** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

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**ý**                                 QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe quarterly period ended February 28, 2002**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                           to                           **

**0-19395**(Commission File number)

** **

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**SABASOFTWARE, INC.**

(Exact Name of Registrant 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**(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

On March 31, 2002, 48,159,154 shares of the Registrant’s Common Stock,$.001 par value, were outstanding.

 

**SABA SOFTWARE, INC.FORM 10-Q**

** **

**QUARTER ENDED FEBRUARY 28, 2002INDEX**

** **
|           |                                                                                                             |
|----------------|------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                             |
| **Part I.**    | **FINANCIAL INFORMATION**                                                                                        |
| Item 1.        | Financial Statements  (Unaudited)                                                                                |
|           |                                                                                                             |
|           | Condensed  Consolidated Balance Sheets as of February 28, 2002 and May 31, 2001                                  |
|           |                                                                                                             |
|           | Condensed  Consolidated Statements of Operations for the three and nine months ended  February 28, 2002 and 2001 |
|           |                                                                                                             |
|           | Condensed  Consolidated Statements of Cash Flows for the nine months ended February 28,  2002 and 2001           |
|           |                                                                                                             |
|           | Notes  to Condensed Consolidated Financial Statements                                                            |
|           |                                                                                                             |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      |
|           |                                                                                                             |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                      |
|           |                                                                                                             |
| **Part II.**   | **OTHER INFORMATION**                                                                                            |
| Item 1.        | Legal Proceedings                                                                                                |
| Item  2.       | Changes  in Securities and Use Of Proceeds                                                                       |
| Item 3.        | Defaults Upon  Senior Securities                                                                                 |
| Item  4.       | Submission  of Matters to a Vote of Securities Holders                                                           |
| Item  5.       | Other  Information                                                                                               |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                |
|           |                                                                                                             |
| **SIGNATURES** |

 

 

2

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**PART 1: FINANCIAL INFORMATION**

 

#### **Item 1.    FinancialStatements**

**SABA SOFTWARE, INC.CONDENSED CONSOLIDATED BALANCESHEETS(in thousands)**(unaudited)

** **
|                                                                                                                                                                                                |   | **FEBRUARY 28,****2002** |   | **MAY 31,****2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|---------------------|--------|
| **ASSETS**                                                                                                                                                                                          |   |                     |   |                |   |
| Current assets:                                                                                                                                                                                     |   |                     |   |                |   |
| Cash and cash equivalents                                                                                                                                                                           |   | $                        | 10,983 |                | $      | 11,833 |   |
| Short-term investments                                                                                                                                                                              |   | 13,241                   |   | 22,500              |   |
| Accounts receivable, net                                                                                                                                                                            |   | 9,793                    |   | 19,079              |   |
| Prepaid expenses and other current assets                                                                                                                                                           |   | 1,006                    |   | 1,406               |   |
| Total current assets                                                                                                                                                                                |   | 35,023                   |   | 54,818              |   |
| Property and equipment, net                                                                                                                                                                         |   | 5,597                    |   | 7,997               |   |
| Goodwill, net                                                                                                                                                                                       |   | 5,919                    |   | —              |   |
| Purchased intangible assets, net and other assets                                                                                                                                                   |   | 4,336                    |   | 5,296               |   |
| Total assets                                                                                                                                                                                        |   | $                        | 50,875 |                | $      | 68,111 |   |
|                                                                                                                                                                                                |   |                     |   |                |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |   |                     |   |                |   |
| Current liabilities:                                                                                                                                                                                |   |                     |   |                |   |
| Accounts payable                                                                                                                                                                                    |   | $                        | 1,762  |                | $      | 4,479 |   |
| Accrued expenses                                                                                                                                                                                    |   | 8,107                    |   | 12,870              |   |
| Deferred revenue                                                                                                                                                                                    |   | 9,352                    |   | 16,900              |   |
| Current portion of capital lease obligations                                                                                                                                                        |   | 1,551                    |   | 1,613               |   |
| Total current liabilities                                                                                                                                                                           |   | 20,772                   |   | 35,862              |   |
| Deferred revenue                                                                                                                                                                                    |   | 130                      |   | 506                 |   |
| Notes payable and other long-term liabilities                                                                                                                                                       |   | 2,776                    |   | 2,107               |   |
| Capital lease obligations, less current portion                                                                                                                                                     |   | 619                      |   | 1,677               |   |
| Total liabilities                                                                                                                                                                                   |   | 24,297                   |   | 40,152              |   |
|                                                                                                                                                                                                |   |                     |   |                |   |
| Stockholders’ equity:                                                                                                                                                                          |   |                     |   |                |   |
| Preferred stock, issuable in series: $0.001 par value; 5,000,000  authorized  shares at February 28, 2002 and May 31, 2001;  none issued  or outstanding                                            |   | —                   |   | —              |   |
| Common stock: $0.001 par value; 200,000,000 authorized shares at  February  28, 2002 and May 31, 2001; 48,141,407 shares issued at  February 28, 2002 and 45,997,508 shares issued  at May 31, 2001 |   | 48                       |   | 46                  |   |
| Additional paid-in capital                                                                                                                                                                          |   | 183,035                  |   | 165,858             |   |
| Deferred stock compensation                                                                                                                                                                         |   | (4,488                   | )      | (7,448              | )      |
| Notes receivable from stockholders                                                                                                                                                                  |   | (637                     | )      | (806                | )      |
| Treasury stock: 337,500 shares at February 28, 2002 and 225,000 shares  at  May 31, 2001, at cost                                                                                                   |   | (101                     | )      | (67                 | )      |
| Accumulated deficit                                                                                                                                                                                 |   | (151,334                 | )      | (129,655            | )      |
| Accumulated other comprehensive income                                                                                                                                                              |   | 55                       |   | 31                  |   |
| Total stockholders’ equity                                                                                                                                                                     |   | 26,578                   |   | 27,959              |   |
| Total liabilities and stockholders’ equity                                                                                                                                                     |   | $                        | 50,875 |                | $      | 68,111 |   |

 

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements.*

 

 

3

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**SABA SOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS(in thousands, except per share data)(unaudited)**

** **
|                                                                  |   | **THREE MONTHS ENDED****FEBRUARY 28,** |   | **NINE MONTHS ENDED****FEBRUARY 28,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenues:                                                             |   |                                   |   |                                  |   |   |   |   |   |
| License                                                               |   | $                                      | 6,213  |                                  | $      | 6,896 |   | $ | 19,985 |   | $ | 17,024 |   |
| Services                                                              |   | 6,641                                  |   | 7,627                                 |   | 20,881 |   | 20,570 |   |
| Total revenues                                                        |   | 12,854                                 |   | 14,523                                |   | 40,866 |   | 37,594 |   |
|                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Cost of revenues:                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Cost of license                                                       |   | 38                                     |   | 12                                    |   | 127 |   | 20 |   |
| Cost of services                                                      |   | 2,815                                  |   | 5,674                                 |   | 10,420 |   | 16,150 |   |
| Amortization of acquired developed  technology                        |   | 388                                    |   | —                                |   | 1,148 |   | — |   |
| Total cost of revenues                                                |   | 3,241                                  |   | 5,686                                 |   | 11,695 |   | 16,170 |   |
| Gross profit                                                          |   | 9,613                                  |   | 8,837                                 |   | 29,171 |   | 21,424 |   |
|                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Operating expenses:                                                   |   |                                   |   |                                  |   |   |   |   |   |
| Research and development                                              |   | 3,331                                  |   | 4,534                                 |   | 11,339 |   | 15,542 |   |
| Sales and marketing                                                   |   | 6,135                                  |   | 13,973                                |   | 23,438 |   | 40,050 |   |
| General and administrative                                            |   | 1,416                                  |   | 2,541                                 |   | 5,097 |   | 7,629 |   |
| Amortization of deferred stock compensation  and other stock  charges |   | 1,539                                  |   | 3,273                                 |   | 5,848 |   | 12,821 |   |
| Amortization of goodwill and purchased  intangible  assets            |   | 904                                    |   | —                                |   | 2,753 |   | — |   |
| Acquired in-process research  and development                         |   | —                                 |   | —                                |   | 2,199 |   | — |   |
| Total operating expenses                                              |   | 13,325                                 |   | 24,321                                |   | 50,674 |   | 76,042 |   |
| Loss from operations                                                  |   | (3,712                                 | )      | (15,484                               | )      | (21,503 | ) | (54,618 | ) |
| Interest (expense) income and other, net                              |   | (7                                     | )      | 406                                   |   | (63 | ) | 2,339 |   |
| Loss before provision for income taxes                                |   | (3,719                                 | )      | (15,078                               | )      | (21,566 | ) | (52,279 | ) |
| Provision for income taxes                                            |   | 68                                     |   | —                                |   | 113 |   | 65 |   |
| Net loss                                                              |   | $                                      | (3,787 | )                                     | $      | (15,078 | ) | $ | (21,679 | ) | $ | (52,344 | ) |
|                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted net loss per share                                  |   | $                                      | (0.08  | )                                     | $      | (0.35 | ) | $ | (0.47 | ) | $ | (1.24 | ) |
| Shares used in computing basic and diluted net loss per share         |   | 46,832                                 |   | 42,863                                |   | 46,202 |   | 42,243 |   |

 

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements.*

 

 

