Mail Stop 4-6
October 8, 2004
Bobby Yazdani
CEO and Chairman
Saba Software, Inc.
2400 Bridge Parkway
Redwood Shores, California 94065-1166
RE: Saba Software, Inc.
Amendment No. 1 to Form S-3
Filed September 9, 2004
File No. 333-118226
Form 10-K for fiscal year ended May 31, 2004
File No. 0-30221
Dear Mr. Yazdani:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your documents in
response to these comments. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form S-3
Our Business, page 1
1. Please revise this section to include only information that
summarizes the key aspects of this offering and your business.
You
may move non-conforming information to elsewhere in your document.
See Item 503(a) of Regulation S-K.
2. We note your assertion that you are a "leading provider" of
human
capital development and management solutions. Please revise to
disclose your basis for this assertion. For example, is this
assertion based on how your revenues compare with the revenues
generated by each significant competitor in your industry, or on
the
number of customers, or your market share, etc? We note similar
assertions on pages 1 and 11 of your Form 10-K. Additionally,
please
revise your competition section on page 5 of your Form 10-K to
link
this assertion to your discussion of your industry position. See
Item 101(c)(1)(x) of Regulation S-K.
3. Please balance your discussion of your leading industry
position
by also disclosing your general financial condition over the last
fiscal year including your history of net losses and negative cash
flow, as well as describing your substantial indebtedness.
Risk Factors, page 2
4. Your risk factor section is long and appears to consist of risk
factors that are not specific to your company or this offering.
In
this regard, do not present risks that could apply to any issuer
in
your industry. Please review your risk factors to revise or
eliminate any risk factors as necessary in order to ensure
meaningful
disclosure that is specific to your company or this offering.
For example:
* "We are exposed to recent unfavorable economic conditions," page
4
* "If we lose key personnel or are unable to attract and retain
....,"
page 5
* "If we fail to maintain an effective system of internal controls
....," page 5
* "Our market is subject to rapid technological change ..." page 7
* "Sales of shares eligible for future sale could cause ...," Page
10
5. Additionally, in each risk factor, get to the risk as quickly
as
possible and provide only enough detail to place the risk in
context.
In some of your risk factors, the actual risk you are trying to
convey does not stand out from the numerous bullet points or the
extensive detail you provide.
For example:
* "Fluctuations of our results could cause our stock price ...,"
page 3
* "If we are unable to manage the complexity ...," page 6
6. To the extent useful and available, provide quantification to
explain and give context to amounts your describe as "significant"
or
"substantial."
For example:
* In "Fluctuations of our results could cause ...," page 3, please
quantify by amount or percentage the past fluctuations in your
operating revenues, as well as the fluctuations in your overall
quarter-to-quarter operating results.
* In "A decline in the price of, or demand for, our main product
....," page 4, quantify by amount or percentage what is meant by
"substantial majority."
* In "Our stock price may fluctuate substantially," page 10,
quantify
by amount or percentage the fluctuation in stock price over a
quarterly or yearly basis.
Difficulties we may encounter managing our growth ..., page 5
7. Please briefly describe what is meant by your intention to grow
your business "significantly." For example, how do you intend to
grow your business? Are you planning to expand your sales force?
If
so, by how much (e.g., 20%, 50%, etc.)? Are you planning growth
through acquisition? A more detailed explanation of your planned
growth is appropriate for your MD&A and business sections as well.
Claims by third parties that we infringe on their intellectual
property ..., page 8
8. Please briefly disclose your history of litigation in this
area,
including the IP Learn settlement.
If we release products containing defects ..., page 8
9. Disclose whether you have experienced any material difficulty
in
the past with undetected errors or performance problems.
We may not be able to secure necessary funding ..., page 9
10. Please revise to address the risks associated with failing to
satisfy the Nasdaq requirements under a separate risk factor
caption.
In this regard, disclose whether you met this requirement for the
three months ending August 31, 2004.
Disclosure Regarding Forward-Looking Statements, page 12
11. Additionally, please eliminate statements that limit the
amount
of reliance investors may make on the disclosure provided in your
prospectus. In this regard, we note in your second paragraph the
statement that investors "should not place undue reliance on any
forward-looking statements."
