Filed On 8/29/02 4:40pm ET · SEC File 0-30221 · Accession Number 1012870-2-3646
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
8/29/02 Saba Software Inc 10-K 5/31/02 5:139 Donnelley R R & S..13/FA
Annual Report · Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K Annual Report HTML 996K
2: EX-10.10 Employment Letter Dated March 25, 2002 HTML 29K
3: EX-10.11 Severance Agreement Dated April 1, 2002 HTML 25K
4: EX-21.1 List of Subsidiaries of Saba HTML 9K
5: EX-23.1 Consent of Ernst and Young Llp HTML 6K
10-K · Annual Report
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2002
|
¨ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from
to
SABA SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
| (State or Other
Jurisdiction of Incorporation or Organization) |
|
94-3267638 (I.R.S. Employer
Identification Number) |
| |
|
|
| 2400 Bridge Parkway Redwood
Shores, California (Address of Principal Executive Offices) |
|
94065-1166 (Zip Code)
|
(Registrant’s Telephone Number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 31, 2002 was
approximately $95,321,909 (based on a closing sale price of $2.43 per share as reported for the NASDAQ National Market). Shares of common stock beneficially held by each executive officer and director and by each person who beneficially owns 5% or
more of the outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Portions of Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 7, 2002 are incorporated by reference in Part III of
this Form 10-K to the extent stated herein.
PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities and Exchange Act of 1934 (the “Exchange Act”). All statements in this Annual Report
other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any statements of the plans and objectives for future operations and any statement of assumptions underlying any of the
foregoing. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,” or the negative
thereof or other comparable terminology are forward-looking statements. Forward-looking statements include (i) in Item 1, statements regarding competition and the merit of claims in litigation, (ii) in Item 2, statements regarding the adequacy
of our existing facilities to meet anticipated needs, (iii) in Item 3, statements regarding the resolution and effect of pending litigation, (iv) in Item 5, statements regarding payment of cash dividends in the future, and (v) in Item 7, statements
regarding an increase in operating expenses, including sales and marketing, research and development, and general and administrative, incurrence of non-cash expenses relating to stock compensation, amortization of purchased intangible assets and any
potential goodwill impairment, growth of our operations and personnel, fluctuations in operating results from quarter to quarter, long sales cycles, effects of our voluntary stock option exchange program, possible acquisitions and strategic
ventures, expansion of our sales and marketing organization, sufficiency of cash resources, credit facilities and cash flows to meet working capital, capital expense and business expansion requirements, development of new or enhanced applications
and services, impact of SFAS No. 143, 144 and 146 and EITF No. 01-14, and the significance of Saba Learning Enterprise Edition and related services, as well as other products, for our revenues. These forward-looking statements involve risks and
uncertainties, and it is important to note that our actual results could differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors
detailed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Impact Future Operating Results.” All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in
our Reports on Form 10-Q.
ITEM 1: BUSINESS
Overview
We are a
leading provider of human capital development and management infrastructure software and services. Our software solutions are designed to enable businesses and governments to increase performance by automating the processes necessary to develop and
manage the people, or human capital, that comprise their “extended enterprise” of employees, customers, partners and suppliers.
Our offerings are designed to increase the return to the organization on their investment in human capital by cost-effectively meeting the learning and performance management needs of enterprises across geographies and
industries. The Saba solutions provide information and business processes that empower managers to more tightly align organizational capabilities with desired business outcomes. Organizations implementing Saba solutions can automate competency
targeting and assessment, development planning, learning and knowledge content creation and delivery, resource allocation, performance management and reporting.
We were incorporated in Delaware in April 1997. Our headquarters are located at 2400 Bridge Parkway, Redwood Shores, California 94065, and our telephone number at this location is (650) 696-3840.
2
Products and Services
Saba Learning
Saba Learning
is an Internet-based, learning management system that allows an organization to improve performance across the extended enterprise by effectively deploying learning that supports business objectives. Saba Learning automates the learning processes
for both learners and learning providers. Saba Learning is available in Enterprise and ASP editions.