4

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**SABASOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
|                                                                         |   | **Nine  months ended February 28,** |    |
|------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                         |   | **2002**                            |    | **2001** |   |
| **Operating activities:**                                                    |   |                                |    |   |   |
| Net loss                                                                     |   | $                                   | (21,679 | ) | $ | (52,344 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                                |    |   |   |
| Depreciation and amortization                                                |   | 2,618                               |    | 2,029 |   |
| Amortization of goodwill and purchased intangible assets                     |   | 2,753                               |    | — |   |
| Amortization of acquired developed technology                                |   | 1,148                               |    | — |   |
| Amortization of deferred stock compensation                                  |   | 5,752                               |    | 12,821 |   |
| Acquired in-process research and development                                 |   | 2,199                               |    | — |   |
| Write-off of property and equipment                                          |   | 325                                 |    | — |   |
| Issuance of common stock for services                                        |   | 57                                  |    | — |   |
| Compensation expense resulting from acceleration of vesting of common  stock |   | 39                                  |    | — |   |
|                                                                         |   |                                |    |   |   |
| Changes in operating assets and liabilities:                                 |   |                                |    |   |   |
| Accounts receivable                                                          |   | 9,300                               |    | (8,677 | ) |
| Prepaid expenses and other current assets                                    |   | 367                                 |    | (249 | ) |
| Accounts payable                                                             |   | (2,671                              | )       | (1,396 | ) |
| Accrued expenses                                                             |   | (4,835                              | )       | 6,745 |   |
| Deferred revenue                                                             |   | (7,924                              | )       | 5,320 |   |
| Other liabilities                                                            |   | 670                                 |    | 622 |   |
| Net cash used in operating activities                                        |   | (11,881                             | )       | (35,129 | ) |
|                                                                         |   |                                |    |   |   |
| **Investing activities:**                                                    |   |                                |    |   |   |
| Purchases of short-term investments                                          |   | (21,686                             | )       | (35,382 | ) |
| Proceeds from redemptions and maturities of short-term investments           |   | 30,955                              |    | 16,092 |   |
| Purchases of property and equipment                                          |   | (480                                | )       | (1,624 | ) |
| Decrease (increase) in other assets                                          |   | 293                                 |    | (140 | ) |
| Net cash provided by (used in) investing activities                          |   | 9,082                               |    | (21,054 | ) |
|                                                                         |   |                                |    |   |   |
| **Financing activities:**                                                    |   |                                |    |   |   |
| Proceeds from issuance of common stock                                       |   | 3,004                               |    | 2,713 |   |
| Repurchase of common stock                                                   |   | (4                                  | )       | — |   |
| Principal payments under capital lease obligations                           |   | (1,190                              | )       | (977 | ) |
| Collections on notes receivable from stockholders                            |   | 139                                 |    | 182 |   |
| Net cash provided by financing activities                                    |   | 1,949                               |    | 1,918 |   |
|                                                                         |   |                                |    |   |   |
| Decrease in cash and cash equivalents                                        |   | (850                                | )       | (54,265 | ) |
| Cash and cash equivalents, beginning of period                               |   | 11,833                              |    | 74,033 |   |
| Cash and cash equivalents, end of period                                     |   | 10,983                              |    | 19,768 |   |
| Short-term investments, end of period                                        |   | 13,241                              |    | 24,226 |   |
| Total cash, cash equivalents and short-term investments, end of period       |   | $                                   | 24,224  |   | $ | 43,994 |   |
|                                                                         |   |                                |    |   |   |
| **Supplemental disclosure of non-cash transactions:**                        |   |                                |    |   |   |
| Equipment purchased under capital lease obligations                          |   | $                                   | —  |   | $ | 1,737 |   |
| Common stock issued for acquisition                                          |   | $                                   | 14,078  |   | $ | — |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements.*

 

 

5

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**SABASOFTWARE, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.             Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Saba Software, Inc. and its subsidiaries (Saba) and, inthe opinion of management, reflect all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation of Saba’s consolidatedfinancial position, results of operations and cash flows as of and for thedates and periods presented. The condensed consolidated balance sheet as of May31, 2001 has been prepared from Saba’s audited consolidated financialstatements.

 

These unaudited condensed consolidated financial statements should beread in conjunction with Saba’s audited consolidated financial statementsincluded in Saba’s Annual Report on Form 10-K filed with the Securities andExchange Commission on August 29, 2001. The results of operations for the threeand nine months ended February 28, 2002 are not necessarily indicative ofresults for the entire fiscal year ending May 31, 2002 or for any future period.

 

**2.             Basicand Diluted Net Loss Per Share**

 

Basic and diluted net loss per share information for all periods ispresented under the requirements of Statement of Financial Accounting Standards(SFAS) No. 128, “Earnings per Share.” Basic earnings per share has beencomputed using the weighted–average number of shares of common stockoutstanding during the period, less shares that may be repurchased, andexcludes any dilutive effects of options, warrants, and convertible securities.Potentially dilutive issuances have been excluded from the computation ofdiluted net loss per share as their inclusion would be anti–dilutive.

 

The calculations of basic and diluted net loss per share are as follows(in thousands, except per share amounts):

 
|                                                                                            |   | **Three months ended****February 28,** |   | **Nine months ended****February 28,** |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                            |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net loss                                                                                        |   | $                                      | (3,787 | )                                     | $      | (15,078 | ) | $ | (21,679 | ) | $ | (52,344 | ) |
| Weighted-average shares of common stock outstanding                                             |   | 48,036                                 |   | 44,604                                |   | 47,567 |   | 44,144 |   |
| Weighted-average shares subject to repurchase                                                   |   | (1,204                                 | )      | (1,741                                | )      | (1,365 | ) | (1,901 | ) |
| Weighted-average shares of common stock used in computing basic and  diluted net loss per share |   | 46,832                                 |   | 42,863                                |   | 46,202 |   | 42,243 |   |
| Basic and diluted net loss per share                                                            |   | $                                      | (0.08  | )                                     | $      | (0.35 | ) | $ | (0.47 | ) | $ | (1.24 | ) |

 

**3.        ComprehensiveLoss**

Saba reports comprehensive loss in accordance withSFAS No. 130, “Reporting Comprehensive Income.” Saba’s components ofcomprehensive loss consist of net loss, foreign currency translationadjustments and net unrealized gain (loss) on available-for-sale securities.

 

 

6

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The following table sets forth the calculation ofcomprehensive loss for all periods presented (in thousands):

 
|                                  |   | **Three months ended****February 28,** |   | **Nine months ended****February 28,** |   |
|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net loss                              |   | $                                      | (3,787 | )                                     | $      | (15,078 | ) | $ | (21,679 | ) | $ | (52,344 | ) |
| Foreign currency translation loss     |   | (64                                    | )      | 577                                   |   | 14 |   | (12 | ) |
| Unrealized gain (loss) on investments |   | (24                                    | )      | 4                                     |   | 10 |   | 43 |   |
| Comprehensive loss                    |   | $                                      | (3,875 | )                                     | $      | (14,497 | ) | $ | (21,655 | ) | $ | (52,313 | ) |

 

**4.****                      ****Segment Information**

 

**Saba operates primarily in asingle operating segment, providing software and services that increasebusiness performance through human capital development and management.**

 

##### ***Geographic Information***

 

The following tables present revenue and long-lived assets informationby geographic area (in thousands):

 
|          |   | **Total Revenue**                      |   | **Total Revenue**                     |   |
|---------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|          |   | **Three months ended****February 28,** |   | **Nine months ended****February 28,** |   |
|          |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| United States |   | $                                      | 9,410  |                                  | $      | 9,443 |   | $ | 28,752 |   | $ | 27,647 |   |
| International |   | 3,444                                  |   | 5,080                                 |   | 12,114 |   | 9,947 |   |
| Total         |   | $                                      | 12,854 |                                  | $      | 14,523 |   | $ | 40,866 |   | $ | 37,594 |   |

 
|          |   | **Long-Lived Assets**         |   |
|---------------|--------|-------------------------------|--------|
|          |   | **As of  February 28,  2002** |   | **As of  May 31,  2001** |   |
| United States |   | $                             | 14,569 |   | $ | 11,635 |   |
| International |   | 363                           |   | 500 |   |
| Total         |   | $                             | 14,932 |   | $ | 12,135 |   |

 

**5.****                      ****Legal Matters**

 

In November 2001, a complaint was filed in theUnited States District Court for the Southern District of New York againstSaba, certain of its officers and directors, and certain underwriters of Saba’sinitial public offering. The complaint was purportedly filed on behalf of aclass or certain persons who purchased Saba common stock between April 6, 2000and December 6, 2000. The complaint alleges violations by Saba and its officersand directors of the Securities Act of 1933 in connection with certain allegedcompensation arrangements entered into by the underwriters in connection withthe offering. Similar complaints have been filed against over 310 other issuersthat have had initial public offerings since 1998. Saba intends to vigorouslydefend against this action. Although no assurance can be given that this matterwill be resolved in Saba’s favor, Saba believes that the resolution of thislawsuit will not have a material adverse effect on its financial position,results of operations or cash flows.

 

 

7

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**ITEM 2:****MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

We are a leading provider of human capital development and managementinfrastructure software and services. Our software solutions are designed toenable businesses and governments to increase performance by automating theprocesses necessary to develop and manage the people, or human capital, thatcomprise their “extended enterprise” of employees, customers, partners andsuppliers. Our offerings are designed to increase the return to theorganization on their investment in human capital by cost-effectively meetingthe learning and performance management needs of enterprises across geographiesand industries. Human capital development and management solutions help toidentify what people know and are capable of doing with their knowledge,identify where and how to enhance the capacity to add value to theorganization, and identify ways to maximize the value that is created throughincreasing the capacity to contribute. Our solutions provide information andbusiness processes that empower managers to more tightly align organizationalcapabilities with desired business outcomes.

