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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 2001
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-27861
Centra Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3268918
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
430 Bedford Street, Lexington, MA 02420
(Address of Principal Executive Offices)
(781) 861-7000
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of the Form 10-K [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $129,565,000 as of February 28, 2002 based on the
last sale price of the Common Stock as reported on the Nasdaq Stock Market for
that date. There were 25,464,788 shares of the Registrant's Common Stock issued
and outstanding on February 28, 2002.
TABLE OF CONTENTS
Page
No.
----
PART I.
Item 1. Business....................................................... 4
Item 2. Properties..................................................... 8
Item 3. Legal Proceedings.............................................. 9
Item 4. Submission of Matters to a Vote of the Security Holders........ 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................... 10
Item 6. Selected Consolidated Financial Data........................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 29
Item 8. Consolidated Financial Statements and Supplementary Data....... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures...................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant............. 30
Item 11. Executive Compensation......................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management. 35
Item 13. Certain Relationships and Related Transactions................. 36
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements....................................... 37
Signatures 40
2
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K, including
information with respect to our future business plans, constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause our results to differ materially from those
indicated by such forward-looking statements. These factors include those set
forth below under the heading "Factors That Could Affect Future Results"
beginning on page 22.
Except as otherwise expressly stated, forward-looking statements contained
in this report assume that we will continue to operate as an independent
company and do not give effect to our proposed merger with SmartForce Public
Limited Company, described under "Subsequent Event" on page 21. Consummation of
the proposed merger with SmartForce will cause our business plans and our
results to differ in material respects from those indicated in the
forward-looking statements appearing herein.
3
PART I.
ITEM 1. BUSINESS
Overview
Centra Software, Inc. (Centra or the Company) was incorporated in Delaware
in 1995. We design, develop, market and support software and services for
eLearning and real-time business collaboration. Our products and services
enable real-time, group-oriented human interaction and content management over
corporate networks and the Internet. Our products and services are designed to
facilitate strategic business processes across the extended enterprise,
including accelerated product introductions, hands-on software application
deployments and change-management initiatives, employee training, customer
interaction and online selling, and other revenue-generating activities, such
as priced programs for online education and the delivery of collaborative
services on the Web.
Our products are available as packaged software applications, hosted
services, and subscription based application service provider, or (ASP)
offerings. Based on a common collaboration framework, our products and services
support a range of convenient business interactions online, including real-time
virtual learning, large-scale Web conferences, and interactive Web meetings.
Each real-time collaboration interface includes capabilities for voice-over-IP
audio conferencing, software application sharing, real-time data exchange,
shared workspaces, and facilities for session recording and playback. These
products and services allow organizations to increase the productivity of their
members and enhance the effectiveness of knowledge transfer while reducing
travel, facilities, and telecommunications costs.
In April 2001, Centra completed the acquisition of MindLever.com, Inc
(MindLever), a privately-held provider of management systems for learning
content with standards-based solutions for creating, storing, and delivering
live and self-paced learning content in the form of personalized eLearning
programs. As a result of this acquisition and through its continuing
integration efforts, Centra's products and services for live collaboration have
been expanded to include capabilities and tools for rapid content authoring and
the management of proprietary content, session recordings, and other
third-party, standards-compliant content in a centralized, online content
repository. Using these "Knowledge Products," organizations can design and
deliver personalized, blended learning programs - combining live and self-paced
learning activities - to increase the overall effectiveness of eLearning
programs as well as to protect their investments in content and knowledge
assets by ensuring reusability across various delivery platforms through
support for industry content and interoperability standards.
As of December 31, 2001, Centra had approximately 1.9 million end-users in
775 distinct customer organizations worldwide, across many industry sectors,
including Accenture, APL, AT&T, Cadbury Schweppes, Century 21, Citigroup,
Domino's Pizza, EMC Corporation, ExxonMobil, Federal Bureau of Prisons,
McKesson, Merck, Nationwide Insurance, Nikko Securities, Procter & Gamble,
Stanford University, Sysco, University of Tennessee, U.S. Internal Revenue
Service, and Viacom. Approximately 26% of our revenue in 2001 came from
customers outside of the United States.
To complement and extend Centra's solutions, and to facilitate rapid
integration with third-party products and services for eLearning and
collaboration, Centra has identified, recruited, and actively supports a
strategic "ecosystem" of business relationships with leading content
developers, services and consulting firms, learning technology providers, and
online training companies, including Microsoft, Oracle, Cisco, Siebel, Saba,
Docent, AchieveGlobal, New Horizons, PwC Consulting, Deloitte Consulting, EDS,
and KPMG iLS.
Industry Background
We believe that our customer base is made up of businesses operating in a
climate characterized by swift economic changes, a need for stronger focus on
top-line results, bottom-line cost cutting, and improvements in
4
productivity. Companies continue to seek new ways to utilize the capabilities
and the universal reach of the Internet to accelerate business processes,
improve productivity, create revenue-generating opportunities, leverage
employee knowledge and expertise, and lower operating costs. In order to
achieve these goals, organizations need collaborative technologies that enable
the sharing and exchange of business-critical information with geographically
distributed customers, partners, prospects and employees. To be truly
effective, however, these technologies must be easy to use and support the
numerous ways in which people collaborate and learn, including one-to-one
customer and sales interactions, one-to-many seminar and presentation events,
many-to-many learning and interactive teamwork sessions, and individual,
on-demand learning activities.
Many existing Internet-based communication tools, including chat rooms,
instant messaging, Web meetings and screen sharing, address only discrete
collaboration needs and are not integrated with a common user interface or
back-end management system. As a result, these products do not support the
broad range of live interaction required by business professionals for
effective eLearning and collaboration, and are not suitable for organizations
seeking to simplify and lower costs of ownership for their information
technology systems.
To maximize the return on their infrastructure investments, companies
require a solution that can integrate voice communication, conferencing,
content sharing and group interaction. More than just virtual classrooms, a
complete solution for live eLearning and collaboration must support a broad
range of live, self-service, and recorded group interactions in a variety of
business contexts, supported by a common collaboration framework. The solution
must allow customers, partners and employees to interact from any location,
regardless of whether they are on a corporate network or on a low bandwidth
dial-up connection, and provide anytime, anywhere access to knowledge and
information by blending live online interaction with self-paced content and
recordings. Finally, an effective live eLearning and collaboration solution
must have a reliable and scalable management environment that can grow to
support and integrate with e-commerce systems, enterprise computer systems, and
emerging Web technologies.
Products and Services
Centra's products and services for eLearning and business collaboration
enable effective, Web-based interaction and knowledge sharing with customers,
partners and employees in a variety of business contexts. Unlike other ways
that people may interact, collaborate and learn, our collaboration solutions
enable groups of people to quickly assemble, converse, interact, share content
and work together in real time over intranets, extranets and the Internet. In
2001, Centra delivered the industry's first scalable, single-server platform
for the consolidated management of eLearning and collaboration. The new
enterprise system, known as CentraOne(TM), is designed to accelerate global
deployments utilizing a thin-client architecture that delivers full-function
collaboration environments directly to the desktop through a browser interface
over low-bandwidth network connections. We expect CentraOne to streamline
system administration functions with features for managing large numbers of
users through a single back-end management system. Leveraging the core
capabilities of CentraOne, Centra offers a suite of compatible Web
collaboration products, content creation tools, and a knowledge delivery system
that can be quickly installed on-site using Centra's rapid deployment
methodology, or conveniently accessed through Centra's secure, full-service ASP
service.
Centra's products, including those for interactive online meetings, virtual
learning, and large-scale Web conferences, provide access to users through
firewalls and proxy servers, and deliver full-performance IP audio
conferencing, streaming video, application sharing, and dynamic multimedia over
low-bandwidth network connections through a standard browser interface that is
consistent and easy to use. Based upon a technological foundation employing
Internet standards and Microsoft platform technologies, Centra's solutions can
be deployed on a single Microsoft Windows NT server and are designed to operate
without any special hardware or network technologies. Our enterprise-class
software systems are designed to scale, as customer usage requires, by adding
additional servers.
5
Our currently available enterprise-class solutions, based on the CentraOne
platform, consist of five primary products. Many of these products and services
are available in 12 localized language editions, which include Brazilian
Portuguese, Chinese, Danish, English, French, German, Greek, Iberian
Portuguese, Italian, Japanese, Korean, and Spanish.
Centra Symposium(TM) 5.3. Centra Symposium software is designed for
virtual classrooms and highly interactive teamwork. Its real-time
collaboration features include full-duplex voice over the Internet,
integrated Web-based video conferencing, full-feature application sharing,
breakout rooms, whiteboards, slide mark-up, Web touring, text chat,
real-time feedback, quizzes, surveys, graded assessments, and record and
playback capabilities.
Centra Conference(TM) 5.3. Centra Conference software is designed for
large-scale Web conferences, seminars, events and corporate communications.
Integrated capabilities for voice over the Internet eliminate the need for
additional teleconference equipment and services required by some competing
solutions for real-time communication. Additional features include
streaming, real-time video, application sharing, record and playback, and
system administration capabilities optimized for managing large groups of
attendees.
Centra eMeeting(TM) 5.3. Centra eMeeting software provides an
easy-to-use virtual meeting facility where users can schedule, organize and
run their own Web meetings with co-workers, customers, suppliers, partners,
and prospects. Using Centra eMeeting, individuals can create business
meetings with others inside or outside the corporate firewall, using a
personal meeting room for spontaneous meetings, or using Centra's Speed
Scheduler feature to organize a meeting for a later date and time.
Centra Knowledge Center(TM) 5.3 and Centra Knowledge Catalog(TM)
5.3. Centra Knowledge Center software is designed to provide on-demand
access to a wide variety of learning resources and activities stored in a
centralized, online content repository. Other capabilities include content
management, personalized learning tracks, and competency management. This
content repository is also the basis for Centra Knowledge Catalog(TM), a
searchable catalog of self-paced content and recorded knowledge objects that
is a standard feature of every Centra Symposium and Centra Conference system.
Centra Knowledge Composers(TM). Centra Knowledge Composers are software
tools designed to facilitate the authoring of interactive learning content
derived from Microsoft PowerPoint presentations, simulations, and live
online sessions. These easy to use tools enable business professionals to
create "knowledge objects" in industry standard formats and then store them
in the main content repository.
Product Development
In July 1997, we began commercial shipment of our first software product,
Centra Symposium. We continue to devote a substantial portion of our resources
to developing new products and services, and enhancing our existing products
and services. Our product development expenses were $4.6 million in 1999, $8.5
million in 2000, and $12.5 million in 2001. As of December 31, 2001, our
product development organization consisted of 101 employees. We believe that
our ability to continue to attract and retain a technically skilled development
team is critical to our success.
Professional Services
Centra provides comprehensive customer assistance programs, including
consulting, education and support services. Our professional services
organization consisted of 57 employees as of December 31, 2001.
Consulting. We offer a wide range of consulting services to customers to
facilitate the efficient and cost-effective use of our products and
services. Our consulting group is responsible for the deployment and
implementation of our products, as well as for providing installation,
support and training services.