Saba
Performance
Saba Performance is a globally scalable performance management system designed to allow an
organization to quickly and effectively execute business strategies by automating key business processes. With Saba Performance users can set, align and track business goals; assess performance, competency and certification requirements against
those goals; plan development activities to meet those requirements; track, and provide feedback on, individual progress across the extended enterprise and measure business and individual performance improvement before repeating the performance
management cycle. Saba Performance is currently in limited release.
Saba Exchange
Saba Exchange is designed to enable enterprises and learning providers to buy and sell learning and knowledge content and to promote
informal learning and collaboration within communities of practice. Saba Exchange has broad functionality, including search capability for thousands of publicly available learning offerings by competency, certification, role, industry, geography,
language, provider and delivery method; and community features such as chat rooms and discussion groups.
Saba
Content
Saba Content is an enterprise-scale Learning Content Management Server (LCMS), that
manages the processes and procedures of authoring, deploying, storing and managing learning content. A robust learning object repository, Saba Content is standards-compliant and supports major learning content formats. Integrating with
industry-leading authoring tools such as Saba Publisher and Dreamweaver, Saba Content provides import wizards that power efficiency gains for those of our customers who create their own content. Saba Content supports many multimedia formats.
Saba Publisher
Saba Publisher is a content creation software product that enables quick and easy creation of standards-compliant learning content. Through a simple and intuitive interface, Saba Publisher empowers
users with no programming experience to create media-rich, interactive learning content. Saba Publisher is fully integrated into the Saba3 Release 4 platform and allows our customers to maximize the return on their overall system with a powerful yet
simple content creation tool.
Saba Dialog and Collaboration
Saba Dialog and Collaboration combine to provide an on-line environment supporting real-time chat, knowledge storage and retrieval and
interactive support. Rather than relying on the inherently insecure public Instant Messaging platforms available to users, Saba Dialog allows for secure, ‘behind the firewall’ chat, including the ability to record, store and index
conversations as they happen.
Saba Live!
Saba Live! is a distance-learning tool, allowing our customers to hold real-time events in one place, while allowing participants to access them from anywhere in the world
via the Internet. Providing virtual classroom capabilities, Saba Live! allows our customers to save significant travel expenses associated with worldwide events.
3
Services
We offer comprehensive services to assist in the successful implementation of our products. As of May 31, 2002, we employed approximately 95 people worldwide in
services-related activities.
Our global services organization supports multiple offerings, including:
| |
• |
|
Strategic workshops. Saba Strategic Workshops are designed to enable organizations to effectively link human capital development and management to
business strategies. Offerings include developing new human capital development and management strategies, change management, developing and deploying competency models, and measurement and evaluation strategies. |
| |
• |
|
Consulting services. Our consulting services include the definition of business objectives, the design of phased plans for achieving these objectives,
technical solution specifications, establishment of implementation timelines and resource requirements, installation of Saba solutions, systems configuration, data loading, custom report and notification design, website development, enterprise
system integration and post-implementation assessment. |
| |
• |
|
Customer support. We provide several product support options so that customers may utilize their own resources to the degree desired and leverage their
existing investments in customer support. Options include enterprise support, an end-user help desk and on-site support. |
| |
• |
|
Education services. We provide a broad range of education offerings in a variety of formats, including instructor-led training and web- and
technology-based training. Course curricula, designed to enable customers to fully exploit the value of the Saba solutions, include product training, project team training, and technology training. |
| |
• |
|
Hosting services. We offer hosting services for our software in support of our customers’ development, testing, and production environments. Our
hosting offerings include security administration and backup and recovery services. |
Customers
Our customers include a wide spectrum of large, global organizations in the automotive, communications, computer and
electronics, consumer package goods, energy, financial services, government, manufacturing, medical equipment, pharmaceutical, professional services, software and transportation industries. Of the companies on the Fortune 500, three of the top five
are our customers, as well as all of the ‘Big 3’ automakers and three of the ‘Big 5’ consulting firms. In the public sector, our customers include the Army University Access Online, the Federal Law Enforcement Training Center and
several branches of the U.S. Government.