 

**General**

 

We commenced operations in April 1997 and through March 1998 focusedsubstantially all of our efforts on research activities, developing ourproducts and building our business infrastructure. We shipped our first SabaLearning products and began to generate revenues from software license fees,implementation and consulting services fees and support fees in April 1998. Webegan to operate Saba Exchange in December 1999 and our application serviceprovider (ASP) edition of Saba Learning in September 2000, and first shippedour limited release version of Saba Performance in May 2001. To date, we havenot generated significant revenues from the Saba Exchange, Saba Learning ASPEdition or Saba Performance.

 

**Critical Accounting Policies**

 

Our discussion and analysis of financial condition and results ofoperations is based upon our condensed consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of financial statements in conformitywith generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpenses during the reporting periods. Actual results could differ materiallyfrom those estimates. Note 2 to the consolidated financial statements in ourAnnual Report on Form 10-K for the fiscal year ended May 31, 2001 describes thesignificant accounting policies used in preparation of the consolidatedfinancial statements. While there are a number of accounting policies, methodsand estimates affecting our financial statements, areas that are particularlysignificant include revenue recognition policies, the allowance for doubtful accountsand the assessment of recoverability of goodwill and purchased intangibleassets.

 

###### *Revenuerecognition.* We recognize revenues in accordance with the provisions ofAmerican Institute of Certified Public Accountants (AICPA) Statement ofPosition (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9,“Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.” Under SOP 97-2, as amended, we recognize revenues whenall 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 softwarearrangements involving multiple elements to be allocated to each element basedon the relative fair values of the elements. Revenue recognized frommultiple-element arrangements is allocated to undelivered elements of thearrangement, such as support services, based on the relative fair values of theelements specific to us. Our determination of fair value of each element inmulti-element arrangements is based on vendor-specific objective evidence(VSOE). We limit our assessment of VSOE for each element to either the price chargedwhen the same element is sold separately or the price established bymanagement, having the relevant authority to do so, for an element not yet soldseparately.

 

 

8

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Prior to November 30, 1999, we had not established VSOE of fair valuefor our support services. Accordingly, we recognized the revenue generated fromthese multiple-element arrangements ratably over the period during which thesupport services were provided, which was generally 12 months.

 

A substantial majority of our licenses entered into from November 30,1999 to August 31, 2001 include rights to unspecified additional platformversions of our software, extended payment terms and/or services essential tothe functionality of the software. For licenses that include rights tounspecified additional platform versions, we recognize license revenues ratablyover the period during which we are required to provide the additional platformversions beginning in the month when all other revenue recognition criteriahave been met. Revenue from contracts with extended payment terms arerecognized at the lesser of amounts due and payable or the amount of thearrangement fee otherwise recognizable. For contracts that involve significantcustomization and implementation or consulting services essential to thefunctionality of the software, the license and services revenues are recognizedover the service delivery period using the percentage-of-completion method. Weuse labor hours incurred as a percentage of total expected hours as the measureof progress towards completion. A substantial majority of our licenses enteredinto after August 31, 2001 do not provide for unspecified additional platformversions, extended payment terms or service essential to the functionality ofthe software. Revenues derived from these licenses are recognized on contractsigning if the other conditions of SOP 97-2 are satisfied. Revenues from ourapplication service provider offering and from our hosting services aregenerally recognized ratably over the term of the arrangement.

 

Revenue allocated to support is recognized ratably over the supportterm, typically 12 months, and revenue allocated to implementation, consulting,education and other services is generally recognized as the services areperformed. Although we primarily provide implementation and consulting serviceson a time and materials basis, a significant portion of these services has beenprovided on a fixed-fee basis.

 

*Allowance for doubtful accounts.*The allowance for doubtful accounts isbased on our assessment of the collectibility of specific customer accounts andthe aging of the accounts receivable. If there is a deterioration of a majorcustomer’s credit worthiness or actual defaults are higher than our historicalexperience, we may be required to increase the allowance for doubtful accounts.

 

*Recoverability of goodwill andpurchased intangible assets.* We plan to adopt SFAS No. 142 during our fiscal yearbeginning June 1, 2002. Under SFAS No. 142, we will be required to testgoodwill and indefinite-lived intangible assets for impairment rather thanamortize them. The nonamortization approach applies to previously recordedgoodwill and to previously recognized intangible assets deemed to haveindefinite useful lives, as well as goodwill and indefinite-lived intangibleassets arising from acquisitions completed after the application of SFAS No.142. As such, we will cease amortization of capitalized goodwill as of May 31,2002. In addition, we will perform an impairment test at least annually at thereporting unit level. Any impairment charges on goodwill and indefinite-livedintangible assets will be presented as a separate line item within theoperating section of the consolidated statement of operations.

 

**Cost of Revenues**

 

Our cost of revenues includes cost of our license revenues and cost ofour services revenues. Our cost of license revenues includes the cost ofmanuals and product documentation, production media, shipping costs androyalties to third parties. Our cost of services revenues includes salaries andrelated expenses for our professional services organization, as well asthird-party hosting costs. Because our cost of services revenues is greaterthan cost of license revenues, cost of total revenues as a percentage of totalrevenues may fluctuate based on the mix of products and services sold.

 

 

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**Operating Expenses**

 

Our operating expenses are classified into three general operationalcategories: research and development, sales and marketing and general andadministrative. In addition, our operating expenses include amortization ofdeferred stock compensation and other stock charges and amortization ofgoodwill and purchased intangible assets.

 

We classify all charges to the research and development, sales andmarketing and general and administrative expense categories based on the natureof the expenses. Each of these three categories includes commonly recurringexpenses such as salaries, employee benefits, travel and entertainment costs,and allocated communication, rent and depreciation costs. We allocate theseexpenses to each of the functional areas that derive a benefit from suchexpenses based upon their respective headcounts. The sales and marketing categoryof operating expenses also includes sales commissions and expenses related topublic relations and advertising, trade shows and marketing collateralmaterials. The general and administrative category of operating expenses alsoincludes allowances for doubtful accounts and administrative and professionalservices fees.

 

In connection with the granting of stock options to, and restrictedstock purchases by, our employees, we recorded deferred stock compensationtotaling approximately $36.5 million through February 28, 2002. This amountrepresents the difference between the exercise or purchase price, asapplicable, and the deemed fair value of our common stock for financialaccounting purposes on the date these stock options were granted or purchase agreementsfor restricted stock were signed. During the nine months ended February 28,2002, we also recorded deferred stock compensation of $2.8 million for the intrinsic value of stock subject torepurchase assumed by us in connection with the acquisition of Ultris, Inc. Theseamounts are included as a component of stockholders’ equity and are beingamortized by charges to operations over the vesting period of the restrictedstock. The amortization of the remaining deferred stock compensation willresult 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 beingamortized on a straight-line basis over their estimated useful lives of sixmonths to three years. Our June 2001 acquisition of Ultris, Inc. resulted ingoodwill and purchased intangible assets of $9.1 million. These assets arebeing amortized on a straight-line basis over their estimated useful lives of 18months to three years. Upon adoption of SFAS No. 142 upon our fiscal yearbeginning June 1, 2002, we will cease amortization of capitalized goodwill andwe will utilize the impairment test approach described in SFAS No. 142.

 

**History of Losses**

 

We have incurred significant losses and negative cash flows fromoperations since our inception. As of February 28, 2002, we had an accumulateddeficit of $151.3 million. We have not achieved profitability and cannot becertain that we will be able to realize sufficient revenues to achieve or, onceachieved, sustain profitability. While we have in the recent past and may fromtime to time in the future reduce operating expenses in response to downturnsin the United States or international economies, we generally expect to incursignificantly greater operating expenses in the future. We also expect to incursubstantial non-cash expenses relating to stock based compensation andamortization of goodwill and purchased intangible assets. With our adoption ofSFAS No. 142 beginning June 1, 2002, we will cease amortization of capitalizedgoodwill and will utilize the impairment test approach described in SFAS No.142. As a result, we are unable to predict the amount and timing of anyimpairment write-off. We expect to incur significant losses for the foreseeablefuture and will need to generate significantly higher revenues in order toachieve profitability. If we achieve profitability, we may not be able tosustain it.

 

We had 335 full-time employees as of February 28, 2002. Despite recentreductions in staffing, we have generally experienced periods of significantexpansion of operations that have placed significant demands on our managementand operational resources. To manage future growth of our operations andpersonnel, we must continue to invest in scalable operational systems,procedures and controls. We must also be able to recruit qualified candidatesto manage our expanding operations. We expect any future expansion to continueto challenge our ability to hire, train, manage and retain our employees.

 

 

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**Limited Operating History**

 

We have a limited operating history that makes it difficult to forecastour future operating results. We believe that period-to-period comparisons ofour operating results should not be relied upon as predictive of futureperformance. Our prospects must be considered in light of the risks, expensesand difficulties encountered by companies at an early stage of development,particularly companies in new and rapidly evolving markets, such as humancapital development and management, electronic commerce and Internet software.We may not be successful in addressing these risks and difficulties. Althoughwe have experienced significant growth in revenues in prior periods, we do notbelieve that prior growth rates are sustainable or indicative of our futureoperating results.