6
Education. We provide education programs to assist presenters, content
developers, event managers, systems administrators, help-desk support
professionals, implementation specialists and other professionals in the use
of our products and services. We offer a comprehensive series of online
classes using Centra's products to provide knowledge and skills to
successfully deploy, use and maintain our products and services. These
courses focus on the technical aspects of our products, as well as business
issues and processes related to live eLearning and business collaboration.
Support. Our standard maintenance agreement gives customers access to
new software releases and related technical support. Our support team helps
resolve technical inquiries and is available over the Web and by telephone,
e-mail and fax. This group is also responsible for maintaining technical
information on our products.
Hosting and ASP Services
We make our entire product line accessible to a broader set of buyers
through a variety of secure, outsourced application services and hosting
options. These services are designed to accommodate the needs of buyers,
primarily in North America, who may require the flexibility of an outsourced
service or who lack the IT infrastructure and resources to deploy an eLearning
and collaboration solution onsite. Our hosting and ASP services organization
consisted of 8 employees as of December 31, 2001.
Sales and Marketing
Distribution
We sell our products and services through a direct sales force and a
telesales organization. As of December 31, 2001, our sales and marketing
organization consisted of 87 sales and marketing professionals located in 11
domestic and 7 international locations. Our direct sales force primarily
focuses on selling Centra's enterprise server products to Global 2000
companies, universities, governments, and other large organizations. We utilize
direct sales teams consisting of both sales and technical professionals who
work directly with potential customers to provide proposals, demonstrations and
presentations designed to meet the specific needs of each customer.
Augmenting the efforts of our direct sales force outside of North America,
we also sell Centra products indirectly through relationships with value-added
resellers and distributors. As of December 31, 2001, Centra has relationships
with 24 resellers throughout Europe, the Middle East, the Pacific Rim, China,
India, Brazil, and South Africa, and with master distributors in Japan and
Korea. We intend to increase our direct sales force, both domestically and
abroad, and to authorize additional distributors and resellers in selected
international markets.
We market and sell subscriptions to our Centra eMeeting ASP service
primarily through our North American telesales organization. Our telesales team
also works with our direct sales force to convert ASP service subscribers into
enterprise license customers and to assist in sales of all other ASP service
offerings.
Pricing
We derive revenues from software licenses, user licenses, professional
services and hosting and ASP services. A variety of licensing models are used
to support the business needs of different types of customers. These licensing
models include named-user licenses, concurrent-user licenses, time-limited
licenses and revenue-sharing. In addition, we offer our customers hosting and
convenient ASP services to outsource the administration of their live eLearning
and collaboration operations. Hosting customers pay a set-up fee and monthly
service fees in addition to license fees for the purchased software. For Centra
ASP customers, Centra offers fee-based subscriptions in varying configurations.
We typically provide our consulting and education services either on a
time-and-materials basis or, for education, on a course subscription or per
course basis. Prices for Centra systems vary based upon the number of system
users and servers, and the level of use.
Marketing
We focus our marketing efforts on creating awareness of our solution among
business executives considering enterprise-level eLearning and collaboration
solutions, as well as individual and departmental users
7
suitable for the Centra ASP service. We conduct a variety of marketing programs
worldwide to educate our target market and have engaged in marketing activities
such as online seminars, direct marketing, Web marketing, trade shows, press
and industry analyst relations, and user conferences. The marketing
organization works closely with our customers and direct sales organization to
manage the lead process and capture, organize and prioritize customer feedback
to help guide our product development efforts.
We have entered into agreements with several systems integrators and
training companies to integrate our products and services into their offerings.
These relationships increase market awareness of our software infrastructure
and assist us with sales lead generation. For example, we enjoy an ongoing
relationship with PwC Consulting that enables them to incorporate Centra
solutions into their application deployment methodology. In concert with
Centra, PwC Consulting uses Centra products to deliver live interactive
training, support, implementation and consulting services to their customers
that are deploying enterprise applications such as Oracle, Peoplesoft, SAP and
Siebel. We have similar relationships with Deloitte Consulting, KPMG, EDS and
RWD Technologies that provide additional marketing resources, awareness and
account access to increase our reach into the marketplace.
Competition
The market for live eLearning and collaboration solutions is immature,
competitive, rapidly evolving and subject to rapid technological change. We
expect that the intensity of our competition will increase in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered. These include suppliers addressing segments of Centra's
overall target market with products and services for virtual classrooms, Web
conferences, Web meetings, content management and creation, and related
technologies.
Some of our competitors have longer operating histories, and greater
financial, technical, marketing and other resources than we do. In addition,
many of our competitors have well-established relationships with our current
and potential customers. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and other incentives
not matched by us. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
We believe that the principal competitive factors affecting our market
include a significant base of reference customers, the breadth and depth of the
offered solution, the global reach of distribution channels, product quality
and reliability, customer and professional services quality, core technology,
product features and price. Although we believe that our solution competes
favorably with respect to these factors, our market is relatively new and is
developing rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, technical and other resources.
Employees
As of December 31, 2001, we employed a total of 294 people. Of these
employees, 57 were engaged in professional services, 8 in hosting and ASP
services, 87 in sales and marketing, 101 in product development and 41 in
general and administration. As of December 31, 2001, 258 were located in the
United States and 36 were located outside of the United States. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppages. We consider our relations with our employees to
be good.
ITEM 2. PROPERTIES
Our headquarters occupy approximately 49,000 square feet in Lexington, MA
under a lease that expires on June 30, 2005. These current facilities are
expected to meet our needs through December 31, 2002, at which time we may
expand our facilities by entering into one or more additional leases at our
current location or lease space
8
at another location. In addition, we lease 29,508 square feet in Morrisville,
NC, primarily as a research and development facility, under a lease that
expires May 27, 2005 and 5,263 square feet for a technical support facility in
Duluth, GA under a lease that expires January 31, 2004. We also lease sales and
service offices in the United States in the metropolitan areas of Atlanta,
Chicago, Dallas, Philadelphia, San Francisco, Seattle and Washington, D.C. and,
internationally, in London, Paris, Denmark and Basel, Switzerland. Each of
these offices generally is leased under an agreement with a remaining term of
12 months or less.
ITEM 3. LEGAL PROCEEDINGS
From time to time Centra has been, and expects to continue to be, subject to
legal proceedings and claims in the ordinary course of its business. Such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
Potential Securities Class Action Lawsuit
In December 2001, a complaint was filed in the United States District Court
for the Southern District of New York, naming as defendants Centra, certain of
its officers and directors and the managing underwriters of Centra's initial
public offering. The complaint is captioned William Wood, et al., v. Centra
-------------------------------
Software, Inc., et al., No. 01 CV 10988. As of March 13, 2002, neither Centra
- -----------------------
nor the named individuals had been served with the complaint, and therefore
were not yet formal parties to the suit. The complaint, purportedly brought on
behalf of the class of persons who purchased Centra's common stock between
February 3, 2000 and December 6, 2000, alleges that, in connection with
Centra's initial public offering in February 2000, the underwriters received
undisclosed commissions from certain investors in exchange for allocating
shares to them and also agreed to allocate shares to certain customers in
exchange for the agreement of those customers to purchase additional shares in
the after-market at pre-determined prices. The complaint asserts that Centra's
registration statement and prospectus for the offering were materially false
and misleading due to their failure to disclose these alleged arrangements. The
complaint seeks damages in an unspecified amount against Centra and the named
individuals. If Centra is made a defendant in the action, it intends to
vigorously defend against the allegations, which it believes lack merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 2001.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CTRA." Public trading of our common stock commenced on February 3, 2000. Prior
to that, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
the common stock as reported on the Nasdaq National Market during each quarter
the stock has been publicly traded.
High Low
------ ------
Year Ended December 31, 2000:
First Quarter ended March 31, 2000 (beginning February 3, 2000). $36.88 $21.00
Second Quarter ended June 30, 2000.............................. $18.25 $ 5.91
Third Quarter ended September 30, 2000.......................... $15.50 $ 6.44
Fourth Quarter ended December 31, 2000.......................... $ 8.06 $ 3.13
High Low
------ ------
Year Ended December 31, 2001:
First Quarter ended March 31, 2001.............................. $ 8.69 $ 3.94
Second Quarter ended June 30, 2001.............................. $17.00 $ 5.50
Third Quarter ended September 30, 2001.......................... $17.14 $ 7.61
Fourth Quarter ended December 31, 2001.......................... $10.70 $ 4.51
As of February 28, 2002, there were approximately 230 holders of record of
our common stock. This number does not include stockholders for whom shares are
held in a "nominee" or "street" name.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain earnings, if any, for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.
In February 2000, we completed the initial public offering of our common
stock. The shares of common stock sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(the "Registration Statement") (Registration No. 333-89817) that was declared
effective by the Securities and Exchange Commission on February 3, 2000. The
aggregate gross proceeds from the offering were $80.5 million. Our total
expenses in connection with the offering were approximately $7.3 million, of
which approximately $5.6 million was for underwriting discounts and commissions
to underwriters and $1.7 million was for other expenses paid to persons other
than directors or officers of our company or persons owning more than 10
percent of any class of our equity securities. Our net proceeds from the
offering were approximately $73.2 million. From the effective date through
December 31, 2001, we used approximately $6.5 million for payments of dividends
to preferred shareholders, $18.1 million to fund operations, $1.5 million for
capital expenditures, $5.0 million for the MindLever acquisition and
satisfaction of related debt and $1.0 million to pay amounts outstanding under
our loans. As of December 31, 2001, we had approximately $41.1 million of net
proceeds remaining, and pending use of these proceeds, we intend to invest such
proceeds primarily in high-quality short-term investments.
10
ITEM6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
Year Ended December 31,
---------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
License.............................................. $ 234 $ 3,356 $ 7,017 $ 18,697 $ 28,815
Services............................................. 55 870 1,578 4,276 10,302
------- ------- ------- -------- --------
Total revenues................................... 289 4,226 8,595 22,973 39,117
------- ------- ------- -------- --------
Cost of revenues:
License.............................................. 75 185 173 314 505
Services (1)......................................... 130 919 1,543 3,381 6,552
------- ------- ------- -------- --------
Total cost of revenue............................ 205 1,104 1,716 3,695 7,057
------- ------- ------- -------- --------
Gross profit............................................ 84 3,122 6,879 19,278 32,060
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing (1).............................. 2,465 5,066 8,040 22,563 25,481
Product development (1).............................. 3,042 3,078 4,594 8,481 12,516
General and administrative (1)....................... 983 1,442 2,440 4,977 7,418
Compensation charge for issuance of stock options.... -- -- 736 925 887
Acquired in-process research and development......... -- -- -- -- 2,200
Amortization of goodwill............................. -- -- -- -- 783
Amortization of other intangible assets.............. -- -- -- -- 533
------- ------- ------- -------- --------
Total operating expenses......................... 6,490 9,586 15,810 36,946 49,818
------- ------- ------- -------- --------
Operating loss................................... (6,406) (6,464) (8,931) (17,668) (17,758)
Other income, net....................................... 35 211 308 3,810 1,076
------- ------- ------- -------- --------
Net loss................................................ (6,371) (6,253) (8,623) (13,858) $(16,682)
Accretion of discount on preferred stock................ 506 506 507 649 --
------- ------- ------- -------- --------
Net loss attributable to common stockholders............ $(6,877) $(6,759) $(9,130) $(14,507) $(16,682)
======= ======= ======= ======== ========
Basic and diluted net loss per share.................... $ (1.33) $ (1.16) $ (1.39) $ (0.67) $ (0.68)
======= ======= ======= ======== ========
Weighted average shares outstanding, basic and diluted.. 5,156 5,845 6,588 21,781 24,449
======= ======= ======= ======== ========
Pro forma basic and diluted net loss per share.......... $ (0.64) $ (0.64)
======= ========
Pro forma weighted average shares outstanding, basic and
diluted............................................... 15,281 22,608
======= ========
- --------
(1)Excludes compensation charge for issuance of stock options. See note (1) to
consolidated statements of operations on page 44.