Selling Security Holders, page 13
12. Item 7 of Form S-3 requires disclosure of material
relationships
between the selling security holders and the registrant within the
past three years. A description of how these selling stockholders
acquired their shares, and the material terms of the securities
they
acquired constitutes a material relationship that must be
described
within your Form S-3. Therefore, please revise your selling
stockholder section to include this information. See Item 507 of
Regulation S-K.
13. Please disclose unequivocally, if true, that Messrs. Samber
and
Leniham exercise the sole/shared voting and dispositive powers
with
respect to the shares to be resold. See interpretation 4S of the
Regulation S-K portion of the March 1999 Supplement to our
publicly
available CF Telephone Interpretation Manual.
14. Disclose whether either of the selling security holders is an
affiliate of a broker-dealers. If such broker-dealer affiliation
exists, disclose whether the selling security holder acquired
their
shares in the ordinary course of business and whether at the time
of
the acquisition it had any plans or proposals, directly or with
any
other person ,to distribute the shares. Additionally, explain the
nature of the affiliation.
15. If applicable, please update your selling security holder
table
so that the information is current at the time of your amended
filing.
Plan of Distribution, page 14
16. We note that the selling shareholders may engage in short
sales.
Please advise whether the selling shareholders have any currently
open short positions, and if so, the amount. In this regard,
please
confirm that you are aware of CF Telephone Interpretation A.65.
17. Regarding your disclosure on page 15 where you state that you
will file a "prospectus supplement" if you are notified that any
of
the selling shareholders entered into a material arrangement with
broker-dealers for the sale or purchase of shares, please revise
to
clarify that, consistent with you undertaking in Item
512(a)(1)(iii)
of Regulations S-K, you will file a post-effective amendment to
reflect this change, rather than a prospectus supplement.
Exhibit 5.1
18. We note your legal opinion is limited to the "General
Corporation
Law of the State of Delaware." As you may know, Section VIII A.14
of
the CF Current Issues Outline restricts such limitation unless
your
legal counsel can confirm in writing that it understands that any
such limitation includes the statutory provisions and also all
applicable provisions of the Delaware Constitution and reported
judicial decisions interpreting these laws. Please either revise
your legal opinion as necessary or provide the required written
confirmation.
Form 10-K for fiscal year ended May 31, 2004
General
19. To the extent that comments on the Form S-3 are applicable to
your periodic reports, revise as appropriate. In addition, to the
extent that comments on the Form 10-K are applicable to other
periodic reports or your disclosure in the prospectus, revise as
appropriate.
Our Customers, page 3
20. Please provide us with copies of all materials that support
your
claim that your customers represent 22% of the Fortune Global 100
and
20% of the FTSE 100.
21. Additionally, regarding your statement that your customers are
"leaders in their regions," disclose your basis for stating that
two
of your customers represent "two of the top five companies in
Europe," that three of your customers represent "the top three
companies in Germany," and that one of your customers "is the
largest
company in Brazil." For example, is this assertion based on the
respective company`s revenues, market capitalization, market
share,
etc? Are these companies the largest in all industries or a
specific
industry?
Alliances, page 4
22. Please advise us whether any of the "strategic alliance
agreements" and "alliance agreements" referenced in this section
are
material to your operations or contain terms in the agreements
that
are material to an investors understanding of your business. If
any
material agreement exists, please disclose in this section. For
example, have you relied heavily on any of your strategic
alliances
in the past or expect such reliance in the future? Do any of the
terms of your agreements hinder your ability to recruit or hire
certain personnel?
Research and Development, page 5
23. We note that a significant percentage of your operational
expenses are attributable to your research and development
activities. Consistent with the requirements of Item
101(c)(1)(xi),
disclose the amount spent during each of the last three fiscal
years
on research and development activities.
Proprietary Rights, page 6
24. Please clarify whether you currently possess any material
patents, licenses, etc., as well as clarify their importance,
duration and effect. In this regard, we note from your MD&A, page
11, the emphasis you place on the license revenue that Saba
Enterprise Learning generates. See Item 101(c)(1)(iv) of
Regulation
S-K.