 

**RESULTS OF OPERATIONS**

**THREE AND NINE MONTHS ENDED FEBRUARY28, 2002 AND 2001**

 

*Revenues*

 

Total revenues decreased to $12.9 million for the three months endedFebruary 28, 2002 from $14.5 million for the three months ended February 28,2001. The decrease is primarily attributable to lower sales of licenses relatedto the downturn in the economy. As a result of lower license sales, servicesrevenues decreased. For the nine months ended February 28, 2002, revenuesincreased to $40.9 million from $37.6 million for the nine months endedFebruary 28, 2001. The growth in revenues for the nine-month period endedFebruary 28, 2002 is primarily attributable to recognition of deferred licenserevenue. As a percentage of total revenues, revenues from customers outside theUnited States represented approximately 27% for the three months ended February28, 2002 and 35% for the three months ended February 28, 2001. For the ninemonths ended February 28, 2002, revenues from customers outside the UnitedStates represented approximately 30% as compared to 26% for the nine monthsended February 28, 2001. During the three months ended February 28, 2002, onecustomer represented more than 10% of our revenues. During the nine monthsended February 28, 2002 and the three and nine months ended February 28, 2001,no customer represented more than 10% of our revenues.

 

License revenues decreased to $6.2 million, representing 48% of totalrevenues, for the three months ended February 28, 2002, from $6.9 million, or47% of total revenues, for the three months ended February 28, 2001. Thedecrease in dollar amount of license revenue is primarily attributable to lowersales of licenses. For the nine months ended February 28, 2002, licenserevenues increased to $20.0 million from $17.0 million for the nine monthsended February 28, 2001. The increase in the amount of license revenues isprimarily attributable to recognition of deferred license revenue.

 

Services revenues decreased to $6.6 million, representing 52% of totalrevenues, for the three months ended February 28, 2002, from $7.6 million, or53% of total revenues, for the three months ended February 28, 2001. Thedecrease in the dollar amount of services revenues is due to decreasedimplementation services as a result of fewer license sales to new customers,partially offset by an increase in support renewals sold to our installed base.For the nine months ended February 28, 2002, services revenues increased to$20.9 million from $20.6 million for the nine months ended February 28, 2001.The increase in the dollar amount of services revenues is primarilyattributable to increased support and education services provided to ourcustomers, which was mostly offset by a decrease in implementation services. Weexpect that a growing number of our Saba Learning Enterprise Editionimplementations will be performed by third-party consultants contractingdirectly with the customer.

 

The mix of license and services revenues as a percentage of totalrevenues may vary significantly due to our relatively early stage ofdevelopment.

 

 

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*Cost of Revenues*

 

Total cost of revenues decreased to $3.2 million for the three monthsended February 28, 2002, from $5.7 million for the three months ended February28, 2001. For the nine months ended February 28, 2002, total cost of revenuesdecreased to $11.7 million from $16.2 million for the nine months endedFebruary 28, 2001. The decreases in the dollar amount of cost of revenues areprimarily attributable to reduced services personnel. Cost of services revenuesrepresented 42% of services revenues for the three months ended February 28, 2002and 74% of services revenues for the three months ended February 28, 2001. Forthe nine months ended February 28, 2002, cost of services revenues represented50% of services revenues and for the nine months ended February 28, 2001,represented 79% of services revenues. The decreases in the cost of services asa percentage of services revenues are primarily attributable to increasedbillable hours as a percent of total hours, as well as an increased averagebilling rate of our consultants. Failure to achieve our revenue goals will havea significant adverse impact on gross margin.

 

The cost of revenues includes amortization of acquired developedtechnology from the acquisitions of Human Performance Technologies, Inc. inMarch 2001 and Ultris, Inc. in June 2001. The developed technology of $2.3million acquired from Human Performance Technologies, Inc. is being amortizedover a two-year useful life and the developed technology of $1.2 millionacquired from Ultris, Inc. is being amortized over a three-year useful life.

 

*Operating Expenses*

 

*Research and development*. Research and development expensesdecreased to $3.3 million for the three months ended February 28, 2002, from$4.5 million for the three months ended February 28, 2001. For the nine monthsended February 28, 2002, research and development expenses decreased to $11.3million from $15.5 million for the nine months ended February 28, 2001. Thedecreases are primarily attributable to reduced research and developmentpersonnel. To date, all software development costs have been expensed in theperiod incurred.

 

*Sales and marketing.* Sales and marketing expenses decreasedto $6.1 million for the three months ended February 28, 2002, from $14.0million for the three months ended February 28, 2001. For the nine months endedFebruary 28, 2002, sales and marketing expenses decreased to $23.4 million from$40.1 million for the nine months ended February 28, 2001. The decreases areprimarily attributable to decreases in the number of sales and marketingpersonnel, as well as decreases in spending on advertising and other marketingactivities.

 

*General and administrative.* General and administrative expensesdecreased to $1.4 million for the three months ended February 28, 2002, from$2.5 million for the three months ended February 28, 2001. For the nine monthsended February 28, 2002, general and administrative expenses decreased to $5.1million from $7.6 million for the nine months ended February 28, 2001. Thedecreases are primarily attributable to decreases in general and administrativepersonnel and bad debt expense.

 

*Amortization of deferred stockcompensation and other stock charges.* During the three months ended February 28, 2002, werecorded deferred stock amortization and other stock charges of $1.5 million.During the nine months ended February 28, 2002, we recorded deferred stockamortization and other stock charges of $5.8 million. Included in these amounts is $390,000 for three months endedFebruary 28, 2002 and $1.6 million for the nine months ended February 28, 2002 related to the post-acquisition amortization ofthe deferred compensation for the intrinsic value of stock subject torepurchase assumed in connection with the acquisition of Ultris, Inc. Theestimated intrinsic value of the 198,445 shares subject to repurchase wasapproximately $2.8 million, which is being amortized over the four-yearrepurchase period. During the three months ended February 28, 2001, werecorded deferred stock amortization of $3.3 million. During the nine monthsended February 28, 2001, we recorded deferred stock amortization of $12.8million.

 

 

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*Amortization of goodwill andpurchased intangible assets.* During the three months ended February 28, 2002, werecorded amortization of goodwill and purchased intangible assets of $904,000as a result of our March 2001 acquisition of Human Performance Technologies,Inc. and June 2001 acquisition of Ultris, Inc. During the nine months endedFebruary 28, 2002, amortization of goodwill and purchased intangible assets forthese acquisitions was $2.8 million. Purchased intangible assets consist ofintellectual property, customer base, assembled workforce, and noncompetitionagreements. The intangible assets are stated at cost less accumulated amortizationand are being amortized on a straight-line basis over their estimated usefullives of six months to three years. Goodwill is being amortized on astraight-line basis over its estimated useful life of three years. Uponadoption of SFAS No. 142 during our fiscal year beginning June 1, 2002, we willcease amortization of capitalized goodwill and we will utilize the impairmenttest approach described in SFAS No. 142.

 

*Acquired in-process research anddevelopment.*Acquired in-process research and development in the nine months ended February28, 2002 represents the write-off of the fair value of acquired research anddevelopment work obtained in connection with the acquisition of Ultris, Inc.The total charge for in-process research and development in the Ultris, Inc.acquisition was $2.2 million based on the value allocated to projectsidentified as in-process research and development, such as the completion andtesting of instant messaging functionality and integration with software ofother companies. This amount was charged to expense in the three months endedAugust 31, 2001 immediately following the completion of the acquisition. Therewas no acquisition activity during the three and nine months ended February 28,2001.

 

For the acquisition of Ultris, Inc., the write-off was necessarybecause the acquired in-process research and development had not yet reachedtechnological feasibility and the related products under development had notyet achieved commercial viability. The nature of the efforts required todevelop the purchased in-process research and development into commerciallyviable products principally relate to planning, designing, prototyping,verification and testing activities that are necessary to establish that theproduct can be produced to meet its design specifications, including functions,features and technical performance requirements.

 

We obtained anindependent valuation for the allocation of the purchase price of Ultris, Inc.Values were assigned to acquired developed technology, in-process research anddevelopment, goodwill and workforce. The fair value of the acquired in-processresearch and development was determined by estimating the projected net cashflows related to the products, including costs to complete the development ofthe technology and the future revenues to be earned upon commercialization ofthe products. These cash flows were then discounted back to their net presentvalue. The projected net cash flows from the project were based on management’sestimates of future revenues and operating profits.

 

*Interest (expense) income and other,net.* Interest(expense) income and other, net consists of interest income, interest expenseand other non-operating expenses. Interest (expense) income and other, netdecreased to an expense of $7,000 for the three months ended February 28, 2002,from income of $406,000 for the three months ended February 28, 2001. For thenine months ended February 28, 2002, interest (expense) income and other, netdecreased to an expense of $63,000, from income of $2.3 million for the ninemonths ended February 28, 2001. The decreases are attributable primarily todecreases in short-term investments and the decline in short-term interestrates since February 28, 2001.

 

*Provision for income taxes.* From inception to February 28, 2002, we incurred net losses for federaland state tax purposes. During the three months ended February 28, 2002, werecorded income tax expense of $68,000. For the three months ended February 28,2001, no income tax expense was recorded. For the nine months ended February28, 2002, we recorded income tax expense of $113,000 as compared to $65,000 forthe nine months ended February 28, 2001. The income tax expense consistsprimarily of domestic minimum taxes and foreign income tax expense incurred asa result of local country profits.

 

 

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FLUCTUATIONS OF QUARTERLY RESULTS

 

Our results of operations could vary significantly from quarter toquarter. If revenues fall below our expectations, we will not be able to reduceour spending rapidly in response to the shortfall and operating losses willincrease. We anticipate that we will continue to experience long sales cycles.Therefore, the timing of future customer contracts are difficult to predict,making it difficult to predict revenues between quarters.