11
December 31,
--------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- ------- -------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 8,079 $ 1,979 $ 7,878 $65,187 $48,183
Working capital.................................. 7,241 1,541 5,828 59,927 42,188
Total assets..................................... 9,238 4,753 13,296 75,064 70,977
Term loan, net of current maturities............. 158 530 376 1,894 2,631
Redeemable convertible preferred stock........... 17,992 18,498 32,480 -- --
Total stockholders' equity (deficit)............. (9,977) (16,672) (24,787) 61,874 51,347
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We design, develop, market and support software infrastructure and
application service provider (ASP) services for live eLearning and real-time
business collaboration. Our enterprise products provide a comprehensive range
of knowledge delivery and services which include features such as
voice-over-the-Internet, software application sharing, real-time data exchange,
shared workspaces, record and playback, and standards-compliant content
management and monitoring. Our products to date have been sold primarily to
Global 2000 businesses and have consisted of product offerings and network
service solutions for corporate eLearning and training, collaborative sales and
marketing, and one-to-one customer, partner and employee relationships.
On April 30, 2001, we acquired MindLever.com, Inc. (MindLever), a provider
of management systems for learning content, for $2.9 million in cash and
509,745 shares of common stock valued at approximately $3.8 million, plus
acquisition costs in the approximate amount of $512,000, for a total purchase
price of approximately $7.2 million. The acquisition was accounted for using
the purchase method in accordance with APB No. 16. Accordingly, the results of
operations of MindLever have been included in our results of operations from
the date of acquisition.
Through December 31, 2001, our revenues were derived from licenses of our
software products, from related maintenance, and from the delivery of
implementation consulting, training, hosting and ASP services. We price the
license of our enterprise application software on a rental or purchase basis
under a variety of licensing models, including perpetual named-user licenses,
perpetual concurrent-user licenses, time-limited licenses and revenue-sharing.
Customers who license our enterprise application software typically purchase
renewable maintenance contracts that provide telephone support, bug fixes and
rights to unspecified upgrades and enhancements on a when-and-if available
basis over a stated term, usually a twelve-month period. Maintenance is priced
as a percentage of our license fees. We also offer implementation consulting,
training, and education services to our customers, primarily on a
time-and-materials basis, but also for education, on a course subscription or
per course basis. In addition, we offer hosting services for customers under
hosting agreements, with terms typically ranging from six to twelve months, to
outsource the administration and infrastructure necessary to operate our
enterprise application software. The hosting fees include a set-up fee and a
monthly service fee, in addition to license fees for the software. Finally, we
offer all of our licensed products as an ASP service, with terms typically
ranging from three to twelve months. The ASP service fees include a set-up fee
and monthly, hourly or per event subscription fee.
Centra executes contracts that govern the terms and conditions of each
software license, maintenance arrangement and other services arrangements.
These contracts may be elements in a multiple element arrangement. Revenue
under multiple element arrangements, which may include several different
software products and services sold together, is allocated to each element
based on the residual method in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position 98-9, Software
Revenue Recognition with Respect to Certain Arrangements.
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Centra uses the residual method when vendor-specific objective evidence of
fair value does not exist for one of the delivered elements in the arrangement.
Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. Centra has established sufficient
vendor-specific objective evidence for the value of its consulting, training,
and other services, based on the price charged when these elements are sold
separately. Accordingly, software license revenues are recognized under the
residual method in arrangements in which software is licensed with consulting,
training, and other services.
Revenues from license fees are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collectability is probable. Advance payments are recorded as
deferred revenue until the products are shipped, services are delivered or
obligations are met. Centra's products do not require significant
customization. Billings to customers are generally due within 90 days of the
invoice date. The Company has offered extended payment terms greater than 90
days but less than 12 months to certain of its customers for which license
revenue is recognized upon shipment. These customers are well capitalized and
typically have entered into enterprise-wide license arrangements with the
Company. The Company believes that it has sufficient history of collecting all
amounts due within the stated terms under these types of arrangements to
conclude that the fee is fixed or determinable at the time license revenues are
recognized.
Revenues related to maintenance and software application hosting are
recognized on a straight-line basis over the period that the maintenance and
hosting services are provided. Revenues related to ASP services are recognized
on a straight-line basis over the subscription period that the ASP services are
provided, or on an as-used basis if defined in the contract. Revenues allocable
to implementation, consulting and training services are recognized as the
services are performed, ratably over a subscription period, or upon completing
project milestones if defined in the agreement.
We record as deferred revenues any billed amounts due from customers in
excess of revenues recognized. Deferred revenue at December 31, 2001 consisted
primarily of deferred contract maintenance, deferred ASP services, deferred
consulting services, deferred license revenue, deferred hosting services and
deferred education services.
We sell our products and services primarily through a direct sales force and
through relationships with distributors, resellers and other strategic
partners. We have established European direct sales and service operations
headquartered in the United Kingdom and have master distributors in Japan and
Korea. In addition, we have value added resellers throughout Europe, the Middle
East, the Pacific Rim, China, India, Brazil and South Africa. Revenues from
sales outside of the United States were $787,000, $2,767,000 and $10,045,000 or
9%, 12% and 26% of our total revenues for 1999, 2000 and 2001, respectively.
During 1999, 2000 and 2001, we have invested in the infrastructure necessary to
expand our global operations, including the formation and staffing of our
European subsidiaries and our Asian operations. We expect to continue to invest
in our international operations as we expand our international direct and
indirect channels and enhance our marketing efforts to increase worldwide
market share. We anticipate that revenues derived from outside the United
States will increase both in terms of percentage of revenues and absolute
dollars.
Our cost of license revenues includes royalties due to third parties for
technology included in our products, as well as costs of product documentation,
media used to deliver our products, and fulfillment. Our cost of service
revenues includes (a) salaries and related expenses for our consulting,
education, technical support and information technology services organizations,
(b) an overhead allocation consisting primarily of that portion of our
facilities, communications and depreciation expenses that is attributable to
providing our services, and (c) direct costs related to our hosting and ASP
service offerings.
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Our operating expenses are classified into six general categories: sales and
marketing, product development, general and administrative, compensation charge
for issuance of stock options, acquired in-process research and development,
and amortization of goodwill and other intangible assets.
. Sales and marketing expenses consist primarily of (a) salaries and other
related costs for sales and marketing personnel and (b) costs associated
with marketing programs, including trade shows and seminars,
advertising, public relations activities and new product launches.
. Product development expenses consist primarily of employee salaries and
benefits, fees for outside consultants and related costs associated with
the development of new products, the enhancement of existing products,
purchase of third party source code, quality assurance, testing,
documentation and third party localization costs.
. General and administrative expenses consist primarily of salaries and
other related costs for executive, financial, administrative and
information technology personnel, as well as outside accounting, legal,
investor relations and other costs associated with being a public
company.
. Compensation charge for issuance of stock options represents the
amortization, over the vesting period of the option, of the difference
between the exercise price of options granted to employees and the
deemed fair market value of the options for financial reporting purposes.
. Acquired in-process research and development represents the cost of
incomplete research and development projects acquired through the
Mindlever acquisition. The cost is the estimated fair value of the
research and development projects based on risk-adjusted cash flows.
These costs were expensed as of the date of acquisition.
. Amortization of goodwill and other intangible assets represents the
amortization, over five and three year periods respectively, of the
excess of the purchase price over the fair value of the identifiable
tangible net assets acquired and the valuation of the developed
technology and know-how and assembled workforce.
In the development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal product development have been expensed as incurred.
Our previously outstanding series A and series B preferred stock had
participation rights that allowed holders to receive a premium equal to 150% of
their original investment upon redemption, liquidation or automatic conversion
of the preferred stock into common stock. For financial reporting purposes, we
discounted the value of series A and series B preferred stock by the value of
these participation rights. Prior to February 2000, we had been increasing the
carrying value of the series A and series B preferred stock for the liquidation
premium and participation discount through charges to stockholders' deficit
over the redemption period. This increase is also reflected in the accretion of
discount on preferred stock in our statement of operations. Upon the automatic
conversion of the series A and series B preferred stock into common stock in
February 2000, $649,000 in unamortized liquidation premium and participation
discount on the series A and series B preferred stock was accreted.
We have experienced substantial losses in each fiscal period since our
inception. As of December 31, 2001, we had an accumulated deficit of $57.7
million. These losses and our accumulated deficit have resulted from our
initial lack of substantial revenues, as well as the significant costs incurred
in the development of our products and services and in the preliminary
establishment of our infrastructure. We expect to increase our expenditures in
all areas in order to execute our business plan, and to expand further
internationally, particularly in sales and
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marketing. The planned increase in sales and marketing expense will result
principally from the hiring of additional sales force personnel and from
marketing programs to maintain brand awareness. Accordingly, we expect to
experience additional losses during 2002.
Although we have experienced significant revenue growth in recent periods,
our recent rate of revenue growth may not be sustainable. We may not be able to
continue to increase our revenues or to attain profitability and, if we do
achieve profitability, we may not be able to sustain profitability for any
period. We believe that period-to-period comparisons of our historical
operating results may not be meaningful, and you should not rely upon them as
an indication of our future financial performance. See "Factors That May Affect
Future Results" below.
Results of Operations
The following table sets forth operating data expressed as percentages of
total revenues for each period indicated.
Year Ended December 31,
---------------------
1999 2000 2001
---- ---- ----
Consolidated Statement of Operations Data:
Revenues:
License........................................... 82% 81% 74%
Services.......................................... 18 19 26
---- --- ---
Total revenues................................ 100 100 100
Cost of revenues:
License........................................... 2 1 1
Services(1)....................................... 18 15 17
---- --- ---
Total cost of revenues........................ 20 16 18
---- --- ---
Gross margin......................................... 80 84 82
Operating expenses:
Sales and marketing(1)............................ 94 98 65
Product development(1)............................ 53 37 32
General and administrative(1)..................... 28 22 19
Compensation charge for issuance of stock options. 9 4 2
Acquired in-process research and development...... -- -- 6
Amortization of goodwill.......................... -- -- 2
Amortization of other intangible assets........... -- -- 1
---- --- ---
Total operating expenses...................... 184 161 127
---- --- ---
Operating loss....................................... (104) (77) (45)
Other income, net.................................... 3 17 2
---- --- ---
Net loss............................................. (101)% (60)% (43)%
==== === ===
- --------
(1)Excludes compensation charge for issuance of stock options. See note (1) to
consolidated statements of operations on page 44.