Alliances
As of May 31, 2002, we have entered into strategic partnership agreements with three of the ‘Big 5’ consulting firms—as well as a number of global
providers—who act as systems integrators and implementation partners for Saba solutions. These partnerships and the associated training of qualified personnel in these organizations greatly increase the number of consulting professionals
trained to implement Saba solutions. We have several hundred trained consultants including third-party consultants. Additionally, systems integrators provide opportunities for our sales managers to gain entry to executive levels at our target
accounts.
We have also entered into several alliance agreements with packaged content providers, custom content
developers, and content authoring and learning delivery tool providers in order to increase the range of content offerings available to our customers. The Saba Content Alliance Program helps our content partners create and deliver learning content
for use in conjunction with Saba solutions through support of industry standards applicable to a broad variety of media formats, including web-based training, computer-based training, video, and asynchronous and synchronous delivery, as well as
through support of traditional forms of learning such as instructor-led classes, seminars, and workshops. Content Alliance members also provide numerous content offerings available through Saba
4
Exchange. In support of this program, we also operate a content developers resource center and testing lab that provides our content partners with direct access to Saba systems for standards
compliance testing.
Sales and Marketing
We license our products to organizations primarily through a worldwide direct sales force. Our direct sales efforts target large organizations including Global 2000 businesses and government
organizations. As of May 31, 2002, we had 85 sales and marketing professionals located in 19 sales offices, 11 of which are in the United States.
We focus our marketing efforts on generating sales lead, supporting proposal and sales efforts, creating market awareness of our solutions and establishing strategic relationships. Our marketing
activities include seminar programs, speaking engagements, industry trade shows, direct marketing, industry marketing, website and e-mail programs and public relations events.
Technology
Our product architecture facilitates the rapid
development, deployment and customization of Internet-based solutions for organizational learning and performance management. Our products share a common core foundation, based on widely adopted standard Internet technologies that leverage thin
client computing and electronic commerce capabilities over the Internet.
The Core Foundation
Our core foundation consists of a scalable application server and a database server and uses standard web-browser clients. The
core foundation accelerates application development by providing transaction management, persistence management and resource pooling services so application developers can focus on building business logic and user interfaces. Key features of this
core foundation include:
| |
• |
|
Open interfaces. Published Java application programming interfaces, or APIs, enable developers to build custom Saba application extensions, and public
database views allow analysts to design custom reports using standard reporting tools. |
| |
• |
|
Scalability. Scalability is accomplished using load-balancing techniques, allowing multiple servers to be deployed to handle peak periods when the
largest number of concurrent users is expected on the system. |
| |
• |
|
Standard relational database server. We use standard relational database servers. To enhance performance and ensure that users are served efficiently,
the core foundation executes database stored procedures to optimize intense database processing. The core foundation currently supports Oracle and Microsoft SQL Server databases. |
| |
• |
|
Java-based application server. The business and application logic reside on a Java application server. This Java-based architecture allows us to deploy a
site across a farm of servers with diverse operating environments, such as Microsoft Windows NT, Sun Solaris, Linux or HP UX. |
| |
• |
|
Electronic commerce enabled. The core foundation includes interfaces to external electronic payment services, enabling real-time electronic commerce.
|
| |
• |
|
Multiple language support. The core foundation is designed to support multiple languages. Currently Saba solutions support 14 languages.
|
| |
• |
|
Workflow monitoring of learning object changes. A workflow component applies business rules when learning objects change. For example, e-mail can
automatically be sent to students when details about their class change. |
| |
• |
|
Integration with legacy enterprise applications. The core foundation is capable of exchanging data with external legacy systems. We provide connectors to
the leading human resources and financial systems. |
5
Research and Development
Our research and development operations are organized around software platform and applications development initiatives. These two
development activities share resources and collaborate on design and development. Core teams are responsible for platform and infrastructure development, application development, user interface and application design, enterprise connectivity,
Internet applications and design, quality assurance, documentation and release management. As of May 31, 2002, we had 107 research and development employees.