 

We are subject to employer payroll taxes, both domestic and foreign, onemployee exercises of non-qualified stock options. These taxes are recorded asa charge to operations in the period such options are exercised based on actualgains realized by employees, measured by the difference between the price ofour common stock on the date of exercise and the exercise price. We receivedomestic tax deductions for gains realized by domestic employees on theexercise of non-qualified stock options for which the benefit is recorded asadditional paid-in capital when realized. Our taxes and cash flows could varysignificantly from quarter to quarter depending on the number of non-qualifiedstock options exercised by employees in any quarter and, consequently, ourresults of operations.

 

Other factors that could affect our quarterly operating results includethose described below and under the caption “Factors That May Affect FutureOperating Results:”

 

•                  dependence of our revenues on a small number of large orders and theaverage order value;

•                  our ability to attract new customers;

•                  any changes in revenue recognition policies and provisions andinterpretations of these provisions;

•                  our ability to license additional products to current customers;

•                  the announcement or introduction of new products or services by us orour competitors;

•                  changes in the pricing of our products and services or those of ourcompetitors;

•                  variability in the mix of our products and services revenues in anyquarter;

•                  technical difficulties or service interruptions of our computer networksystems or the Internet generally; and

•                  the amount and timing of operating costs and capital expendituresrelating to expansion or contraction of our business.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since inception, we have funded our operations primarily through thesale of equity securities, through which we have raised net proceeds of $126.0million through February 28, 2002, equipment leases and other debt. As ofFebruary 28, 2002, we had $24.2 million of cash, cash equivalents andshort-term investments and outstanding equipment leases and notes payable of$2.4 million.

 

Cash used in operating activities was $11.9 million during the ninemonths ended February 28, 2002 and $35.1 million during the nine months endedFebruary 28, 2001. Cash used in operating activities during the nine monthsended February 28, 2002 was primarily attributable to a net loss of $21.7million, which was partially offset by $5.8 million in amortization of deferredstock compensation, $2.8 million in amortization of goodwill and purchasedintangible assets and a charge for acquired in-process research and developmentof $2.2 million. Cash used in operating activities during the nine months endedFebruary 28, 2001 was primarily attributable to a net loss of $52.3 million, anincrease in accounts receivable of $8.7 million and a decrease in accountspayable of $1.4 million. This was partially offset by $12.8 million inamortization of deferred stock compensation, an increase in accrued expenses of$6.7 million and an increase in deferred revenue of $5.3 million.

 

Cash provided by investing activities during the nine months endedFebruary 28, 2002 was primarily attributable to net redemptions and maturitiesof short-term investments of $9.3 million. Cash used in investing activitiesduring the nine months ended February 28, 2001 was primarily attributable tonet purchases of short-term investments of $19.3 million.

 

 

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Cash provided by financing activities during the nine months endedFebruary 28, 2002 was primarily attributable to proceeds from the sale of stockunder our stock incentive programs of $3.0 million, partially offset by $1.2million for payments on capital lease obligations. Cash provided by financingactivities during the nine months ended February 28, 2001 was primarilyattributable to proceeds from the sale of stock under our stock incentiveprograms of $2.7 million, partially offset by payments on capital leaseobligations of $977,000.

 

At February 28, 2002, we did not have any material commitments forcapital expenses. Our principal commitments consisted of obligations undercapital and operating leases.

 

We currently anticipate that our available cash resources and creditfacilities, including our $8 million line of credit agreement entered into inJune 2001, combined with cash flows generated from sales, will be sufficient tomeet our presently anticipated working capital, capital expense and businessexpansion requirements for at least the next 12 months. However, we may chooseto raise additional funds within the next 12 months to support expansion,develop new or enhanced applications and services, respond to competitivepressures, acquire complementary businesses or technologies or take advantageof unanticipated opportunities. Our future liquidity and capital requirementswill depend on numerous factors, including the success of our existing and new productand service offerings and competing technological and market developments. Wemay be required to raise additional funds through public or private financing,strategic relationships or other arrangements. There can be no assurance thatadditional funding, if needed, will be available on terms acceptable to us, ifat all.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedSFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS No. 141 prohibits the use of the pooling-of-interests method forbusiness combinations initiated after June 30, 2001. SFAS No. 141, which alsoincludes the criteria for the recognition of intangible assets separately fromgoodwill, is effective for any business combination accounted for by thepurchase method that is completed after June 30, 2001. SFAS No. 142, whichincludes the requirements to test goodwill and indefinite-lived intangibleassets for impairment rather than amortize them, is effective for fiscal yearsbeginning after December 15, 2001 with early adoption permitted for companieswith fiscal years beginning after March 15, 2001, provided they have not yetissued their first quarter financial statements. In all cases, SFAS No. 142must be adopted as of the beginning of a fiscal year. The nonamortizationapproach applies to previously recorded goodwill and to previously recognizedintangible assets deemed to have indefinite useful lives, as well as goodwilland indefinite-lived intangible assets arising from acquisitions completedafter the application of SFAS No. 142. In place of amortization, an impairmenttest must be performed at least annually at the reporting unit level. Anyimpairment charges on goodwill and indefinite-lived intangible assets would bepresented as a separate line item within the operating section of theconsolidated statement of operations. We do not expect SFAS No. 141 to have animpact on our consolidated financial position or results of operations. We planto adopt SFAS No. 142 during our fiscal year beginning June 1, 2002. As such,we will cease amortization of capitalized goodwill as of May 31, 2002, and wewill utilize the impairment test approach discussed above.

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 requires businesses to record the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred. When the liability is initially recorded, the entitycapitalizes a cost by increasing the carrying amount of the related long-livedasset. Over time, the liability is accreted to its present value each period,and the capitalized cost is depreciated over the useful life of the relatedasset. Upon settlement of the liability, an entity either settles theobligation for its recorded amount or incurs a gain or loss upon settlement. Weare required to adopt SFAS No. 143 for our fiscal year beginning June 1, 2003.We are currently assessing the impact, if any, of SFAS No. 143 on our financialposition and results of operations.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” which supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of” and Accounting Principles Board No. 30, “Reporting theResults of Operations — Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions.” SFAS No. 144 also amends Accounting Research Bulletin No. 51,“Consolidated Financial Statements.” SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less cost to sell. The statement also significantly changes thecriteria required to classify an asset as held-for-sale. Additionally, SFAS 144expands the scope of discontinued operations to include all components of anentity with operations that (1) can be distinguished from the rest of theentity and (2) will be eliminated from the ongoing operations of the entity ina disposal transaction. We are required to adopt SFAS 144 for our fiscal yearbeginning June 1, 2002. We are currently assessing the impact of SFAS 144 onour financial position and results of operations.

 

 

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**FACTORS THAT MAY IMPACT FUTUREOPERATING RESULTS**

 

**We have a limitedoperating history and are subject to the risks encountered by early-stagecompanies**

 

We were founded in April 1997 and shipped our first products in April1998. Because we have a limited operating history, you should consider andevaluate our operating prospects in light of the risks and uncertaintiesfrequently encountered by early-stage companies in rapidly evolving markets.For us, these risks include:

 

•                  risks that our revenue forecasts may be incorrect because of ourlimited sales to date and our long sales process;

•                  risks associated with our dependence on Saba Learning EnterpriseEdition, and related services, for substantially all of our revenues for theforeseeable future;

•                  risks that our new products, such as Saba Performance and Saba Content,will fail to achieve market acceptance;

•                  risks that our strategy of establishing Saba Exchange may not besuccessful;

•                  risks that fluctuations in our quarterly operating results will besignificant relative to our revenues; and

•                  risks that the current economic downturn will continue to negativelyimpact the demand for our products and services.

 

These risks and other risks are described in more detail below. Ourfuture growth will depend substantially on our ability to address these and theother risks described in this section. If we do not successfully address theserisks, our business would be significantly harmed.

 

**We have a history oflosses, expect future losses and cannot assure you that we will achieveprofitability**

 

We have incurred significant losses and negative cash flows fromoperations since our inception. We have not achieved profitability and cannotbe certain that we will realize sufficient revenues to achieve or sustainprofitability. We expect to derive substantially all of our revenues for theforeseeable future from the licensing of our Saba Learning Enterprise Editionand providing related services. Over the longer term, we expect to deriverevenues from Saba Exchange, which is based on an evolving and unprovenbusiness model, and new products such as Saba Learning ASP Edition, SabaPerformance, which is in limited release, and Saba Content, and servicesrelated to these offerings. In the future, we expect to continue to incursubstantial non-cash expenses relating to the amortization of deferredcompensation, goodwill and purchased intangible assets that will contribute toour net losses. As of February 28, 2002, we had an aggregate of $4.5 million ofdeferred compensation and $9.3 million of goodwill and purchased intangibleassets to be amortized. As a result of all of the foregoing, we expect to incurlosses for the foreseeable future and will need to generate significantlyhigher revenues in order to achieve profitability. If we achieve profitability,we may not be able to sustain it.

 

**Fluctuations of ourresults could cause our stock price to experience significant fluctuations ordeclines**

 

Our operating results have varied significantly in the past and willlikely fluctuate significantly in the future. We believe thatquarter-to-quarter comparisons of our revenues and operating results are notnecessarily meaningful and should not be relied on as indicators of futureperformance. Our operating expenses are based on our expectations of futurerevenues and are relatively fixed in the short-term. While we have in therecent past and may from time to time reduce operating expenses in response todownturns in the United States or international economies, we generally expectto increase our operating expenses to expand our sales and marketingoperations, fund greater levels of research and development, develop newalliances, increase our services and support capabilities and improve ouroperational and financial systems. If our revenues do not increase along withthese expenses, our business would be seriously harmed and net losses in agiven quarter would be even larger than expected. It is possible that in somefuture quarter our operating results may be below the expectations of publicmarket analysts or investors, which could cause the market price of our commonstock to fall.