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Comparison of 2001 and 2000
Revenues. Total revenues increased by $16.1 million, or 70%, to $39.1
million for 2001, from $23.0 million for 2000. The increase was attributable to
an increase in our customer base resulting in substantial growth in license and
service revenues.
. License revenues increased by $10.1 million, or 54%, to $28.8 million
for 2001, from $18.7 million for 2000. The increase was attributable to
more effective sales efforts due in part to the continued expansion of
our direct sales force, increased revenues from our value-added reseller
partners and expanded sales to our existing customer base.
. Services revenues increased by $6.0 million, or 140%, to $10.3 million
for 2001, from $4.3 million for 2000. The increase related primarily to
an increase in sales of maintenance contracts to new and existing
customers, increased ASP revenues due to broader acceptance of our ASP
service offerings, and an increase in consulting revenues. Services
revenues represented 26% of total revenues for 2001 compared to 19% of
total revenues for 2000.
Cost of license revenues. Cost of license revenues increased by $191,000, or
61%, to $505,000 for 2001, from $314,000 for 2000. Cost of license revenues was
2% of license revenues for both 2001 and 2000. We anticipate that cost of
license revenues will increase in the future in absolute dollars due to
additional customers licensing our products and the licensing of additional
technologies from third parties.
Cost of services revenues. Cost of services revenues increased by $3.2
million, or 94%, to $6.6 million for 2001, from $3.4 million for 2000. The
increase was due primarily to increased costs associated with providing our ASP
service offering, as well as an increase in the number of technical support,
consulting and education personnel providing services to our customers. Cost of
services revenues was 64% of services revenues for 2001 and 79% of services
revenues for 2000. The decrease as a percentage of services revenues was due
primarily to a greater growth rate in services revenues than in services costs.
The growth in services revenues was attributable to a larger installed customer
base and increased ASP service revenues while costs of ASP services revenues
increased only as additional capacity was needed. We anticipate that the cost
of services revenues will continue to increase in absolute dollars to the
extent that we continue to generate new customers and associated services
revenues and continue to expand our ASP service business. Cost of services
revenues as a percentage of services revenues can be expected to vary
significantly from period to period depending on the mix of services that we
provide and the overall utilization rates of our service personnel and ASP
service.
Sales and marketing expenses. Sales and marketing expenses increased by $2.9
million, or 13%, to $25.5 million for 2001, from $22.6 million for 2000. The
increase was primarily attributable to an increase in the number of direct
sales, telemarketing and sales management employees, as well as an increase in
sales commissions and bonuses attributable to increased revenues over the
previous year. Sales and marketing expenses were 65% of total revenues for 2001
and 98% of total revenues for 2000. We expect that sales and marketing expenses
will continue to increase in absolute dollars to support marketing programs for
new product launches, international expansion and increased sales efforts, but
will decline as a percentage of revenues to the extent that we experience
continued revenue growth.
Product development expenses. Product development expenses increased by $4.0
million, or 47%, to $12.5 million for 2001, from $8.5 million for 2000. The
increase primarily resulted from salaries associated with newly hired product
development personnel, a significant portion of which were added as a result of
the MindLever acquisition, and their related benefit and overhead costs.
Product development expenses were 32% of total revenues for 2001 and 37% of
total revenues for 2000. The decrease as a percentage of total revenues was due
primarily to a larger increase in total revenues than the increase in product
development expenses. We believe that continued investment in product
development is critical to attaining our strategic objectives, and, as a
result, we expect product development expenses will continue to increase in
absolute dollars as additional product development personnel are added and
additional investments are made for third party source code, but will decline
as a percentage of revenues to the extent that we experience continued revenue
growth.
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General and administrative expenses. General and administrative expenses
increased by $2.4 million, or 48%, to $7.4 million for 2001, from $5.0 million
for 2000. The increase resulted primarily from costs associated with increased
headcount and related operational costs required to manage our growth and costs
associated with being a public company. General and administrative expenses
were 19% of total revenues for 2001 and 22% of total revenues for 2000. The
decrease as a percentage of total revenues was due primarily to a larger
increase in total revenues than the increase in general and administrative
expenses. We expect that general and administrative expenses will continue to
increase in absolute dollars as we continue to add administrative personnel to
support our expanding operations and incur additional costs related to the
growth of our business, but will decline as a percentage of revenues to the
extent that we experience continued revenue growth.
Compensation charge for issuance of stock options. We incurred a charge of
$887,000 for 2001, a decrease of $38,000 from $925,000 in 2000, related to the
issuance of stock options during 1999 and 2000. These options, which typically
vest over periods of up to four years, will result in additional compensation
expense of approximately $1.3 million for periods ending subsequent to December
31, 2001. If all options vest in accordance with the original terms, we expect
to incur charges of $868,000 in 2002 and $458,000 in 2003. For additional
information see note (1) to our consolidated statements of operations on page
44 and note 7(b) of notes to consolidated financial statements on page 58.
Acquired in-process research and development. In conjunction with our
acquisition of Mindlever, we allocated $2.2 million of the purchase price to
in-process research and development projects. At the date of acquisition, the
projects had not yet reached technical feasibility, and the research and
development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the date of acquisition.
Amortization of goodwill and other intangible assets. We recognized
amortization of goodwill and other intangible assets in the amount of $1.3
million for the year ended December 31, 2001, while we recognized no such
expense for the prior year. In conjunction with our acquisition of MindLever,
we allocated approximately $5.9 million to goodwill, $2.4 million to other
intangible assets, including $2.1 million to developed technology and know-how
and $300,000 to assembled workforce. Amortization of goodwill and other
intangible assets represents the amortization, over five and three year
periods, respectively, of the excess of the purchase price over the fair value
of the identifiable intangible net assets acquired and the valuation of
developed technology and know-how and assembled workforce. Amortization of
goodwill, developed technology and assembled workforce was $783,000, $467,000
and $66,000, respectively for the year ended December 31, 2001. As of January
1, 2002, the Company will cease amortizing goodwill and assembled workforce.
See "Recent Accounting Pronouncements" on page 21.
Other income, net. Other income, net of other expenses, decreased by $2.7
million, or 71%, to $1.1 million for 2001, from $3.8 million for 2000. The
decrease resulted from a reduction in interest income of $1.6 million year over
year due to lower average cash balances for 2001 and a lower effective interest
rate. The reduction was also the result of recording a $772,000 loss
attributable to our sale of certain short-term debt obligations of
California-based electric utilities when their ratings dropped to below
investment grade in the year ended December 31, 2001.
Comparison of 2000 and 1999
Revenues. Total revenues increased by $14.4 million, or 167%, to $23.0
million for 2000, from $8.6 million for 1999. The increase was attributable to
an increase in our customer base resulting in substantial growth in license and
services revenues.
. License revenues increased by $11.7 million, or 166%, to $18.7 million
for 2000, from $7.0 million for 1999. The increase was attributable to
the continued expansion of our sales force, increased revenues from our
value-added reseller partners, expanded sales to our existing customer
base, and an increase in the average selling prices of software licenses.
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. Services revenues increased by $2.7 million, or 171%, to $4.3 million
for 2000, from $1.6 million for 1999. The increase related primarily to
an increase in maintenance support contracts to new and existing
customers and consulting services sold to new customers. Services
revenues represented 19% of total revenues for 2000 and 18% of total
revenues for 1999.
Cost of license revenues. Cost of license revenues increased by $141,000, or
81%, to $314,000 for 2000, from $173,000 for 1999. Cost of license revenues was
2% of license revenues for both 2000 and 1999.
Cost of services revenues. Cost of services revenues increased by $1.8
million, or 119%, to $3.4 million for 2000, from $1.5 million for 1999. The
increase was due primarily to an increase in the number of technical support,
consulting and education personnel providing services to our customers. Cost of
services revenues was 79% of services revenues for 2000 and 98% of services
revenues for 1999. The decrease as a percentage of service revenues was due
primarily to the growth in services revenues resulting from a larger installed
customer base.
Sales and marketing expenses. Sales and marketing expenses increased by
$14.5 million, or 181%, to $22.6 million for 2000, from $8.0 million for 1999.
The increase was primarily attributable to increased marketing programs,
including advertising, trade shows and public relations. To a lesser extent,
the increase was related to an increase in the number of direct sales,
telemarketing and sales management employees and to an increase in sales
commissions and bonuses related to increased revenues over the previous year.
Sales and marketing expenses were 98% of total revenues for 2000 and 94% of
total revenues for 1999.
Product development expenses. Product development expenses increased by $3.9
million, or 85%, to $8.5 million for 2000, from $4.6 million for 1999. The
increase primarily resulted from salaries associated with newly hired product
development personnel, increased fees for outside consultants and, to a lesser
extent, costs for the localization of the current products. Product development
expenses were 37% of total revenues for 2000 and 53% of total revenues for
1999. The decrease as a percentage of total revenues was due primarily to the
increase in total revenues.
General and administrative expenses. General and administrative expenses
increased by $2.6 million, or 104%, to $5.0 million for 2000, from $2.4 million
for 1999. The increase primarily resulted from salaries associated with newly
hired personnel, related operational costs required to manage our growth and
costs associated with being a public company. General and administrative
expenses were 22% of total revenues for 2000 and 28% of total revenues for
1999. The decrease as a percentage of total revenues was due primarily to the
increase in total revenues.
Compensation charge for issuance of stock options. We incurred a charge of
$925,000 for 2000, an increase of $189,000 from $736,000 in 1999, related to
the issuance of stock options to employees and non-employees during 1999 and
2000.
Other income, net. Other income, net increased by $3.5 million, or 1137%, to
$3.8 million for 2000, from $308,000 for 1999. The increase resulted from a
higher average cash balance for 2000 compared to 1999 due to the receipt of
proceeds from our initial public offering in February 2000.