Our development methodology provides guidelines for planning, controlling and implementing projects. To continue to address market requirements, we consult with our consulting, support, and sales
teams, as well as our customers, in the product development cycle. We conduct our development efforts at multiple sites in the United States and India, which enables continuous development and debugging on a 7 days per week, 24 hours per day
schedule.
Competition
The market for our products and services is intensely competitive, dynamic and subject to rapid technological change. The intensity of competition and the pace of change are expected to increase in the
future. Competitors vary in size and in the scope and breadth of the products and services they offer. Although we believe that we offer the most comprehensive Internet-based learning and performance management platform, we encounter competition
with respect to different aspects of our solutions from a variety of sources including:
| |
• |
|
companies that market and license training, learning, performance, content, resource, talent and staffing management systems; |
| |
• |
|
enterprise software vendors that offer human resources information systems and employee relationship management systems with training and performance modules;
|
| |
• |
|
potential customers’ internal development efforts; |
| |
• |
|
companies that operate Internet-based marketplaces for the sale of on-line learning; |
| |
• |
|
companies that operate Internet-based marketplaces for the sale of goods and services and could potentially decide to evolve their marketplaces to include
content offerings; and |
| |
• |
|
Internet portals that offer learning content, performance support tools or recruiting services. |
We expect additional competition from other established and emerging companies as the market for Internet-based, human capital development
and management solutions continues to evolve. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business.
We believe the principal competitive features affecting our market include:
| |
• |
|
breadth and depth of the solution; |
| |
• |
|
a significant installed base of Global 2000 and government customers; |
| |
• |
|
the ability to support all forms of content offerings; |
| |
• |
|
product quality and performance; |
| |
• |
|
product features and functions; |
| |
• |
|
customer service and support; |
| |
• |
|
ease of implementation; |
| |
• |
|
price to performance ratio. |
6
Although we believe that our solutions currently compete favorably with respect
to these factors, our market is relatively new and is changing rapidly. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, technical, service,
support, marketing and other resources.
Proprietary Rights
Proprietary rights are important to our success and our competitive position. To protect our proprietary rights, we rely on copyright, trademark, patent and trade secret
laws, confidentiality procedures and contractual provisions.
We license rather than sell our software products
and require our customers to enter into written license agreements, which impose restrictions on the use, copying and disclosure of our software. In addition, we seek to avoid disclosure of our trade secrets through a number of means, including but
not limited to, requiring those persons with access to our proprietary information to execute confidentiality agreements with us. These contractual provisions, however, may be unenforceable under the laws of some jurisdictions and foreign countries.
We seek to protect our software, documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. In addition, we have filed nine 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, other parties may independently develop similar or competing technologies or design around any patents that may be issued to us. It is possible that any patent issued to us may not provide any competitive advantages, that
we may not develop future proprietary products or technologies that are patentable, and that the patents of others may seriously limit our ability to do business. In this regard, we have not performed any comprehensive analysis of patents of others
that may limit our ability to do business.
We have applied for registration of several trademarks, including
“Saba”, in the United States and in various foreign countries and will seek to register additional trademarks as appropriate. There can be no assurance that we will be successful in obtaining the trademarks for which we have applied. Even
if these applications are approved, the trademarks may be successfully challenged by others or invalidated. If the applications are not approved because third parties own the trademarks, the use of the trademarks will be restricted unless we enter
into arrangements with the third parties that may be unavailable on commercially reasonable terms.
We cannot
assure you that any of our proprietary rights with respect to our products or services will be viable or of value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries are
uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products
exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States, and effective copyright, trademark and
trade secret protection may not be available in those jurisdictions. Our means of protecting our proprietary rights may not be adequate to protect us from the infringement or misappropriation of such rights by others.