 

 

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Our quarterly revenues are especially subject to fluctuations becausethey depend on the sale of a small number of relatively large orders,principally orders for Saba Learning Enterprise Edition and related services.Therefore, if we do not book a sufficient number of large orders in aparticular quarter, our revenues in future periods could be lower thanexpected. We have not fully developed our business model for Saba Exchange,including the structure and amount of the fees we intend to charge. As thisbusiness model evolves, the potential for fluctuations in our quarterly resultscould increase. Furthermore, our quarterly revenues may be affectedsignificantly by changes in revenue recognition policies and procedures basedon changes to or new applicable accounting standards and how these standardsare interpreted.

 

**Our lengthy sales cycle could causedelays in revenue growth**

 

The period between our initial contact with a potential customer andthe purchase of our products and services is often long. A customer’s decisionto purchase our products and services requires the commitment to increaseperformance through human capital development and management, involves asignificant allocation of resources, and is influenced by a customer’s budgetarycycles. To successfully sell our products and services, we generally musteducate our potential customers regarding the use and benefits of our productsand services, which can require significant time and resources. Many of ourpotential customers are large enterprises that generally take longer to makesignificant business decisions. Our typical sales cycle has been approximately6 to 12 months. The delay or failure to complete sales in a particular quartercould reduce our revenues in that quarter. If our sales cycle unexpectedlylengthens in general or for one or more large orders, it would adversely affectthe timing of our revenues and our revenue growth. If we were to experience adelay of several weeks on a large order, it could harm our ability to meet ourforecasts for a given quarter.

 

**A decline in the priceof, or demand for, our main product Saba Learning Enterprise Edition or ourrelated service offerings would seriously harm our revenues and operatingmargins**

 

Saba Learning Enterprise Edition and related services accounted for asubstantial majority of our revenues in the nine months ended February 28,2002. We anticipate that revenues from our Saba Learning Enterprise Edition andrelated services will continue to constitute a substantial majority of ourrevenues for the foreseeable future. Consequently, a decline in the price of,or demand for, Saba Learning Enterprise Edition or failure to achieve broadmarket acceptance would seriously harm our business.

 

**We are exposed to recent unfavorableeconomic and political conditions**

 

We have seen a rapid and increasingly severe downturn in the UnitedStates economy since the first quarter of fiscal 2001, which has been furtherstalled by the terrorists attacks in September 2001. There can be no certaintyas to the severity or duration of this downturn. Although we cannot predict theextent and timing, if any, of the impact of economic downturns in the UnitedStates on economies in other countries or geographic regions, we are seeing aneconomic slowdown in certain international markets in which we conductbusiness. If the economic conditions in the United States continue or worsen orif a global economic slowdown intensifies, the demand for our products andservices may be reduced. Not only may these economic slowdowns reduce ourcustomers’ and prospects’ budgets for our products and services, but also theymay adversely affect our customers’ ability to pay for our products andservices. Accordingly, these economic slowdowns may have a material adverseimpact on our business, operating results and financial condition.

 

**Our performance depends on a newmarket, human capital development and management**

 

The market for software solutions that automate human capitaldevelopment and management is relatively new and rapidly evolving.Substantially all of our revenues are attributable to the suite of products andservices in this market. If this market fails to develop or develops moreslowly than we expect, or if we fail to identify the challenges and risks inthis new market and successfully address these risks, our business would beharmed.

 

 

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**Our strategy of establishing SabaExchange is unproven and may not be successful**

 

We must more fully establish and enhance Saba Exchange, whereorganizations and learning providers can transact business and collaborate. Oursuccess depends on a significant number of organizations implementing SabaLearning and conducting business with learning providers over the Internetthrough Saba Exchange. If this business strategy is flawed, or if we are unableto execute it effectively, our revenues may be seriously harmed. We beganoperating Saba Exchange in December 1999. Accordingly, we have limitedexperience developing and operating Saba Exchange. To date, only a limitednumber of learning providers and organizations are connected to Saba Exchange.It is possible that we, together with the organizations and learning providerswho comprise this exchange, will not be able to effectively operate thisexchange, both in terms of technical performance as well as commercialviability. It is possible that an insufficient number of organizations and/orlearning providers will join and remain in Saba Exchange, and that we will be unableto generate significant revenues from Saba Exchange. Unless a critical mass oforganizations and learning providers join Saba Exchange, our solutions may notachieve widespread market acceptance and our business would be seriouslyharmed. To date, we have not generated significant revenues from Saba Exchange.

 

**If we lose key personnelor are unable to attract and retain additional qualified personnel we may notbe able to successfully manage our business and achieve our objectives**

 

We believe our future success will depend upon our ability to retainour key management personnel. These employees are not subject to employmentcontracts. We may not be successful in attracting, assimilating and retainingour key employees in the future. Our future success and our ability to expandour operations will also depend in large part on our ability to attract andretain additional qualified technical, sales and marketing personnel.Competition for these types of employees is intense due to the limited numberof qualified professionals and the high demand for them, particularly in theSan Francisco Bay Area, where our headquarters is located. We have in the pastexperienced difficulty in recruiting qualified personnel. Failure to attract,assimilate and retain personnel, particularly technical, sales and marketingpersonnel, would have a material adverse effect on our business and potentialgrowth. Additionally, volatility or a lack of positive performance in our stockprice may adversely affect our ability to retain key employees, all of whomhave been granted stock options or been sold restricted stock.

 

**Difficulties we may encountermanaging our growth could adversely affect our results of operations**

 

The expansion and increased complexity of our operations has placed asignificant strain upon our management systems and resources. If we are unableto manage our expanded operations, our business will be seriously harmed. Wehave expanded the geographic scope of our customer base and operations. Thisexpansion has resulted and will continue to result in substantial demands onour management resources. In order to compete effectively and to manage futureexpansion of our operations, if any, we need to continue to improve ourfinancial and management controls, reporting systems and procedures on a timelybasis and expand, train and manage our employee work force. We have implementedsystems to manage our sales, support and administrative operations. We may findthat these systems, our personnel, procedures and controls are inadequate tosupport our future operations.

 

**Intense competition in our targetmarket 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 thecompetition and the pace of change are expected to increase in the future.Increased competition is likely to result in price reductions, reduced grossmargins and loss of market share, any one of which could seriously harm ourbusiness. Competitors vary in size and in the scope and breadth of the productsand services offered. We encounter competition with respect to differentaspects of our solution from a variety of sources including:

 

 

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•                  companies that operate Internet-based marketplaces for the sale ofon-line learning;

•                  companies that operate Internet-based marketplaces for the sale ofgoods and services and could potentially decide to evolve their marketplaces toinclude content offerings;

•                  Internet portals that offer learning content, performance support toolsor recruiting services;

•                  companies that market and license training, learning, performance,content, resource, talent and staffing management systems;

•                  enterprise software vendors that offer human resources informationsystems and employee relationship management systems with training andperformance modules; and

•                  potential customers’ internal development efforts.

 

Because there are relatively low barriers to entry in the electroniccommerce market, which comprises a portion of our business model, we expectcompetition from a variety of established and emerging companies.

 

Many of our competitors have longer operating histories, substantiallygreater financial, technical, marketing or other resources, or greater namerecognition than we do. Our competitors may be able to respond more quicklythan we can to new or emerging technologies and changes in customerrequirements. Competition could seriously impede our ability to sell additionalproducts and services on terms favorable to us. Our current and potentialcompetitors may develop and market new technologies that render our existing orfuture products and services obsolete, unmarketable or less competitive. Ourcurrent and potential competitors may make strategic acquisitions or establishcooperative relationships among themselves or with other learning solutionproviders, thereby increasing the availability of their services to address theneeds of our current and prospective customers. We may not be able to competesuccessfully against our current and future competitors, and competitivepressures that we encounter may seriously harm our business.

 

**If we are unable tomanage the complexity of conducting business globally, our internationalrevenues may suffer**

 

International revenues accounted for approximately 27% of our revenuesin the three months ended February 28, 2002 and approximately 30% of ourrevenues in the nine months ended February 28, 2002. We intend to expand ourinternational presence in the future. Conducting business outside of the UnitedStates is subject to certain risks, including:

 

•                  changes in regulatory requirements and tariffs;

•                  language barriers;

•                  difficulties in staffing and managing foreign operations;

•                  longer payment cycles and greater difficulty in collecting accountsreceivable;

•                  reduced protection of intellectual property rights;

•                  potentially harmful tax consequences;

•                  fluctuating exchange rates;

•                  price controls and other restrictions on foreign currency;

•                  difficulties in obtaining import and export licenses;

•                  political and social unrest or disturbances;

•                  the burden of complying with a variety of foreign laws; and

•                  political or economic constraints on international trade.

 

We might not successfully market, sell or distribute our products andservices in foreign markets, and we cannot be certain that one or more of suchfactors will not materially adversely affect our future internationaloperations, and consequently, our business and future growth.