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for 2000 and 2001. You should read the following table in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
report. We have prepared this unaudited information on a basis consistent with
the audited consolidated financial statements contained in this report and it
includes all adjustments, consisting of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and
operating
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results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
Quarter Ended,
------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
Consolidated Statement of
Operations Data:
Revenues:
License............................ $ 3,150 $ 4,054 $ 5,187 $ 6,306 $ 7,219 $ 7,501 $ 6,467 $ 7,628
Services........................... 643 961 1,148 1,524 1,853 2,259 2,769 3,421
------- ------- ------- ------- ------- ------- ------- -------
Total revenues................... 3,793 5,015 6,335 7,830 9,072 9,760 9,236 11,049
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License............................ 31 31 154 98 147 137 100 121
Services/(1)/...................... 649 741 829 1,162 1,565 1,661 1,719 1,607
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 680 772 983 1,260 1,712 1,798 1,819 1,728
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................ 3,113 4,243 5,352 6,570 7,360 7,962 7,417 9,321
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing/(1)/........... 4,152 5,091 6,243 7,077 6,336 6,702 5,873 6,570
Product development/(1)/........... 1,806 2,339 2,229 2,107 2,635 3,428 3,418 3,035
General and administrative/(1)/.... 953 1,144 1,216 1,664 1,917 1,916 1,831 1,754
Compensation charge for issuance of
stock options.................... 234 240 228 223 223 223 223 218
Acquired in-process research and
development...................... -- -- -- -- -- 2,200 -- --
Amortization of goodwill and other
intangible assets................ -- -- -- -- -- 329 494 493
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 7,145 8,814 9,916 11,071 11,111 14,798 11,839 12,070
------- ------- ------- ------- ------- ------- ------- -------
Operating loss...................... (4,032) (4,571) (4,564) (4,501) (3,751) (6,836) (4,422) (2,749)
Other income, net................... 588 1,091 1,065 1,066 (47) 565 423 135
------- ------- ------- ------- ------- ------- ------- -------
Net loss............................ (3,444) (3,480) (3,499) (3,435) (3,798) (6,271) (3,999) (2,614)
Accretion of discount on preferred
stock............................. 649 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders...................... $(4,093) $(3,480) $(3,499) $(3,435) $(3,798) $(6,271) $(3,999) $(2,614)
======= ======= ======= ======= ======= ======= ======= =======
(1)Excludes compensation charge for issuance of stock options. See note (1) to
consolidated statements of operations on page 44.
Our total revenues have increased in each successive quarter in all but one
of the quarterly periods presented, primarily due to increased acceptance of
our products, the expansion of our sales force and increased services revenues
as our installed customer base has grown. Total cost of revenues also have
generally increased in absolute dollars over the periods presented due to
increased royalty costs resulting from increased revenues and an increase in
the number of professional services personnel.
Operating expenses have experienced significant variations from quarter to
quarter primarily as the result of the timing and number of additions of
personnel and related compensation costs for sales and marketing, product
development and general and administrative expenses. In addition, variations in
sales and marketing are also
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related to the timing, number and significance of specific marketing
activities, such as advertising, trade shows, product launches and other
promotional activities. Operating expenses will continue to increase as we grow
our infrastructure to support our expanding operations.
Liquidity and Capital Resources
On February 3, 2000, we completed our initial public offering of 5,000,000
shares of common stock. Additionally, on March 2, 2000, the underwriters of the
initial public offering exercised their over-allotment option to purchase an
additional 750,000 shares. At the offering price of $14.00 per share, we
received $73.2 million from these transactions, net of underwriting discounts
and commissions and offering costs.
As of December 31, 2001, we had cash and cash equivalents of $25.4 million
and short term investments of $22.8 million, a decrease from $16.6 million of
cash and cash equivalents and a decrease of $413,000 of short term investments
as of December 31, 2000. This decrease is primarily related to cash used to
fund operations in 2001 and to acquire Mindlever in April 2001. Our working
capital as of December 31, 2001 was $42.2 million, compared to $59.9 million as
of December 31, 2000.
Net cash used in operating activities was $11.3 million for 2001, primarily
the result of operating losses, partially offset by non-cash expenses,
consisting primarily of amortization of goodwill and other intangibles and the
write-off of acquired in-process research and development. Also contributing to
the net cash used in operating activities was an increase in accounts
receivable of approximately $5.2 million, partially offset by an increase in
deferred revenue of approximately $2.9 million. Our operating activities had
resulted in net cash outflows of $8.5 million for 2000 and $5.7 million for
1999. The operating cash outflows resulted primarily from operating losses
reduced by non cash expenses and increases in accounts receivable and prepaid
expenses, partially offset by increases in accrued expenses and deferred
revenues.
Our investing activities had resulted in a net cash outflow of $6.8 million
for 2001, due primarily to the acquisition of Mindlever and for purchases of
property and equipment. Our investing activities had resulted in net cash
outflows of $26.1 million for 2000 and $2.0 million for 1999. Our investing
activities consisted principally of purchases of short-term debt instruments in
2000 and property and equipment in 2000 and 1999.
On January 29, 2001, we liquidated, prior to maturity, certain short-term
debt obligations of California-based electric utilities recorded as
investments. As the result of the decline in fair value at the time of
liquidation, Centra recorded a loss of approximately $772,000 in the year ended
December 31, 2001.
Our financing activities have principally consisted of sales of our
preferred and common stock and the issuance and repayment of bank loans. Net
cash provided by financing activities was $1.5 million for 2001, resulting from
drawings of $2.5 million made under our $4.5 million equipment line of credit
and the receipt of proceeds from stock purchases under the employee stock
purchase plan and from the exercise of stock options, partially offset by
payments on the debt assumed as part of the MindLever acquisition and payments
made under a term loan and two capital leases. Net cash provided by financing
activities in 2000 had been $68.8 million, reflecting the net proceeds of $73.2
million received from our initial public offering, partially offset by $6.5
million in payments to the series A and B preferred shareholders that were due
upon completion of the public offering. Our financing activities had resulted
in a net cash inflow of $13.6 million in 1999, due primarily to the sale of our
equity securities.
On December 22, 2000 and May 4, 2001, Centra amended its equipment line of
credit agreement to allow $2.0 and $2.5 million of additional borrowings,
respectively, of which $4.1 million was outstanding at December 31, 2001.
Interest is payable monthly based on the prime rate (4.75% at December 31,
2001) plus 0.50%. Amounts outstanding are payable in 36 equal monthly
installments beginning on October 1, 2001. Additionally at December 31, 2001,
Centra had outstanding borrowings under the original equipment line of credit
of $58,000, bearing interest at prime rate plus 1.0% per annum. All borrowings
are secured by substantially all of Centra's
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assets. The amended equipment line of credit requires Centra to maintain a
minimum balance of cash, cash equivalents and short term investments of $30
million. We were in compliance with our covenants under the equipment line of
credit at December 31, 2001.
Capital expenditures totaled $3.0 million for 2001, $3.2 million for 2000
and $1.3 million for 1999. Our capital expenditures consisted of purchases of
operating assets to manage our operations, including computer hardware and
software, office furniture and equipment and leasehold improvements. Purchases
of computer equipment represent the largest component of our capital
expenditures. We expect capital expenditures to continue for the foreseeable
future as we increase our number of employees, increase the size of our
operating facilities, increase our ASP service infrastructure and improve and
expand our information systems. Since inception, we have generally funded
capital expenditures either through the use of working capital or with
equipment bank loans.
As of December 31, 2001, we have commitments under operating leases for our
leased facilities that run through December 2005. Our obligations for minimum
future rental payments under these agreements total $6.7 million, approximately
$2.0 million of which is to be paid per year through 2004 and approximately
$851,000 of which is to be paid in 2005. In addition, we have future minimum
payments under our short and long-term debt, consisting of an equipment line of
credit and capital leases, totaling $4.2 million, to be paid through 2004.
As of December 31, 2001, we had net operating loss carryforwards of $39.5
million and research and development credit carryforwards of $1.1 million. The
net operating loss and credit carryforwards will expire at various dates,
beginning in 2002, if not used. Under the provisions of the Internal Revenue
Code, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income. A full valuation allowance has been established in our
financial statements to reflect the uncertainty of our ability to use available
tax loss carryforwards and other deferred tax assets.
We expect to continue to experience significant growth in our capital
expenditures, cost of revenues and operating expenses, particularly sales and
marketing and product development expenses, for the foreseeable future in order
to execute our business plan. We believe that our existing cash balances, will
be sufficient to finance our operations through at least the next 12 months.
However, thereafter, we may need to raise additional funds to support more
rapid expansion of our sales force, develop new or enhanced products or
services, respond to competitive pressures, or acquire complementary businesses
or technologies. If we seek to raise additional funds, we may not be able to
obtain funds on terms which are favorable or acceptable to us. If we raise
additional funds through the issuance of equity securities, the percentage
ownership of our existing stockholders would be reduced. Furthermore, the
securities could have rights, preferences or privileges senior to our common
stock.
Subsequent Event
On January 16, 2002, we entered into an Agreement and Plan of Merger and
Reorganization with SmartForce PLC, and its wholly owned subsidiary, Atlantic
Acquisition Corp. Under the merger agreement, holders of our common stock will
receive 0.425 SmartForce American Depositary Shares (ADSs) for each share of
our common stock outstanding at the time of the merger. The merger, which is
expected to close in the second calendar quarter of 2002, is subject to certain
conditions including the approval of the merger by our stockholders and the
approval by SmartForce's shareholders of the issuance of SmartForce ADSs in the
merger. The merger is intended to qualify as a tax-free reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
and will be accounted for as a purchase transaction by Smartforce PLC.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method.
This statement is effective for all business combinations initiated after June
30, 2001.
21
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill, as well as certain other intangible assets,
determined to have indefinite lives, will no longer be amortized. Instead,
these assets will be reviewed for impairment on a periodic basis, at least
annually. This statement is effective for the Company in the first quarter of
its fiscal year ending December 31, 2002. As of January 1, 2002, the Company
will cease amortizing goodwill and reclassify assembled workforce to goodwill.
The Company does not believe these assets are currently impaired. The adoption
of SFAS No. 142 is expected to reduce the Company's amortization expense by
approximately $1.3 million in 2002 and 2003, $1.2 million in 2004 and 2005 and
$400,000 in 2006. The Company will continue to review these assets for
impairment on at least an annual basis.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Under SFAS No. 144 it is required that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions. The provisions
of this statement are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material impact on its financial
statements.
Factors That Could Affect Future Results
From time to time, information provided by us, statements made by our
employees or information included in our filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" involving risks and uncertainties. In
particular, statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this report relating
to management's expectations concerning our future results of operations and
the sufficiency of capital to meet working capital and capital expenditure
requirements may be forward-looking statements. The words "expect,"
"anticipate," "internal," "plan," "believe," "seek," "estimate" and similar
expressions are intended to identify such forward-looking statements. Such
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that could cause our future results to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf. Many of these factors are beyond our ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on
forward-looking statements. Centra disclaims any intent or obligation to update
publicly any forward-looking statements, whether in response to new information
or future events or otherwise.
Except as otherwise expressly stated, forward-looking statements contained
in this report assume that we will continue to operate as an independent
company and do not give effect to our proposed merger with SmartForce Public
Limited Company, described under "Subsequent Event" on page 21. Consummation of
the proposed merger with SmartForce will cause our business plans and our
results to differ in material respects from those indicated in the
forward-looking statements appearing herein. Important factors that may cause
our actual results to differ from the forward-looking statements described
above include, but are not limited to, the following factors discussed below.
22
Risks Related To The Proposed Merger With SmartForce
Failure to complete the merger with SmartForce could damage our financial
condition and our business.