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights,
particularly in the software and Internet-related industries. On May 31, 2002, IP Learn, LLC (IP Learn) filed a lawsuit against us alleging that we infringed a number of patents assigned to IP Learn and asking the court for a preliminary and
permanent injunction, as well as unspecified damages. We believe that IP Learn’s claims are without merit, and we intend to defend against them vigorously. We could become subject to additional intellectual property infringement claims as the
number of our competitors grows
7
and our products and services overlap with competitive offerings. Any of these claims, even if not meritorious, could be expensive to defend and could divert management’s attention from
operating our company. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial award of damages and to develop noninfringing technology, obtain a license or cease selling the
products that contain the infringing intellectual property. We may be unable to develop noninfringing technology or obtain a license on commercially reasonable terms, if at all.
Employees
As of May 31, 2002, we had a total of 333
employees, including 107 in research and development, 85 in sales and marketing, 95 in services and 46 in administration and finance. Of these employees, 244 were located in North America and 89 were located outside of North America. None of our
employees is represented by a collective bargaining agreement, and we have not experienced any work stoppages. We consider our relations with our employees to be good. Our future success depends on our continuing ability to attract and retain highly
qualified technical, sales and senior management personnel.
ITEM 2: PROPERTIES
Facilities
Our principal executive offices occupy approximately 48,000 square feet in Redwood Shores, California under a lease that expires in April 2014. We have additional leased facilities in the Annapolis, Chicago, Denver, Detroit,
New Jersey, Philadelphia, and Washington D.C. metropolitan areas and in Australia, Canada, France, Germany, India and the United Kingdom. We believe that our facilities are adequate to meet our needs for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
In November 2001, a complaint was filed in the United States District Court for the Southern District of New York against us, certain of our officers and directors, and
certain underwriters of our initial public offering. The complaint was purportedly filed on behalf of a class of certain persons who purchased our common stock between April 6, 2000 and December 6, 2000. The complaint alleges violations by us and
our officers and directors of the Securities Act of 1933 in connection with certain alleged compensation arrangements entered into by the underwriters in connection with the offering. An amended complaint was filed in April 2002. Similar complaints
have been filed against hundreds of other issuers that have had initial public offerings since 1998. The complaints have since been consolidated into a single action. We intend to vigorously defend against this action. Although no assurance can be
given that this matter will be resolved favorably, we believe that the resolution of this lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows.
On May 31, 2002, IP Learn, LLC (IP Learn) filed a complaint against us in the United States District Court for the Northern District of
California. The compliant alleges that we infringed a number of U.S. patents assigned to IP Learn and asks the court for a preliminary and permanent injunction, as well as unspecified damages. Substantially similar complaints have been filed against
at least three other companies in our industry. We believe that the complaint is without merit, and we intend to defend against it vigorously. Although no assurance can be given that this matter will be resolved favorably, we believe that the
resolution of this lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows.
We are also party to various legal disputes and proceedings arising from the ordinary course of general business activities. While, in the opinion of management, resolution of these matters is not expected to have a material
adverse effect on our consolidated financial position, results of operations or cash flows, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material to us.
8
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5: MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since
our initial public offering on April 7, 2000, our common stock has traded on the Nasdaq National Market under the symbol “SABA.” The following table sets forth the range of high and low closing sales prices of our common stock for the
periods indicated:
|
|
High
|
|
Low
|
| First Quarter |
|
$ |
38.81 |
|
$ |
15.13 |
| Second Quarter |
|
$ |
32.00 |
|
$ |
13.63 |
| Third Quarter |
|
$ |
20.00 |
|
$ |
8.75 |
| Fourth Quarter |
|
$ |
14.60 |
|
$ |
3.75 |
|
|
High
|
|
Low
|
| First Quarter |
|
$ |
16.41 |
|
$ |
8.00 |
| Second Quarter |
|
$ |
7.93 |
|
$ |
1.69 |
| Third Quarter |
|
$ |
6.44 |
|
$ |
3.25 |
| Fourth Quarter |
|
$ |
4.93 |
|
$ |
2.49 |
We had approximately 523 shareholders of record as of May 31, 2002.
We have not declared or paid any cash dividends on our common stock, and presently we intend to retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future.