Item 3. Legal Proceedings, page 8
25. Please provide the basis for your belief that the November
2001
complaint filed in the Southern District of New York and the March
12, 2004 complaint filed by Docent, Inc. are without merit.
Item 7. Management`s Discussion and Analysis, page 11
Overview, page 11
26. An informative overview informs readers how the company earns
revenues and income and generates cash, as well as provides
insight
into short and long term material opportunities, challenges and
risks
on which the company`s executives are most focused. Please
consider
adding disclosure that discusses any short and long term material
opportunities, challenges and risks that concern management, as
well
as the actions management is taking to address them. For example,
expand your discussion of how Saba earns its revenues by
distinguishing between revenues from licenses and services, and
discuss the decreasing importance of license revenues. Similarly,
more specifically discuss how management intends to focus on
"aggressively managing costs to achieve positive cash flow from
operations ...." Additionally, based on the decline in North
American employees and increase in employees outside of North
America, discuss whether management is pursuing a plan to decrease
costs by moving additional operations outside of North America.
See
Section III.A of SEC Release 33-8350.
27. Your MD&A provides discussion and analysis of past financial
condition and operating analysis, however, there does not appear
to
be much emphasis on your prospective financial condition and
operating performance. Please consider revising your MD&A,
including
your overview section, to discuss prospective matters, such as
subscription trends. Please focus in you revised discussion on
any
material trends and uncertainties. In this regard, we note your
general discussion of the decrease in worldwide demand; however,
please expand this discussion to explain how you anticipate this
will
impact Saba. For example, it is unclear how the benefit you
received
from the "high level of renewals" last year will impact your
operations in the current year. Additionally, we note from the
last
risk factor on page 2 of your Form S-3 that you expect to incur
losses for the foreseeable future and will need to generate
"significantly higher revenue" in order to achieve profitability.
Please further explain this statement in this section. See
Section
III.B.3 of SEC Release 33-8350.
28. Please discuss in this section your 2004 restructuring
activities
and their impact on your business. Specifically, discuss the
period(s) over which your employee reductions occurred and the
rationale behind these reductions.
29. Additionally, tell us what your expectation is of additional
restructuring charges or adjustments. Tell us what consideration
you
gave to MD&A of such charges and adjustments.
30. As mentioned in the risk factor on page 4 of your Form S-3,
please include within your business section a discussion of your
sales cycle.
Revenue Models, page 11
31. In light of the fact that service revenues accounted for 71%
of
fiscal 2004 revenues and 63% of fiscal 2003 revenues, please
clarify
your statement that "we generate the majority of our revenues from
the sale of perpetual software licenses, primarily Saba Enterprise
learning, along with annual support services ...,"
Results of Operations, page 13
32. Regarding your disclosure that one customer that accounted for
12% of your revenues in fiscal 2003, please advise us of the
reasons
for this change. For example, is this no longer a customer of
Saba,
or did the amount generated by this customer decrease? Please
consider the materiality of this change to an investor`s
understanding your business.
33. We note your disclosure that you attribute the decline in your
consulting revenue in fiscal year 2004 to an increase in the
number
of implementations performed by third-party integrators. You also
indicate that your international customers are more likely to use
third party integrators, and there was an increase in this mix of
customers during this period. Do you expect that the mix of
international customers will continue to increase? In this
regard,
will any such increases result in continuing declines in your
consulting revenue?
34. We note that between 2004 and 2003 you experienced lower
"consultant utilization rates" and "lower realized average hourly
billing rates" for your consultants. We note that you indicate
such
declines led to the increase in cost of services as a percentage
of
services revenue for such period. Please revise to clarify the
percentage of such increase that is the result of a reduction in
volume of services sold versus a reduction in prices charged for
such
services.
35. In this section, you sometimes refer to two or more factors
that
contributed to material changes over the reported periods. Some
examples of these factors include the following:
* The decrease in service revenues affected by the decreases in
consulting revenue, partially offset by increases in support
revenue;
* The decrease in R&D expenses due to the decrease in R&D
personnel,
partially offset by increased staffing in your lower-cost
development
center in India; and
* The decrease in sales and marketing expenses resulting from
reduced
sales and marketing personnel, lower commission expense and lower
expenditures for marketing programs.