If the merger with SmartForce is not completed for any reason, we will be
subject to a number of material risks, including:
. the provision in the merger agreement which provides that under certain
circumstances described in the merger agreement, we could be required to
pay SmartForce a termination fee in the amount of $12 million;
. costs related to the merger, such as legal and accounting fees and a
portion of the investment banking fees, must be paid even if the merger
is not completed;
. benefits that we expect to realize from the merger would not be
realized; and
. the diversion of management attention from our day-to-day business and
the unavoidable disruption to our employees and our relationships with
customers and suppliers during the period before consummation of the
merger may damage our competitive position and our business.
During the pendency of the merger, we may not be able to enter into a merger or
business combination with another party that might be advantageous to us,
because of restrictions in the merger agreement.
Covenants in the merger agreement may impede our ability to make
acquisitions or complete other transactions that are not in the ordinary course
of business pending completion of the merger. As a result, if the merger is not
consummated, we may be at a disadvantage to our competitors. In addition, while
the merger agreement is in effect and subject to narrowly defined exceptions,
we are prohibited from soliciting, initiating, encouraging or entering into
certain extraordinary transactions, such as a merger, sale of assets or other
business combination outside the ordinary course of business with any third
party. As a result, we might be prevented from entering into transactions which
might otherwise have been favorable to our stockholders.
We may lose key personnel, customers and business partners due to uncertainties
associated with the merger.
Pending the closing of the merger, our current and prospective employees,
customers and business partners may experience uncertainty about their future
relationships with the resulting combined company. Such uncertainty may
adversely affect our ability to attract and retain key management, sales,
marketing and technical personnel. Current and prospective customers and
business partners may, in response to the announcement of the merger agreement,
delay or cancel purchasing decisions. Any delay in, or cancellation of,
purchasing decisions could adversely affect our business and results of
operations.
Partners or customers may react unfavorably to the proposed combination.
We seek to enter relationships with numerous other technology companies,
including software and services firms, to deliver our products and services to
customers. Some of these partners may feel that the proposed merger poses new
competitive threats to their businesses and as a result may discontinue their
relationships with us. In addition, some of our customers may view SmartForce
as a competitor to them and, therefore, terminate their relationships with us.
Other Risks
Our quarterly operating results may fluctuate significantly. This makes it more
difficult to predict our future financial performance, and increases the
likelihood that our results for a particular quarter could fall below the
expectations of market analysts and investors, which could cause the price of
our stock to drop rapidly and severely.
23
We have in the past experienced fluctuations in our quarterly operating
results and anticipate that such fluctuations will continue and could intensify
in the future. As a result, it is likely that in one or more future quarters
our results of operations will be below the expectations of public market
analysts and investors. This could adversely affect the price of our common
stock. For example, in October 2001, we announced revenues for the quarter
ended September 30, 2001 that were substantially lower than had been expected
by the investment market. As a result of this announcement, the trading price
of our common stock declined approximately 33% by the end of the following
trading day.
Our operating results have fluctuated, and may continue to fluctuate, as a
result of a number of factors, including:
. the evolution of the market for live eLearning and business
collaboration solutions;
. market acceptance of our products and services;
. our success and timing in developing and introducing new products and
enhancements to existing products;
. the introduction of products and services by our competitors;
. changes in pricing policies by us or our competitors;
. the length of our sales cycle;
. changes in customer buying patterns; and
. market entry by new competitors.
Most of our expenses, such as employee compensation and rent, are relatively
fixed. Moreover, our expense levels are based, in part, on our expectations
regarding future revenue increases. As a result, any shortfall in revenues in
relation to our expectations could cause significant changes in our operating
results from quarter to quarter and could result in increased quarterly losses.
Our limited operating history makes it difficult to evaluate our future
prospects.
We began shipping our first product in July 1997 and began to provide our
eMeeting product as an ASP service in June 2000 and our Symposium and
Conference products as an ASP service in October 2000. Additionally, we began
shipping our Centra Knowledge Products in June 2001. Our limited operating
history may make it difficult for investors to evaluate our future prospects.
We have incurred substantial losses in the past and may not achieve
profitability in the future.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, we may not remain profitable for any substantial period of time. If
we fail to achieve profitability within the time frame expected by investors,
the market price of our common stock may fall. We had net losses of $8.6
million in 1999 and $13.9 million in 2000 and $16.7 million in 2001. As a
result of ongoing operating losses, we had an accumulated deficit of $57.7
million at December 31, 2001. We expect to continue to incur significant sales
and marketing, research and development and general and administrative expenses
and, as a result, we will need to generate significant revenues to achieve and
maintain profitability. We may not sustain our growth or generate sufficient
revenues to attain profitability.
Our sales cycle makes it difficult to predict our quarterly operating results.
We have a long sales cycle because we generally need to educate potential
customers regarding the benefits of our live online eLearning and business
collaboration products and services prior to sale. Our sales cycle varies
24
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. Potential
customers frequently need to obtain approvals from multiple decision makers
within their organization prior to making purchase decisions. Our long sales
cycle, which can range from several weeks to several months or more, makes it
difficult to predict the quarter in which sales may occur. Delays in sales
could cause significant variability in our revenues and operating results for
any particular period.
The development of a market for our live eLearning and business collaboration
products and services is uncertain.
The market for live eLearning and business collaboration products and
services is immature and rapidly evolving. If the market for eLearning and
business collaboration solutions does not grow at the rate we expect, this will
have a material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced eLearning and business collaboration products
and services is highly uncertain.
We expect to depend on sales of our Centra Symposium(TM) solution for
substantially all of our revenues for the foreseeable future.
We anticipate that revenues from our Centra Symposium(TM) product and
related services will continue to constitute a substantial portion of our
revenues for the foreseeable future. Consequently, any decline in the demand
for Centra Symposium(TM) would seriously harm our business.
We face significant competition from other technology companies and we may not
be able to compete effectively.
The market for live eLearning and collaboration solutions is immature,
competitive, rapidly evolving and subject to rapid technological change. We
expect that the intensity of our competition will increase in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered. We encounter competition with respect to different
aspects of our collaboration solution from a variety of software and services
vendors. In addition, bigger companies with more resources than we have could
enter our market and either reduce our sales or require us to lower our prices,
or both.
Some of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than we do. Some
have significantly greater name recognition and a larger installed base of
customers. In addition, many of our competitors have well-established
relationships with our current and potential customers. In the past, we have
lost potential customers to competitors for various reasons, including lower
prices and other incentives not matched by us. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Our success depends on our ability to expand our sales force and distribution
channels.
To increase our revenues, we must increase the size of our sales force, the
number of our indirect channel partners, including value-added resellers and
systems integrators and the number of our alliance partners, including
technology, content and service providers. As of December 31, 2001, our sales
organization consisted of 74 professionals. We intend to increase our sales
organization over the next twelve months. However, there is competition for
qualified sales personnel in our business, and we cannot assure that we will be
successful in attracting, integrating, motivating and retaining new sales
personnel. Our existing or future channel partners and alliance partners may
choose to devote greater resources to marketing and supporting the products of
other
25
companies. In addition, we may face conflicts among our sales force and our
channel and alliance partners. Our inability to increase our direct sales force
and our number of indirect channel partners and alliance partners may limit our
future revenue growth and hurt our future operating results.
If we lose the services of our chief executive officer, chief operating officer
or any other member of our management team, our business could suffer.
Our future success depends to a significant degree on the skill, experience
and efforts of Leon Navickas, our chief executive officer, Anthony Mark, our
president and chief operating officer, and the other members of our management
team. The loss of any member of our management team could have a material
adverse effect on our business. We do not have agreements with any of our
executive officers which commit them to remain employed by us.
Future regulations could be enacted that either directly restrict our business
or indirectly impact our business by limiting the growth of electronic commerce.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws
or regulations could limit the market for our products and services. Although
they might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose
companies involved in e-commerce to liability, which could limit the growth of
Web use and e-commerce generally and thereby reduce demand for our products and
services. Such legislation or regulation could dampen the growth in Web usage
and decrease its acceptance as a medium of communications and commerce.
Our failure to manage our rapid growth effectively could hurt our business.
Our failure to manage our rapid growth effectively could have a material
adverse effect on the quality of our products, our ability to retain key
personnel, and on our business, operating results and financial condition. We
have been experiencing a period of rapid growth that has been placing a
significant strain on all of our resources. From January 1, 2001 to December
31, 2001, the number of our employees increased from 201 to 294. To manage our
future growth, if any, effectively, we must continue to enhance our information
technology infrastructure, financial and accounting systems, controls and
personnel, integrate a significant number of new hires, and manage expanded
operations in geographically distributed locations. In addition, we may need to
identify and move to alternative facilities to accommodate our growth, which
could disrupt our business and hurt our operating results.
Our future success will depend on our ability to enhance our existing products
and services and to develop and introduce new products and services.
We believe our future success will depend in large part on our ability to
enhance and broaden our live eLearning and business collaboration products and
services to meet the evolving needs of the market. Our market is characterized
by rapidly changing technologies, frequent new product and service
introductions, and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. To achieve our goals, we need to respond effectively to
technological changes and new industry standards and developments. In the past,
we have experienced delays in the introduction of new products. In addition,
our product enhancements must meet the requirements of our current and
prospective customers and must achieve significant market acceptance. We could
also incur substantial costs if we need to modify our products, services or
information technology infrastructure to adapt to these changes, standards and
developments.
As we continue to expand our international operations, we will face new
business risks that we have not encountered previously.
In addition to our North American operations, we have established sales,
marketing and service operations in Europe and the Pacific Rim. This expansion
will require additional resources and management attention and
26
will subject us to new regulatory, economic and political risks. Given our
limited experience in international markets, we cannot be sure that our
international expansion will be successful. In addition, we will face new risks
in doing business internationally. These risks could reduce demand for our
products and services, lower the prices at which we can sell our products and
services, or otherwise have an adverse effect on our operating results. Among
the risks we believe are most likely to affect us are:
. longer payment cycles and problems in collecting accounts receivable;
. adverse changes in trade and tax regulations;
. the absence or significant lack of legal protection for intellectual
property rights;
. the adoption of data privacy laws or regulations;
. political and economic instability; and
. currency risks.
Our success depends on our ability to protect our proprietary rights.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. If we fail to protect our
proprietary rights, other companies might copy our technology and introduce
products or services which compete with ours, without paying us for our
technology. This could have a material adverse effect on our business,
operating results and financial condition. Our proprietary technology includes
the Centra(R) trademark, among others, and two patent applications, neither of
which has been issued. We depend upon a combination of patent and trademark
laws, license agreements, non-disclosure and other contractual provisions to
protect proprietary and distribution rights in our products. In addition, we
attempt to protect our proprietary information and those of our vendors and
partners through confidentiality and license agreements with our employees and
others. Although we have taken steps to protect our proprietary technology,
they may be inadequate. Existing trade secret, copyright and trademark laws
offer only limited protection. Moreover, the laws of other countries in which
we market our products may afford little or no effective protection of our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and
expensive, even if we were to prevail.
Claims by other companies that we infringe their proprietary technology could
force us to redesign our products or otherwise hurt our financial condition.
