from issuances
of common stock in connection with Saba's Employee Stock Purchase Plan and
collections on notes receivable from stockholders, partially offset by payments
on capital lease obligations. Cash provided by financing activities was $31.2
million during the nine months ended February 29, 2000, resulting primarily from
net proceeds from the issuance of preferred stock.
At February 28, 2001, 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.
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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 risks typical of an
international business. Such factors include, but are not limited to, changes in
foreign currency exchange rates, local regulations and restrictions and
political climates, weak economic conditions in foreign markets, differing tax
structures and foreign currency rate volatility. Sales are primarily made in
U.S. Dollars; however, as we continue to expand our operations, more of our
contracts may be denominated in Australian Dollars, British Pounds, Canadian
Dollars, Euros, French Francs and German Marks. A strengthening of the U.S.
Dollar could make our products less competitive in foreign markets.
Our exposure to foreign exchange rate fluctuations also arises in part
from the translation of the financial results of foreign subsidiaries into U.S.
dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability.
Our investments are made in accordance with an investment policy
approved by our Board of Directors. At February 28, 2001, the average maturity
of our investment securities was approximately three months. All investment
securities had maturities of less than two years. 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 investments, which are primarily money market
funds and commercial paper, we believe that there is no material market risk
exposure.
All investments are carried at market value, which approximates cost.
At February 28, 2001, 100% of our investments were considered available for sale
securities and had maturities of one year or less. The weighted average interest
rate of our portfolio was 6.29% at February 28, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". We
are required to adopt SFAS No. 133, as amended, for the fiscal 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 (SEC) issued
Staff Accounting Bulletin (SAB) 101 regarding recognition, presentation and
disclosure of revenues. In March 2000, the SEC issued SAB 101A "Amendment:
Revenue Recognition in Financial Statements," which delays implementation of SAB
101 until our second quarter of fiscal 2001. In June 2000, the SEC issued SAB
101B "Second Amendment: Revenue Recognition in Financial Statements," which
delays the implementation of SAB 101 until our fourth quarter of fiscal 2001. We
adopted SAB 101 in the first quarter of fiscal 2001 and it did not have any
material effect on our accounting practices or financial results.
In March 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on EITF 00-2, "Accounting for Web Site Development Costs", EITF 00-2
discusses how an entity should account for costs incurred to develop a web site.
We adopted EITF 00-2 and it has not had any material effect on our accounting
practices or financial results.
In March 2000, the EITF reached a consensus on EITF 00-3, "Application
of AICPA Statement of Position (SOP) 97-2 to Arrangements that Include the Right
to Use Software on Another Entity's Hardware". EITF 00-3 discusses whether SOP
97-2 applies to arrangements that require the vendor to host the software and
whether SOP 97-2 applies to arrangements in which the customer has an option to
take delivery of the software and, if so, when delivery of the software occurs
and how the vendor's hosting obligation impacts revenue recognition. We adopted
this EITF and it has not had a material impact on our results of operations.
In March 2000, the FASB 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
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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 has not had any material
effect 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:
o risks that our revenue forecasts may be incorrect because of our
limited sales to date and our long sales cycle;
o risks associated with our dependence on Saba Learning Enterprise
and related services for substantially all of our revenues for the
foreseeable future;
o risks that our strategy of establishing Saba Learning Exchange may
not be successful; and
o 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, although we may
attempt from time to time to reduce operating expenses in response to downturns
in the United States economy, we generally 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 February 28, 2001, we had an aggregate
of $11.7 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
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. Although we may attempt from time to time to reduce
operating expenses in response to downturns in the United States economy, we
generally expect 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
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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 during fiscal 2000 and during the nine months
ended February 28, 2001. 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.
WE ARE EXPOSED TO RECENT UNFAVORABLE ECONOMIC CONDITIONS
We have seen a rapid and increasingly severe downturn in the United
States economy during the second and third quarters of fiscal 2001. While we
expect this economic downturn to continue well into the fourth quarter of fiscal
2001, there can be no certainty as to the severity or duration of this downturn.
We also cannot predict the extent and timing, if any, of the impact of economic
downturns in the United States on economies in other countries and geographic
regions in which we conduct business. If the economic conditions in the United
States continue or worsen or if wider or global economic slowdowns occur, the
demand for our products and services may be reduced. Not only may these economic
slowdowns reduce our customers' and prospects' budgets for our products and
services, but also they may adversely affect our customers' ability to pay for
our products and services. Accordingly, these economic slowdowns may have a
material adverse impact on our business, operating results and financial
conditions.
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
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Saba Learning Exchange. If this business strategy is flawed, or if we are unable
to execute it effectively, our revenues may 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. Additionally,
volatility or a lack of positive performance in our stock price may adversely
affect our ability to retain key employees, all of whom have been granted stock
options.
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 535 employees at February 28, 2001. 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:
o improve existing and implement new operational, financial and
management controls, reporting systems and procedures;
o install enhanced management information systems; and
o hire, train, retain, motivate and manage our employees.
We may not be able to install adequate management information and
control systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. If we are unable to manage growth effectively, our business
would be seriously harmed.
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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:
o companies that operate Internet-based marketplaces for the sale of
on-line and off-line learning;
o companies that operate Internet-based marketplaces for the sale of
goods and services that may decide to evolve their marketplaces to
include learning offerings;
o Internet portals that offer learning content;
o companies that market and license training management systems;
o enterprise software vendors that offer human resources information
systems training modules; and
o 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 less than 10% of our revenues in
the three and nine months ended February 29, 2000, 31% of our revenues in the
three months ended February 28, 2001 and 21% of our revenues in the nine months
ended February 28, 2001. We intend to expand our international presence in the
future. Conducting business outside of the United States is subject to certain
risks, including:
o changes in regulatory requirements and tariffs;
o language barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles and greater difficulty in collecting
accounts receivable;
o reduced protection of intellectual property rights;
o potentially harmful tax consequences;
o fluctuating exchange rates;
o price controls and other restrictions on foreign currency;
o difficulties in obtaining import and export licenses;
o the burden of complying with a variety of foreign laws; and
o political or economic constraints on international trade or
instability.
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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
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:
o user privacy;
o taxation;
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o content;
o right to access personal data;
o copyrights;
o distribution; and
o 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 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
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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 seven patent applications
in the U.S. We cannot assure you that any patents will be issued or, if issued,
such patents will protect our intellectual property or 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
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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:
o difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
o the diversion of management's attention from other business
concerns;
o risks of entering markets in which we have no or limited prior
experience; and
o 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:
o the announcement of new products and services or product and
service enhancements by us or our competitors;
o quarterly variations in our results of operations or those of our
competitors;
o changes in earnings estimates or recommendations by securities
analysts that may follow our stock;
o developments in our industry; and
o general market conditions and other factors, including factors
unrelated to our operating performance or the operating
performance of our competitors.
In addition, the stock market in general, and the Nasdaq National
Market and technologies companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of these companies. Broad market and industry trends
may also materially and adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been initiated against these companies.
Class-action litigation, if initiated, could result in substantial costs and a
diversion of management's attention and resources.
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
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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)
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
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
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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.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K:
None.
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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.
April 16, 2001 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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