Please revise to quantify the amount of the changes contributed by
each of the factors or events that you identify as they relate to
revenues, research and development expense and marketing expense.
See Section III.D of SEC Release 33-6835.
Liquidity and Capital Resources, page 19
36. When comparing to prior years your cash flows from operating,
investing and financing, disclose the percentage change for each
increase and decrease you reference.
37. Your discussions of cash used in operating activities are
recitations of the reconciling items identified on the face of the
statements of cash flows. This type of narrative does not
contribute
to an understanding of your cash flows but simply repeats items
that
are readily computable from the financial statements. Revise to
address material changes and trends in the underlying drivers
(e.g.
cash receipts from customers, cash payments to suppliers, etc.) in
financial statement line items as they impacted your liquidity and
capital resources. For example, revised disclosure should address
the $10 million decrease in working capital from fiscal year 2003
to
2004 and whether this constitutes a trend impacting future
liquidity
and capital. See Instruction 4 to Item 303 of Regulation S-K and
Section IV.B.1. of SEC Release 33-8350.
38. We note your disclosure that your previous and amended credit
facility provides for the maintenance of certain covenants
including
the one financial covenant you disclose. Revise to disclose any
other material covenants in both quantitative and qualitative
terms
and whether you expect to meet the requirements of these covenants
in
the future.
Contractual Obligations, page 20
39. Please explain why you have not reflected purchase obligations
for goods or services that are enforceable and legally binding.
The
footnotes to the table should discuss any material termination or
renewal provisions to the extent necessary for an understanding of
the timing and amount of the registrant`s payments under its
purchase
obligations. See Item 303 (A)(5) of Regulation S-K.
Consolidated Statements of Operations, page 34
40. We note you include amortization of deferred stock
compensation
and other stock charges as one line item in your statements of
operations. Revise your presentation by allocating the amount of
amortization related to each line item in the statements of
operations (i.e. research and development, sales and marketing and
general and administrative) or provide a schedule below your
statement of operations detailing amounts that should be allocated
to
each line item.
Consolidated Statements of Stockholders` Equity, page 35
41. Explain to us both the amounts and why certain repurchases of
common stock are netted against stock option exercises in each of
the
fiscal years. It would appear these repurchases should be
classified
as treasury shares. Please advise.
Note 2. Summary of Significant Accounting Policies
Cash Equivalents, page 38
42. Please tell us the composition of cash equivalents given the
materiality of the amount.
Revenue Recognition, page 43
43. We note on page 3 that you provide several product support
options to your customers. Tell us supplementally what level of
support is included for perpetual license agreements in which
support
is bundled and how these support options affect your revenue
recognition. Explain the payment terms, duration of support
arrangements and how you account for discounts on purchases and/or
future purchases.
44. We note you provide hosting services to your customers. Tell
us
whether your arrangements include any up-front fees charged to
customers, and if so, clarify the nature of the up-front fee and
how
the related revenue is recognized. Also, clarify whether you
incur
any set-up costs or acquisition costs (i.e. commissions)
associated
with your hosting arrangements. If, so, tell us your accounting
for
theses costs and refer to the literature that supports your
accounting.
45. For your fixed-fee arrangements, revise to disclose the basis
you
use to determine the amount of revenue that is proportional to the
performance of the services. For example, do you use milestones
or
another form of input or output measure? Do you use costs
incurred?
Please advise and justify the methodology you use.
46. When you use the price established by management to determine
VSOE of fair value tell us the period of time between establishing
of
the price and the element`s introduction into the marketplace.
47. Tell us and disclose if you have any delivery and acceptance
or
testing clauses and if you have clear timescales for such
procedures
with trigger points of acceptance. Explain how you recognize
revenue
under such arrangements.