If we were to discover that any of our products violated third-party
proprietary rights, there can be no assurance that we would be able to
reengineer the product or to obtain a license on commercially reasonable terms,
or at all, that would enable us to continue offering the product without
substantial reengineering. We do not conduct comprehensive patent searches to
determine whether the technology used in our products infringes patents held by
third parties. In addition, product development is inherently uncertain in a
rapidly developing technology environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. Any claim of infringement could cause us to incur
substantial costs defending against the claim, even if the claim is invalid,
and could distract our management from our business. Furthermore, a party
making such a claim could secure a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from selling our products or cause our customers to stop using
our products.
Our business could be adversely affected if our products contain errors.
Software products as complex as ours may contain undetected errors or "bugs"
that result in product failures. From time to time we have identified errors in
our products after commercial introduction of the products. While we have not
been materially harmed by errors in the past, the occurrence of errors in the
future could result in loss of or delay in revenues, loss of market share,
diversion of product development resources,
27
injury to our reputation or damage to our efforts to build brand awareness, any
of which could have a material adverse effect on our business, operating
results and financial condition.
We could incur substantial costs resulting from product liability claims
relating to our customers' use of our products and services.
Many of the business interactions supported by our products and services are
critical to our customers' businesses. Any failure in a customer's business
interaction or other collaborative activity caused or allegedly caused by our
products and services could result in a claim for substantial damages against
us, regardless of our responsibility for the failure. Although we maintain
general liability insurance, including coverage for errors and omissions, there
can be no assurance that our existing coverage will continue to be available on
reasonable terms or will be available in amounts sufficient to cover one or
more large claims, or that the insurer will not disclaim coverage as to any
future claim.
We may require additional funds.
We expect that our current cash, cash equivalents and short-term investments
will be adequate to provide us with sufficient working capital for at least the
next 12 months. However, our current plans and projections may prove to be
inaccurate or our expected cash flow may prove to be insufficient to fund our
operations because of product delays, unanticipated expenses or other
unforeseen difficulties. Therefore, we may need to raise additional capital in
order to fund the development and marketing of our products and services.
Our ability to obtain additional financing will depend on a number of
factors, including market conditions, our operating performance and investor
interest, particularly in business collaboration software companies. These
factors may make the timing, amount, terms and conditions of any financing
unattractive. They may also result in our incurring additional indebtedness or
accepting stockholder dilution. If adequate funds are not available or are not
available on acceptable terms, we may have to forego strategic acquisitions or
investments, defer our product development activities, or delay our continued
roll-out of new products and product versions. Any of these actions may
seriously harm our business and operating results.
Our historical operating results may not be indicative of future performance.
Because of the foregoing factors, our operating results are difficult to
forecast. We believe that period-to-period comparisons of our operating results
are not meaningful, and you should not rely on them as indicative of our future
performance. You should also evaluate our prospects in light of the risks,
expenses and difficulties commonly encountered by comparable early-stage
companies in new and rapidly emerging markets. We cannot assure you that we
will successfully address the risks and challenges that face us. In addition,
although we have experienced significant revenue growth recently, we cannot
assure you that our revenues will continue to grow or that we will become or
remain profitable in the future.
We may not successfully integrate the technologies and/or personnel of
MindLever.com, Inc. or any other entity that we acquire in the future and, as a
result, may not realize the expected benefits of such acquisitions.
On April 30, 2001, we acquired MindLever.com, Inc. There can be no assurance
that the integration of all of the acquired technologies will be successful or
will not result in unforeseen difficulties that may absorb significant
management attention.
In the future, we may acquire additional businesses or product lines. The
recently completed acquisition, or any future acquisition, may not produce the
revenue, earnings or business synergies that we anticipated, and an acquired
product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired
28
companies into our business may also result in unforeseen difficulties.
Unforeseen operating difficulties may absorb significant management attention,
which we might otherwise devote to our existing business. Also, the process may
require significant financial resources that we might otherwise allocate to
other activities, including the ongoing development or expansion of our
existing operations.
If we pursue a future acquisition, our management could spend a significant
amount of time and effort identifying and completing the acquisition. If we
make a future acquisition, we could issue equity securities which would dilute
current stockholders' percentage ownership, incur substantial debt, assume
contingent liabilities, incur a one-time charge or be required to amortize
goodwill, or any combination of the foregoing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since some of our sales are currently priced in U.S. dollars and translated to
local currency amounts, a strengthening of the dollar could make our products
less competitive in foreign markets. Interest income and expense are sensitive
to changes in the general level of United States interest rates, particularly
since our investments are in short-term instruments and our long-term debt and
available line of credit require interest payments calculated at variable
rates. Based on the nature and current levels of our investments and debt,
however, we have concluded that there is no material market risk exposure.
In January 2001, we liquidated certain short-term debt obligations of
California-based electric utilities when their ratings dropped to below
investment grade, which resulted in a realized loss of approximately $772,000.
Our general investing policy is to limit the risk of principal loss and to
seek to ensure the safety of invested funds by limiting market and credit risk.
We currently use a registered investment manager to place our investments in
highly liquid money market accounts and government backed securities. All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
listed in Item 14 (a) (1) and begin at page 41 of this report.
The quarterly financial information required by this Item 8 is included in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16 (a) OF THE SECURITIES EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer of Centra:
Name Age Position
---- --- --------
Leon Navickas......... 45 Chief Executive Officer and Chairman
Anthony J. Mark....... 55 President and Chief Operating Officer
Stephen A. Johnson.... 46 Chief Financial Officer, Treasurer and Secretary
Joseph M. Gruttadauria 42 Senior Vice President, Professional Services
Steven N. Lesser...... 45 Vice President, Worldwide Sales
David Barrett (1)..... 45 Director
Richard D'Amore (1)... 48 Director
Robert E. Hult (2).... 55 Director
- --------
(1)Member of the Audit Committee and Compensation Committee.
(2)Member of the Audit Committee
Leon Navickas founded Centra and has served as our Chief Executive Officer
and Chairman of the Board since our incorporation in April 1995. He also served
as our President from our incorporation until January 1999. From May 1983 until
April 1995, Mr. Navickas served as General Manager of Research and Development,
Notes Division for Lotus Development Corp.
Anthony J. Mark has served as our President and Chief Operating Officer
since January 1999 and as our Chief Operating Officer since October 1997. From
March 1997 until October 1997, Mr. Mark served as our Vice President, Product
Development. From May 1995 until March 1997, he performed consulting services
for a number of private companies. From May 1993 until May 1995, Mr. Mark
served as Vice President and General Manager, Broadcast Products Division for
Avid Technology, Inc., a software development company.
Stephen A. Johnson has served as our Chief Financial Officer since November
1998. Since June 1999, Mr. Johnson has served as our Chief Financial Officer,
Treasurer and Secretary. From May 1997 until November 1998, Mr. Johnson served
as our Director of Finance and Administration. From March 1997 until May 1997,
he served as a consultant to Centra. From October 1991 until March 1997, Mr.
Johnson served in a number of positions at Avid Technology, Inc., including
Controller from October 1991 until August 1995; Finance Manager, Desktop
Products Division from August 1995 until February 1996; and Director of
Finance, Worldwide Field Operations from February 1996 until March 1997.
Joseph M. Gruttadauria has served as our Senior Vice President, Professional
Services since October 2000 and our Vice President, Professional Services since
March 1997. From March 1996 until March 1997, Mr. Gruttadauria served as the
Vice President of Sales and Services and Chief Information Officer for OneWave,
Inc., a consulting company. From December 1994 until March 1996, he served as
Director, Customer Service for SAP Americas, a software company. From June 1994
until December 1994 Mr. Gruttadauria served as Vice President, Services and
Manufacturing for the Softswitch Business Unit of Lotus Development Corp. From
December 1989 until June 1994 Mr. Gruttadauria served as Vice President,
Service and Manufacturing for Softswitch, Inc. a software development company.
Steven N. Lesser has served as our Vice President, Worldwide Sales since
January 1999. From July 1997 to August 1998, Mr. Lesser served as Vice
President, North American Sales for Marcam Corporation, a software development
company. From March 1993 until July 1997, he served as Vice President, North
America Sales for MAPICS Business Group of Marcam Corporation.
30
David Barrett has served as a director since December 1999. Since August
2001, Mr. Barrett has been a General Partner at Polaris Venture Partners, LLP,
a venture capital investing firm, which he joined in May 2000 as a Venture
Partner. From February 1998 to March 2000, Mr. Barrett served as Executive Vice
President of Calico Commerce, Inc., a provider of e-business enabling software
and services, including responsibilities as Chief Operating Officer from April
1999 to March 2000. From December 1996 until February 1998, Mr. Barrett served
as Senior Vice President, Worldwide Operations at Pure Atria/Rational Software
Corporation, an enterprise software development automation company. From March
1996 to December 1996, Mr. Barrett served as Vice President, Sales, Marketing
and Services at Nets, Inc., an e-commerce company. From August 1984 through
March 1996, Mr. Barrett held numerous executive roles for Lotus Development
Corporation/IBM, including service as Vice President, Field Sales and Services
from July 1993 until March 1996. Mr. Barrett is a director of four other
companies.
Richard D'Amore has served as a director since April 1995. Since March 1994,
Mr. D'Amore has been a General Partner of North Bridge Venture Partners, L.P.,
a venture capital investing firm. Mr. D'Amore also serves as a director of
Veeco Instruments, Inc., Silverstream Software, Inc., and Solectron Corporation.
Robert E. Hult has served as a director since January 2001. Since March
1998, Mr. Hult has been the Senior Vice President Finance and Operations, Chief
Financial Officer and Treasurer for NMS Communications, a provider of systems
and platform building blocks for voice, video and data communication services
on wireless and wireline networks. From June 1997 to October 1998, Mr. Hult
served as the Vice President and General Manager for AltaVista Search Service,
an internet portal acquired by Compaq. From December 1995 to June 1997, Mr.
Hult served as Chief Financial Officer, and Vice President Operations & Web
Business Development for AltaVista Internet Software, Inc., a wholly owned
subsidiary of Digital Equipment Corp. He served Digital Equipment Corporation
in a variety of financial executive positions from 1972 to 1995.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than 10% of our common
stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely upon review of Forms 3 and 4 and amendments thereto furnished
to us during fiscal 2001 and Forms 5 and amendments thereto furnished with
respect to fiscal 2001, we believe that, except for the failure to file a Form
3 Initial Statement of Beneficial Ownership of Securities of Robert E. Hult
(which omission was subsequently corrected by the filing of a Form 5), all of
our officers, directors and greater-than-10% stockholders fulfilled their
Section 16(a) filing requirements in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS AND DIRECTORS
Directors' Compensation
We do not currently compensate directors for their services as members of
the board of directors or any committee of the board. We reimburse directors
for out-of-pocket expenses incurred in attending board and committee meetings.