 

 

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**Our revenues may decrease if use ofthe Internet in the markets we target does not grow as projected**

 

The use of the Internet as a means to interconnect organizations andlearning providers is integral to our business model. Our business strategy is,in part, to create a global, business-to-business learning marketplace fororganizations and learning providers to transact business and collaborate.However, the use of the Internet as a means of transacting business isrelatively new and has not been accepted by all customers in the markets wehave targeted. The failure of the Internet to continue to develop as acommercial or business medium or of significant numbers of organizations andlearning providers to transact business and collaborate on the Internet wouldharm our revenues and earnings. The acceptance and use of the Internet totransact business and collaborate is dependent upon a number of factors, suchas the growth and use of the Internet in general, the relative ease ofconducting business on the Internet, the efficiencies and improvements thatconducting commerce on the Internet provides, the resolution of concerns abouttransaction security and taxation of transactions on the Internet.

 

**A failure to expand andimprove the infrastructure of the Internet could constrain the functionality ofour products and services and thus limit our revenues**

 

The recent growth in Internet traffic has caused frequent periods ofdecreased performance, and if Internet usage continues to grow rapidly, theInternet infrastructure may not be able to support this growth and reliabilitymay decline. If outages or delays on the Internet occur frequently or increasein frequency, overall Internet usage including usage of our products andservices could grow more slowly or decline. Our ability to increase the speedand scope of our services to customers is ultimately limited by, and dependsupon, the speed and reliability of both the Internet and our customers’internal networks. Consequently, the emergence and growth of the market for ourproducts and services depends upon improvements being made to the entireInternet as well as to our individual customers’ networking infrastructures toalleviate overloading and congestion. If these improvements are not made, theability of our customers to use our products and services will be hindered, andour business may suffer.

 

**A breach of Internetcommerce 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 ofconfidential information over public networks. Failure to prevent securitybreaches of Saba Learning ASP Edition or hosted versions of Enterprise Edition,Saba Exchange or on our customers’ networks, or well-publicized securitybreaches affecting the Internet in general, could significantly harm our growthand revenues. We cannot be certain that advances in computer capabilities, newdiscoveries in the field of cryptography, or other developments will not resultin a compromise or breach of the algorithms we use to protect content andtransactions on Saba Learning ASP Edition or hosted versions of Enterprise Edition,Saba Exchange or within our customers’ networks or proprietary information inour databases. Anyone who is able to circumvent our security measures couldmisappropriate proprietary and confidential information or could causeinterruptions in our operations. We may be required to expend significantcapital and other resources to protect against such security breaches or toaddress problems caused by such breaches. Concerns over the security of theInternet and other on-line transactions and the privacy of users may also deterpeople from using the Internet to conduct transactions that involvetransmitting confidential information.

 

**We may become subject togovernment regulation and legal uncertainties that could reduce demand for ourproducts and services or increase the cost of doing business, thereby adverselyaffecting our financial results**

 

We are not currently subject to direct regulation by any domestic orforeign governmental agency, other than regulations applicable to businessesgenerally, export control laws and laws or regulations directly applicable toInternet commerce. However, due to the increasing popularity and use of theInternet, it is possible that a number of laws and regulations may becomeapplicable to us or may be adopted in the future with respect to the Internetcovering issues such as:

 

 

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•                  user privacy;

•                  taxation;

•                  content;

•                  right to access personal data;

•                  copyrights;

•                  distribution; and

•                  characteristics and quality of services.

 

The applicability of existing laws governing issues such as propertyownership, copyrights, and other intellectual property issues, encryption,taxation, libel, export or import matters and personal privacy to the Internetis uncertain. The vast majority of these laws were adopted prior to the broadcommercial use of the Internet and related technologies. As a result, they donot contemplate or address the unique issues of the Internet and relatedtechnologies. Changes to these laws, including some recently proposed changes,could create uncertainty in the Internet marketplace. Such uncertainty couldreduce demand for our services or increase the cost of doing business due toincreased 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 localauthorities have been investigating certain Internet companies regarding theiruse of personal information. We could incur additional expenses if newregulations regarding the use of personal information are introduced or ifthese authorities choose to investigate our privacy practices.

 

**Our market is subject torapid technological change and to compete, we must continually enhance ourproducts and services**

 

We must continue to enhance and improve the performance, functionalityand reliability of our products and services. The software and electroniccommerce industries are characterized by rapid technological change, changes inuser requirements and preferences, frequent new product and servicesintroductions embodying new technologies and the emergence of new industrystandards and practices that could render our products and services obsolete.In the past, we have discovered that some of our customers desire additionalperformance and functionality not currently offered by our products. Oursuccess will depend, in part, on our ability to both internally develop andlicense leading technologies to enhance our existing products and services,develop new products and services that address the increasingly sophisticatedand varied needs of our customers, and respond to technological advances andemerging industry standards and practices on a cost-effective and timely basis.For example, as the market for human capital development and managementevolves, we intend to develop and introduce new products and enhancements toexisting products that address the requirements of this market. In this regard,we recently commenced sales of Saba Learning ASP Edition, Saba Content and thelimited release version of Saba Performance. There is no assurance that theseproducts will achieve market acceptance. In addition, the development of ourtechnology and other proprietary technology involves significant technical andbusiness risks. We may fail to use new technologies effectively or to adapt ourproprietary technology and systems to customer requirements or emergingindustry standards. If we are unable to adapt to changing market conditions,customer requirements or emerging industry standards, we may not be able toincrease our revenues and expand our business.

 

**Delays in releasing newproducts or enhanced versions of our existing products could adversely affectour competitive position**

 

As part of our strategy, we expect to regularly release new productsand new versions of our existing products. Even if our new products or newversions of our existing products contain the features and functionality ourcustomers want, in the event we are unable to timely introduce these newproducts or product releases, our competitive position may be harmed. We cannotassure you that we will be able to successfully complete the development ofcurrently planned or future products or product releases in a timely andefficient manner. Due to the complexity of our products, internal qualityassurance testing and customer testing of pre-commercial releases may revealproduct performance issues or desirable feature enhancements that could lead usto postpone the release of these products. In addition, the reallocation ofresources associated with any postponement would likely cause delays in thedevelopment and release of other future products or enhancements to ourcurrently available products. Any delay in releasing future products orenhancements of our products could cause our stock price to decline.

 

 

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**If we release productscontaining defects, we may need to halt further shipments and our business andreputation would be harmed**

 

Products as complex as ours often contain unknown and undetected errorsor performance problems. Many serious defects are frequently found during theperiod immediately following introduction and initial shipment of new productsor enhancements to existing products. Although we attempt to resolve all errorsthat we believe would be considered serious by our customers before shipment tothem, our products are not error-free. These errors or performance problemscould result in lost revenues or delays in customer acceptance and would bedetrimental to our business and reputation. As is typical in the softwareindustry, with each release we have discovered errors in our products afterintroduction. We will not be able to detect and correct all errors beforereleasing our products commercially and these undetected errors could besignificant. We cannot assure you that undetected errors or performanceproblems in our existing or future products will not be discovered in thefuture or that known errors considered minor by us will not be consideredserious by our customers, resulting in a decrease in our revenues.

 

**If third parties claim that weinfringe their patents, it may result in costly litigation**

 

We cannot assure you that third parties will not claim our current orfuture products or services infringe their rights. Any such claims, with orwithout merit, could cause costly litigation that could consume significantmanagement time. As the number of product and services offerings in our marketincreases and functionalities increasingly overlap, companies such as ours maybecome increasingly subject to infringement claims. Such claims also mightrequire us to enter into royalty or license agreements. If required, we may notbe able to obtain such royalty or license agreements, or obtain them on termsacceptable to us.

 

**We may not be able to adequatelyprotect our proprietary technology, and our competitors may be able to offersimilar products and services that would harm our competitive position**

 

Our success depends upon our proprietary technology. We rely primarilyon copyright, trademark and trade secret laws, confidentiality procedures andcontractual provisions to establish and protect our proprietary rights. As partof our confidentiality procedures, we enter into non-disclosure agreements withour employees. Despite these precautions, third parties could copy or otherwiseobtain and use our technology without authorization, or develop similartechnology independently. In addition, we have filed eight patent applicationsin 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 bythird parties. Furthermore, effective protection of intellectual propertyrights is unavailable or limited in certain foreign countries. We cannot assureyou that the protection of our proprietary rights will be adequate or that ourcompetitors will not independently develop similar technology, duplicate ourproducts and services or design around any patents or other intellectualproperty rights we hold.

 

**We do not have acomprehensive disaster recovery plan or back-up system, and a disaster couldseverely damage our operations**

 

We currently do not have a comprehensive disaster recovery plan ineffect and do not have fully redundant systems for our services at an alternatesite. A disaster could severely harm our business because our services could beinterrupted for an indeterminate length of time. Our operations depend upon ourability to maintain and protect the computer systems needed for the day-to-dayoperation of Saba Exchange and Saba Learning ASP Edition. A number of thesecomputer systems are located on or near known earthquake fault zones. Althoughthese systems are designed to be fault tolerant, they are vulnerable to damagefrom fire, floods, earthquakes, power loss, telecommunications failures andother events. Additionally, we do not carry sufficient business insurance tocompensate us for all potential losses that could occur.

 

 

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**We outsource themanagement and maintenance of our hosted and ASP solutions to third parties andwill depend upon them to provide adequate management and maintenance services**

 

We rely on third parties to provide key components of our networks andsystems. For instance, we rely on third-party Internet service providers tohost Saba Exchange and Saba Learning Enterprise Edition for customers whodesire to have these solutions hosted. We also rely on third-partycommunications service providers for the high-speed connections that link ourand our Internet service providers’ Web servers and office systems to theInternet. Any Internet or communications systems failure or interruption couldresult in disruption of our service or loss or compromise of customer ordersand data. These failures, especially if they are prolonged or repeated, wouldmake our services less attractive to customers and tarnish our reputation.