On June 15, 2001, we issued approximately 999,945 shares of our common stock in connection
with the acquisition of Ultris Inc., which includes 198,465 shares of stock subject to repurchase. These shares were issued in accordance with the exemption set forth in Section 4(2) of the Securities and Exchange Act of 1933, as amended. These
sales were made without general solicitation or advertising.
9
Item 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes to our consolidated financial statements and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for each of the three years ended May 31,
2002, 2001 and 2000 and the consolidated balance sheet data as of May 31, 2002 and 2001 are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the
year ended May 31, 1999 and for the period from April 16, 1997 (inception) through May 31, 1998 and the balance sheet data as of May 31, 2000, 1999 and 1998 are derived from our audited financial statements previously filed with the SEC.
Selected Consolidated Financial Data
(in thousands, except per share data)
| |
|
Years ended May 31,
|
|
|
1998
|
|
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
| Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues (1) |
|
$ |
55,648 |
|
|
$ |
54,955 |
|
|
$ |
18,755 |
|
|
$ |
1,939 |
|
|
$ |
40 |
|
| Gross profit (loss) |
|
|
39,470 |
|
|
|
31,435 |
|
|
|
8,972 |
|
|
|
675 |
|
|
|
(32 |
) |
| Total operating expenses |
|
|
64,812 |
|
|
|
96,893 |
|
|
|
64,444 |
|
|
|
11,572 |
|
|
|
1,531 |
|
| Loss from operations |
|
|
(25,342 |
) |
|
|
(65,458 |
) |
|
|
(55,472 |
) |
|
|
(10,897 |
) |
|
|
(1,563 |
) |
| Net loss |
|
|
(25,467 |
) |
|
|
(62,791 |
) |
|
|
(54,441 |
) |
|
|
(10,852 |
) |
|
|
(1,571 |
) |
| Basic and diluted net loss per share |
|
|
(0.55 |
) |
|
|
(1.49 |
) |
|
|
(2.94 |
) |
|
|
(0.84 |
) |
|
|
(0.17 |
) |
| Shares used in computing basic and diluted net
loss per share |
|
|
46,491 |
|
|
|
42,224 |
|
|
|
18,548 |
|
|
|
12,987 |
|
|
|
9,439 |
|
| |
|
|
|
| |
|
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
| Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash, cash equivalents and short-term investments |
|
$ |
22,141 |
|
|
$ |
34,333 |
|
|
$ |
78,926 |
|
|
$ |
10,384 |
|
|
$ |
41 |
|
| Working capital (deficiency) |
|
|
14,325 |
|
|
|
18,956 |
|
|
|
65,090 |
|
|
|
7,807 |
|
|
|
(481 |
) |
| Total assets |
|
|
48,688 |
|
|
|
68,111 |
|
|
|
97,705 |
|
|
|
14,068 |
|
|
|
239 |
|
| Long-term obligations, less current portion |
|
|
3,391 |
|
|
|
3,784 |
|
|
|
3,086 |
|
|
|
384 |
|
|
|
578 |
|
| Total stockholders’ equity (deficit) |
|
|
24,346 |
|
|
|
27,959 |
|
|
|
68,704 |
|
|
|
8,429 |
|
|
|
(974 |
) |
(1) |
|
Reflects reclassification of billed expenses as revenue in accordance with EITF No. 01-14 |
Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of human capital development and management infrastructure software and services. Our software
solutions are designed to enable businesses and governments to increase performance by automating the processes necessary to develop and manage the people, or human capital, that comprise their “extended enterprise” of employees,
customers, partners and suppliers. Our offerings are designed to increase the return to the organization on their investment in human capital by cost-effectively meeting the learning and performance management needs of enterprises across geographies
and industries. Our solutions provide information and business processes that empower managers to more tightly align organizational capabilities with desired business outcomes.
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General
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 products and began to generate revenues from software license fees, implementation and consulting services fees and support fees in April 1998. We began to operate Saba Exchange in
December 1999 and our application service provider (ASP) edition of Saba Learning in September 2000, and first shipped our limited release version of Saba Performance in May 2001. To date, we have not generated significant revenues from Saba
Exchange, Saba Learning ASP Edition or Saba Performance.