48. Tell us how you determine the payment terms you offer your
customers and what you believe your normal and customary payment
terms are. Tell us how you recognize revenue on contracts that
involve extended payment terms. Note that extended payment terms
may
include periods less than one year, particularly if the use of the
extended payment terms is not your customary practice. Tell us if
there are any set-offs or termination charge reimbursements or
concessions associated with your normal payment terms. Confirm to
us
that you have a history of successfully collecting under your
original terms without making concessions. Explain how your
normal
payment terms comply with the guidance in paragraphs 27 through 30
of
SOP 97-2 as well as AICPA Technical Practice Aid 5100.56 and .57.
49. We note that Saba Enterprise Learning Suite and Performance
Suite
includes various applications. Tell us how your revenue
recognition
for multiple-element arrangements, which may be comprised of
separate
contracts, complies with the AICPA Technical Questions and Answers
Section 5100.39 "Software Revenue Recognition for Multiple-Element
Arrangements."
Note 5. Stockholder`s Equity, page 46
50. Please explain your accounting for the fiscal 2000 restricted
stock issuances with respect to compensation. Reference the
related
supporting accounting literature.
51. We note employees who elected to participate in the exchange
program were also required to exchange all option grants during
the
six-month period prior to the cancellation date. We also note
that
some employees terminated their employment during the six-month
period and were not granted replacement options. Tell us how you
accounted for these grants and cancellations in accordance with
FIN
44, APBO No. 25 and EITF 00-23.
52. Please explain why variable plan accounting did not apply to
the
option exchange program. Tell us how your accounting addresses
Issue
39 in EITF 00-23.
Note 9. Litigation, page 52
53. Refer to your disclosure regarding the settlement agreement
with
IP Learn, LLC. We note you recognized the aggregate settlement
amount in fiscal 2004. Tell us supplementally what these
settlement
payments relate to. Are they for past, present or future use of
the
four patents in question? If so, tell us what periods the patents
relate to. Additionally, confirm that the shares issued in
settlement are in fact shares of common stock and not stock
options
issued as noted on page 36 in your consolidated statements of
stockholders` equity. We may have further comments.
54. Refer to your disclosures surrounding your litigation with
Docent, Inc. as well as other legal proceedings. If it is at
least a
reasonable possibility that a loss or an additional loss may have
been incurred, revise to give an estimate of the possible loss or
range of loss or state that an estimate cannot be made. Refer to
paragraph 10 of SFAS 5.
Note 11. Acquisitions, page 53
55. We note that you refer to an independent valuation in your
discussion of the allocation of the purchase price of Ultris Inc.
When you refer to an independent appraisal or valuation you should
also disclose the name of the expert and include the expert`s
consent
with the filing. Refer to Section 436(b) of Regulation C. Revise
or
delete this reference.
Note 12. Restructuring, page 54
56. We note you discuss your restructuring programs in the
aggregate
for each year presented. Revise to describe separately the facts
and
circumstances related to each restructuring plan implemented and
the
expected completion dates. See paragraph 20.a of SFAS No. 146.
* * * *
As appropriate, please amend your filings in response to
these
comments. You may wish to provide us with marked copies of the
amendment to expedite our review. Please furnish a cover letter
with
your amendment that keys your responses to our comments and
provides
any requested supplemental information. Detailed cover letters
greatly facilitate our review. Please file your cover letter on
EDGAR. Please understand that we may have additional comments
after
reviewing your amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rule 461 regarding requesting
acceleration of a registration statement. Please allow adequate
time
after the filing of any amendment for further review before
submitting a request for acceleration. Please provide this
request
at least two business days in advance of the requested effective
date.
You may contact Patrick Gilmore, Staff Accountant, at (202)
824-5355 or Craig Wilson, Senior Assistant Chief Accountant, at
(202)
942-2949, if you have questions regarding comments on the
financial
statements and related matters. Please contact Robert D. Bell,
Staff
Attorney, at (202) 942-1953, Tangela Richter, Staff Attorney, at
(202) 942-1837, or me at (202) 942-1990 with any other questions.
Sincerely,
Barbara C. Jacobs
Assistant Director
Office of Computers and Online
Services
cc: James R. Tanenbaum, Esq.
Morrison & Foerster LLP
Fax (212) 468-7900
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Mr. Bobby Yazdani
Saba Software, Inc.
Form S-3; File No. 333-118226
October 8, 2004
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