 

**We depend upon continuing ourrelationship with third-party integrators who support our solutions**

 

Our success depends upon the acceptance and successful integration bycustomers of our products. We often rely on third-party systems integrators toassist with implementation of our products. We will need to continue to rely onthese systems integrators even as we increase the size of our professionalservices group. If large systems integrators fail to continue to support oursolution or commit resources to us, if any of our customers are not able tosuccessfully integrate our solution or if we are unable to adequately train ourexisting systems integration partners, our business, operating results andfinancial condition could suffer. In addition, we cannot control the level and qualityof service provided by our current and future third-party integrators.

 

**We may not be able tosecure necessary funding in the future; additional funding may result indilution to our stockholders**

 

We require substantial working capital to fund our business. We havehad significant operating losses and negative cash flow from operations sinceinception and expect this to continue for the foreseeable future. We expect touse our available cash resources and credit facilities primarily to fund salesand marketing activities, research and development, and continued operations,and possibly make future acquisitions. We believe that our existing capitalresources will be sufficient to meet our capital requirements for the nexttwelve months. However, if our capital requirements increase materially fromthose currently planned or if revenues fail to materialize, we may requireadditional financing sooner than anticipated. If additional funds are raisedthrough the issuance of equity securities, the percentage ownership of ourstockholders will be reduced, stockholders may experience dilution, or suchequity securities may have rights, preferences or privileges senior to those ofthe holders of our common stock. Additional financing may not be available whenneeded on terms favorable to us or at all. If adequate funds are not availableor are not available on acceptable terms, we may be unable to develop orenhance our products and services, take advantage of future opportunities orrespond to competitive pressures.

 

**Our past and futureacquisitions may result in disruptions to our business if we fail to adequatelyintegrate acquired businesses**

 

In March 2001, we acquired Human Performance Technologies, Inc. and inJune 2001, we acquired Ultris, Inc. As part of our overall business strategy,we expect to continue to acquire complementary businesses or technologies thatwill provide additional products or services offerings, additional industryexpertise or an expanded geographic presence. These acquisitions could resultin the use of significant amounts of cash, potentially dilutive issuances ofequity securities, or the incurrence of debt. In addition, any acquisition mayincrease the risk of future write-offs for acquired in-process research anddevelopment, write-offs for the impairment of goodwill or long-lived assets, oramortization of expenses related to intangible assets, any of which couldmaterially adversely affect our business and our operating results. Forexample, as of February 28, 2002, we had an aggregate of $9.3 million ofgoodwill and purchased intangible assets to be amortized as a result of theacquisition of Human Performance Technologies, Inc. and Ultris, Inc. Inaddition, acquisitions involve numerous risks, including:

 

 

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•                  difficulties in the assimilation of the operations, technologies,products and personnel of the acquired company;

•                  the diversion of management’s attention from other business concerns;

•                  risks of entering markets in which we have no or limited priorexperience; and

•                  the potential loss of key employees of the acquired company.

 

**Our stock price may fluctuatesubstantially**

 

The market price for our common stock may be affected by a number offactors, including those described above and the following:

 

•                  the announcement of new products and services or product and serviceenhancements by us or our competitors;

•                  quarterly variations in our results of operations or those of ourcompetitors;

•                  changes in earnings estimates or recommendations by securities analyststhat may follow our stock;

•                  developments in our industry; and

•                  general market conditions and other factors, including factorsunrelated to our operating performance or the operating performance of ourcompetitors.

 

In addition, the stock market in general, and the Nasdaq NationalMarket and technology companies in particular, have experienced extreme priceand volume fluctuations that have often been unrelated or disproportionate tothe operating performance of these companies. Broad market and industry trendsmay also materially and adversely affect the market price of our common stock,regardless of our actual operating performance. In the past, following periodsof volatility in the market price of a company’s securities, securitiesclass-action litigation has often been initiated against that company.Class-action litigation could result in substantial costs and a diversion ofmanagement’s attention and resources.

 

**Sales of shares eligible for futuresale 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. Suchsales also might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and price that we deem appropriate.

 

**The anti-takeoverprovisions in our charter documents could adversely affect the rights of theholders of our common stock**

 

Our Certificate of Incorporation and Bylaws contain provisions thatcould make it harder for a third-party to acquire us without the consent of ourboard of directors. For example, if a potential acquiror were to make a hostilebid for us, the acquiror would not be able to call a special meeting ofstockholders to remove our board of directors or act by written consent withouta meeting. In addition, our board of directors has staggered terms that make itdifficult to remove all directors at once. The acquiror would also be requiredto provide advance notice of its proposal to remove directors at an annualmeeting. The acquiror will not be able to cumulate votes at a meeting, whichwill require the acquiror to hold more shares to gain representation on theboard of directors than if cumulative voting were permitted.

 

Our board of directors also has the ability to issue preferred stockthat would significantly dilute the ownership of a hostile acquiror. Inaddition, Section 203 of the Delaware General Corporation Law limits businesscombination transactions with 15% stockholders that have not been approved bythe board of directors. These provisions and other similar provisions make itmore difficult for a third party to acquire us without negotiation. Theseprovisions may apply even if the offer may be considered beneficial by somestockholders.

 

 

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Our board of directors could choose not to negotiate with an acquirorthat it did not feel was in our strategic interests. If the acquiror wasdiscouraged from offering to acquire us or prevented from successfullycompleting a hostile acquisition by the anti-takeover measures, you could losethe opportunity to sell your shares at a favorable price.

 

**ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We provide our services to customers primarily in the United Statesand, to a lesser extent, in Europe and elsewhere throughout the world. As aresult, our financial results could be affected by risks typical of aninternational business. Such factors include, but are not limited to, changesin foreign currency exchange rates, local regulations and restrictions andpolitical climates, weak economic conditions in foreign markets, differing tax structuresand 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 bedenominated in Australian Dollars, British Pounds, Canadian Dollars and Euros.A strengthening of the U.S. Dollar could make our products less competitive inforeign markets.

 

Our exposure to foreign exchange rate fluctuations also arises in partfrom the translation of the financial results of foreign subsidiaries into U.S.dollars in consolidation. As exchange rates vary, these results, whentranslated, may vary from expectations and adversely impact overall expectedprofitability.

 

Our investments are made in accordance with an investment policyapproved by our board of directors. At February 28, 2002, the average maturityof our investment securities was approximately three months. The majority ofour investment securities had maturities of less than one year. Our interestincome is sensitive to changes in the general level of U.S. interest rates. Dueto the nature of our cash equivalents and investments, which are primarilymoney market funds and commercial paper, we believe that there is no materialmarket risk exposure.

 

All investments are carried at market value, which approximates cost.At February 28, 2002, all of our investments were considered available-for-salesecurities and the majority had maturities of one year or less. The weightedaverage interest rate of our portfolio was approximately 2.5% at February 28,2002.

 

 

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**PARTII  OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

In November 2001, a complaint was filed in the United States DistrictCourt of the Southern District of New York against Saba, certain of itsofficers and directors, and certain underwriters of Saba’s initial publicoffering. The complaint was purportedly filed on behalf of a class or certainpersons who purchased our common stock between April 6, 2000 and December 6,2000. The complaint alleges violations by Saba and its officers and directorsof the Securities Act of 1933 in connection with certain alleged compensationarrangements entered into by the underwriters in connection with the offering.Similar complaints have been filed against over 310 other issuers that have hadinitial public offerings since 1998. We intend to vigorously defend againstthis action. Although no assurance can be given that this matter will beresolved in our favor, we believe that the resolution of this lawsuit will nothave a material adverse effect on our financial position, results of operationsor cash flows.

 

We are also party to various legal disputes and proceedings arisingfrom the ordinary course of general business activities. While, in the opinionof management, resolution of these matters is not expected to have a materialadverse effect on our consolidated financial position, results of operations orcash flows, the ultimate outcome of any litigation is uncertain. Were anunfavorable outcome to occur, the impact could be material to us.

 

**ITEM 2. CHANGES IN SECURITIES AND USEOF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM8-K**

 

a.             Exhibits

 

See Exhibit Index following the signature page.

 

b.             Reports on Form8-K.

 

None.

 

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                         | SABA SOFTWARE, INC. |
|------------------------------|---------------------|
|                         |                |   |
| Dated:   April 15, 2002 | By:                 | /s/     Bobby Yazdani |
|                         |                | *Chairman of  the Board of Directors* |
|                         |                |   |
|                         | By:                 | /s/     Terry Carlitz |
|                         |                | *Chief  Financial Officer and* |
|                         |                | *Director  (Principal Financial and* |
|                         |                | *Accounting  Officer)* |

 

 

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**EXHIBIT INDEX**

** **
| **Exhibit   Number** |   | **Document**                                                                                          |   |
|----------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
| 3.1  (1)             |   | Amended  and Restated Certificate of Incorporation of the Company as effective as of  April 12, 2000. |
|                 |   |                                                                                                  |
| 3.3  (2)             |   | Amended  and Restated Bylaws of the Company as effective as of April 12, 2000.                        |
|                 |   |                                                                                                  |
| 4.1                  |   | Reference  is made to Exhibits 3.1 and 3.2.                                                           |

 

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(1) Incorporated by reference to Exhibit 3.2 to the Company’s RegistrationStatement on Form S-1 (Registration No. 333-95761) previously filed with theSEC.

 

(2) Incorporated by reference to Exhibit 3.4 to the Company’sRegistration Statement on Form S-1 (Registration No. 333-95761) previouslyfiled with the SEC.

 

 

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