Sources of Revenues and Revenue
Recognition
To date, we have generated revenues primarily from licensing Saba Learning Enterprise Edition, and
providing related services, including implementation, consulting, support, hosting and education. Our revenues reflect billed expenses as revenue in accordance with Emerging Issues Task Force (EITF) No. 01-14. Previously we recorded billed expenses
as a reduction to cost of services to offset the related cost incurred.
We recognize revenues in accordance with
the provisions of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions.” Under SOP 97-2, as amended, we recognize revenues when all of the following conditions are met:
| |
• |
|
persuasive evidence of an agreement exists; |
| |
• |
|
delivery of the product has occurred; |
| |
• |
|
the fee is fixed or determinable; and |
| |
• |
|
collection of these fees is probable. |
SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue
recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as support services, based on the relative fair values of the elements. Our determination of fair value of each element in multi-element
arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant
authority to do so, for an element not yet sold separately.
Prior to November 30, 1999, we had not established
VSOE of fair value for our support services. Accordingly, we recognized the revenue generated from these multiple-element arrangements ratably over the period during which the support services were provided, which was generally 12 months.
A substantial majority of our licenses entered into from November 30, 1999 to August 31, 2001 included rights to
unspecified additional platform versions of our software, extended payment terms and/or services essential to the functionality of the software. For licenses that included rights to unspecified additional platform versions, we recognized license
revenues ratably over the period during which we were required to provide the additional platform versions beginning in the month when all other revenue recognition criteria had been met. Revenue from contracts with extended payment terms are
recognized at the lesser of amounts due and payable or the amount of the arrangement fee otherwise recognizable. For contracts that involve significant customization and implementation or consulting services essential to the functionality of the
software, the license and services revenues are recognized over the service delivery period using the percentage-of-completion method. We use labor hours incurred as a percentage of total expected hours as the measure of progress towards completion.
A substantial majority of our licenses entered into after August 31, 2001 do not provide for unspecified additional platform versions, extended payment terms or service essential to the functionality of the software. Revenues derived from these
licenses are recognized on delivery if the other conditions of SOP 97-2 are satisfied. Revenues from our application service provider offering and from our hosting services are generally recognized ratably over the term of the arrangement.
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Support revenue is recognized ratably over the support term, typically 12 months,
and revenue related to implementation, consulting, education and other services is generally recognized as the services are performed. Although we primarily provide implementation and consulting services on a time and materials basis, a significant
portion of these services has been provided on a fixed-fee basis.
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 manuals and product documentation, production media, shipping costs and royalties to third parties. Our cost of services revenues includes salaries and related expenses for our professional services organization, as well as
third-party hosting costs. Because our cost of services revenues is greater than cost of license revenues, cost of total revenues as a percentage of total revenues may fluctuate based on the mix of products and services sold.
Operating Expenses
Our operating expenses are classified into three general operational categories: research and development, sales and marketing, and general and administrative. In addition, our operating expenses
include amortization of deferred stock compensation and other stock charges, and amortization of goodwill and purchased intangible assets.
We classify all charges, except stock compensation and other stock 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 headcounts. 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 doubtful accounts 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. These charges were recorded during fiscal 1999 and 2000 and reduced in fiscal 2001 and 2002 as a result of cancellation of stock options resulting from employee attrition and reductions in workforce. 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.
During the year ended May 31, 2002, we also recorded deferred stock compensation of $2.8 million for the intrinsic value of stock subject to repurchase assumed by us in connection with the acquisition of Ultris Inc. These amounts are included as a
component of stockholders’ equity and are being amortized by charges to operations over the vesting period of the restricted stock using the graded vesting method. The amortization of the remaining deferred stock compensation will result in
additional charges to operations through fiscal 2005.
Our March 2001 acquisition of Human Performance
Technologies, Inc. resulted in purchased intangible assets of $4.6 million. These assets are being amortized on a straight-line basis over their estimated useful lives of six months to three years. Our June 2001 acquisition of Ultris Inc. resulted
in goodwill and purchased intangible assets of $9.1 million. The intangible assets are being amortized on a straight-line basis over their estimated useful lives of six months to three years. Prior to our adoption of Statement of Financial
Accounting Standards (SFAS) No. 142 on June 1, 2002, goodwill was being amortized over its estimated useful life of three years. The net value of goodwill on June 1, 2002 will cease to be amortized but will be subject to an annual impairment test in
accordance with SFAS No. 142.
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History of Losses
We have incurred significant losses and negative cash flows from operations since our inception. As of May 31, 2002, we had an accumulated
deficit of $155.1 million. We have not achieved profitability and cannot be certain that we will be able to realize sufficient revenues to achieve or, once achieved, sustain profitability. While we have in the recent past and may from time to time
in the future reduce operating expenses in response to the downturns in the United States or international economies, we generally expect to incur significantly greater operating expenses in the future. We also expect to incur substantial non-cash
expenses relating to stock compensation, amortization of purchased intangible assets and any potential goodwill impairment. 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 333
full-time employees as of May 31, 2002. Despite recent reductions in staffing, we have generally experienced periods of significant expansion of operations that have placed significant demands on our management and operational resources. To manage
the future growth of our operations and personnel, we must continue to 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.
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 stage 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 prior periods, we do not believe that these growth rates are indicative of our future operating results.
RESULTS OF OPERATIONS
Revenues
Total revenues in fiscal 2002 increased to $55.6
million, from $55.0 million in fiscal 2001 and $18.8 million in fiscal 2000. The modest increase in total revenues in fiscal 2002 over fiscal 2001 is primarily attributable to an increase in license revenues. The growth in revenues in fiscal 2001
over fiscal 2000 reflects our relatively early stage of development and is primarily attributable to our expanded sales force and international presence. As a percentage of total revenues, revenues from customers outside the United States
represented 28% in fiscal 2002, 29% in fiscal 2001 and 13% in fiscal 2000. In fiscal 2002, 2001 and 2000, no customer accounted for more than 10% of our revenues.
License revenues in fiscal 2002 increased to $27.3 million, or 49% of total revenues, from $24.8 million in fiscal 2001, or 45% of total revenues, and $7.9 million in
fiscal 2000, or 42% of total revenues. In fiscal 2002, fewer software licenses included provisions for future deliverables and, as a result, substantially more license revenues were recognized upon delivery in fiscal 2002 than in fiscal 2001.
Therefore, license revenues in fiscal 2002 increased over the prior fiscal year despite a decline in new software agreements. We believe this decline in new software agreements was primarily attributable to the rapid and increasingly severe downturn
in the United States economy, which was further stalled by terrorist attacks in September 2001. The increase in license revenues in fiscal 2001 over fiscal 2000 is primarily attributable to increases in sales of licenses to new customers and, to a
lesser extent, deferred revenue from existing contracts.
Services revenues were $27.3 million in fiscal 2002, or
49% of total revenues, $28.2 million in fiscal 2001, or 51% of total revenues, and $10.1 million in fiscal 2000, or 54% of total revenues. The decrease in services
13
revenues in fiscal 2002 over fiscal 2001 is primarily attributable to decreased consulting revenues as a result of the decline in new software agreements, which was partially offset by an
increase in support and hosting revenues. The increase in services revenues in fiscal 2001 over fiscal 2000 is attributable to increased implementation services in connection with increased software agreements, support and education services
provided to our new customers and support renewals sold to our increasing installed base.
Billed expenses were
$1.1 million in fiscal 2002, or 2% of total revenues, $1.9 million in fiscal 2001, or 4% of total revenues, and $763,000 in fiscal 2000, or 4% of total revenues. The decrease in billed expenses in fiscal 2002 over fiscal 2001 is primarily
attributable to decreased consulting revenues as a result of the decline in new software agreements. The increase in billed expenses in fiscal 2001 over fiscal 2000 is attributable to increased implementation services in connection with an increase
in software license agreements with new customers.
The mix of license and services revenues as a percentage of
to