In January 2001, the board of directors granted David Barrett an option to
purchase 17,500 shares of common stock at a price of $4.13 per share. They vest
over a 4-year period with 6.25% vesting each quarter. Additionally, in January
2001, the board of directors granted Richard D'Amore and Robert Hult options to
purchase 40,000 shares of common stock at a price of $4.13 per share. They vest
over a 4-year period with 25% vesting at the first anniversary of the grant
date and 6.25% each quarter thereafter. These options were issued under the
1999 Stock Incentive Plan.
31
Each director who is not an employee of Centra is eligible to receive option
grants under the 1999 Director Plan. The plan provides that each non-employee
director is eligible to receive an automatic option to purchase 10,000 shares
of common stock upon his initial election to the board, and an additional grant
to purchase 5,000 shares of common stock upon each re-election. Each
non-employee director at the time of our initial public offering was also
entitled under the 1999 Director Plan to receive an automatic option to
purchase 10,000 shares of common stock to date. The non-employee directors have
elected to waive their rights under the 1999 Directors Plan. The 1999 Director
Plan also permits discretionary grants to non-employee directors. All option
grants under the 1999 Director Plan are priced at the then-current market price
of the common stock.
Executive Compensation
The following table provides certain summary information concerning the
compensation earned by Centra's Chief Executive Officer and each of the four
other most highly compensated executive officers (collectively, the "Named
Executive Officers"), for services rendered in all capacities to Centra during
each of the three most recent years.
Summary Compensation Table
Long-Term
Name and Principal Position Annual Compensation (1) Compensation
- --------------------------- ----------------------- ------------
Securities
Underlying
Year Salary($) Bonus($) Options(#)
---- --------- -------- ------------
Leon Navickas................................... 2001 $175,000 $131,250 200,000
Chief Executive Officer 2000 $150,000 $175,000 500,000
1999 $150,000 $175,000 --
Anthony J. Mark................................. 2001 $175,000 $116,250 200,000
President and Chief Operating Officer 2000 $175,000 $155,000 250,000
1999 $175,000 $100,000 300,000
Stephen A. Johnson.............................. 2001 $160,000 $ 50,000 70,000
Chief Financial Officer, Treasurer and Secretary 2000 $150,000 $ 45,000 66,000
1999 $140,000 $ 35,000 45,000
Joseph M. Gruttadauria.......................... 2001 $175,000 $ 75,000 50,000
Senior Vice President, Professional Services 2000 $175,000 $100,000 150,000
1999 $150,000 $ 75,000 37,500
Steven N. Lesser (2)............................ 2001 $160,000 $ 62,882 50,000
Vice President, Worldwide Sales 2000 $150,000 $155,000 75,000
1999 $ 99,680 $100,680 364,500
- --------
(1)In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than $50,000 and less than ten percent of the total annual
salary and bonus for each executive officer.
(2)Mr. Lesser joined Centra during 1999 and, therefore, received compensation
for only a portion of that year.
32
Option Grants in Last Year
The following table contains information concerning stock option grants made
during 2001 under the 1999 Incentive and Nonqualified Stock Option Plan to the
Chief Executive Officer and each of the other Named Executive Officers:
Option Grants in Last Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term(2)
----------------------
% of Total
Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Last Year ($/Share)(1) Date 5%($) 10% ($)
---- ---------- ------------ ------------ ---------- -------- ----------
Leon Navickas......... 200,000(3) 10.6% $4.13 1/02/11 $518,838 $1,314,838
Anthony J. Mark....... 200,000(3) 10.6% $4.13 1/02/11 $518,838 $1,314,838
Stephen A. Johnson.... 50,000(3) 2.7% $4.13 1/02/11 $129,710 $ 328,709
20,000(4) 1.1% $5.72 4/03/11 $ 71,933 $ 182,292
Joseph M. Gruttadauria 50,000(3) 2.7% $4.13 1/02/11 $129,710 $ 328,709
Steven N. Lesser...... 50,000(3) 2.7% $4.13 1/02/11 $129,710 $ 328,709
- --------
(1)All options were granted at exercise prices that were not less than fair
market value at the time of grant, which was determined by the board of
directors to be the last sale price of the common stock on the date of grant
as reported by the Nasdaq Stock Market. Amounts reported in this column
represent hypothetical values that may be realized upon exercise of the
options immediately prior to the expiration of their term, assuming the
specified compounded
(2)Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
common stock over the term of the options. These numbers are calculated
based on rules promulgated by the Securities and Exchange Commission and do
not represent Centra's estimate of future stock price growth. Actual gains,
if any, on stock option exercises and common stock holdings are dependent on
the timing of such exercises and the future performance of the common stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
Named Executive Officers. This table does not take into account any
appreciation in price of the common stock from the date of grant to the
current date. The values shown are net of the option price, but do not
include deductions for taxes or other expenses associated with the exercise.
(3)Option vests 6.25% each quarter beginning 4/02/01 and ending 1/02/05.
(4)Option vests 6.25% each quarter beginning 7/03/01 and ending 4/03/05.
33
Option Exercises and Option Holdings
The following tables set forth information regarding exercises of stock
options during 2001, as well as exercisable and unexercisable options held as
of December 31, 2001 by each of the Named Executive Officers.
Aggregated Option Exercises in 2001 and Year-End Option Values
Common Stock Underlying Value of Unexercised in-the-
Unexercised Options at Money Options at
Year-End (#) Year-End $(2)
------------------------- ----------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Leon Navickas......... -- -- 287,500 412,500 $473,313 $957,688
Anthony J. Mark....... -- -- 226,250 223,750 $392,953 $710,048
Stephen A. Johnson.... -- -- 59,125 99,375 $250,678 $251,459
Joseph M. Gruttadauria -- -- 56,250 143,750 $ 97,828 $292,722
Steven N. Lesser...... -- -- 23,438 101,563 $ 54,778 $237,372
- --------
(1)Amounts disclosed in this column do not necessarily reflect amounts received
by the Named Executive Officers but are calculated based on the difference
between the fair market value of the common stock on the date of exercise
and the exercise price of the options. Named Executive Officers will receive
cash only if and when they sell the common stock issued upon exercise of the
options, and the amount of cash received by such individuals is dependent on
the price of the common stock at the time of such sale.
(2)Calculated on the basis of the last sale price of the common stock on
December 31, 2001 as reported by the Nasdaq Stock Market ($8.00 per share),
less the applicable option exercise price.
Severance Agreements
The Company has entered into severance agreements with each of Leon
Navickas, our Chief Executive Officer; Anthony J. Mark, our President and Chief
Operating Officer; Stephen A. Johnson, our Chief Financial Officer, Treasurer
and Secretary; Steven N. Lesser, our Vice President, Worldwide Sales; and
Joseph M. Gruttadauria, our Senior Vice President, Professional Services. Under
these agreements, if the executive officer is terminated without cause, he will
be entitled to continue to receive base salary and benefits for a period ending
on the earliest of (a) 181 days from the date of termination, (b) the date on
which he begins new employment or (c) the date on which he materially breaches
any written agreement with Centra.
None of our executive officers has any other employment agreement with
Centra. Our executive officers may resign and we may terminate their employment
at any time, subject to the provisions of their severance agreements.
Change of Control Arrangements
We have entered into change of control agreements with each of Leon
Navickas, Anthony J. Mark, Stephen A. Johnson, Steven N. Lesser and Joseph M.
Gruttadauria. Each agreement provides that upon a change of control, 50% of the
executive's unvested options will vest and become immediately exercisable and
50% of our right to repurchase the executive's unvested restricted stock will
terminate. A "change of control" means:
. any merger or consolidation which results in the voting shares
outstanding immediately prior to the merger or consolidation,
representing immediately after the merger or consolidation, less than
50% of the voting power of the surviving entity;
. a sale of all or substantially all of our assets; or
. the sale of our shares in a single transaction or a series of related
transactions, representing at least 80% of the voting power of our
voting shares.
34
These change of control provisions apply to previous grants of restricted
stock and options and to any future grants of restricted stock and options.
The compensation committee of the board of directors, as administrator of
the 1995 stock option plan and the 1999 stock incentive plan, can provide for
accelerated vesting of the shares of common stock subject to outstanding
options held by any of our executive officers or directors in connection with a
change of control of Centra as defined in such plans. The accelerated vesting
may be conditioned on the termination of the individual's employment following
the change of control.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is a former or current employee of
Centra or a party to any other relationship of a character required to be
disclosed pursuant to Item 402(j) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth information about the beneficial ownership of
our outstanding common stock on February 28, 2002 by: (i) each person or entity
who is known by us to own beneficially more than five percent of our common
stock; (ii) each of the Named Executive Officers; (iii) each of our directors;
and (iv) all of our executive officers and directors as a group.
Percentage of
Number of Shares Outstanding
Beneficially Owned Shares
------------------------------ -------------
Outstanding Right to Total Beneficially
Name and Address of Beneficial Owner (1) Shares Acquire Number Owned (1)
---------------------------------------- ----------- -------- --------- -------------
SmartForce PLC(2)......................................... 3,927,560 -- 3,927,560 15.4%
900 Chesapeake Drive
Redwood City, California 94063
GeoCapital LLC(3)......................................... 2,241,825 -- 2,241,825 8.8
825 Third Avenue
New York, NY 10022
Leon Navickas (4)......................................... 1,785,000 362,500 2,147,500 8.3
Kern Capital Management LLC and persons filing jointly (5) 1,596,100 -- 1,596,100 6.3
825 Third Avenue
New York, NY 10022
Anthony J. Mark (6)....................................... 507,384 312,500 819,884 3.2
Steven N. Lesser (6)...................................... 387,000 39,063 426,063 1.7
Joseph M. Gruttadauria (6)................................ 243,834 81,250 325,084 1.3
Stephen A. Johnson (6).................................... 87,293 76,125 163,418 *
Richard D'Amore........................................... 93,018 12,500 105,518 *
David Barrett............................................. 22,500 18,124 40,624 *
Robert E. Hult............................................ --- 12,500 12,500 *
All executive officers and directors as a group
(eight persons) (4)(6).................................. 3,126,029 914,562 4,040,591 15.3
- --------
* Less than one percent.
(1)In accordance with SEC rules, beneficial ownership includes any shares as to
which a person or entity has sole or shared voting power or investment power
and any shares as to which the person or entity has the right to acquire
beneficial ownership within 60 days after February 28, 2002 through the
exercise of any stock option. Except as noted, we believe that the persons
named in the table have sole voting and
35
investment power with respect to the shares of common stock set forth
opposite their names. Percentage of beneficial ownership is based on
25,464,788 shares of common stock outstanding as of February 28, 2002. All
shares included under "Right to Acquire" represent shares subject to
outstanding stock options that are exercisable within 60 days of the date of
this table. The address of each officer and director listed is in care of
Centra Software, Inc., 430 Bedford Street, Lexington, Massachusetts 02420.
(2)The information in this table regarding SmartForce PLC is based upon an
Amended Schedule 13D filed with the Securities and Exchange Commission on
January 30, 2002. SmartForce PLC reported that it has entered into voting
agreements with Messrs. Navickas, Mark, Lesser, Gruttadauria, Johnson,
D'Amore, Barrett and Hult, pursuant to which each such individual granted
SmartForce PLC an irrevocable proxy to vote all of the shares of Centra
common stock beneficially owned by such person in favor of adoption and
approval of the merger agreement and the approval of other actions
contemplated by the merger agreement. Accordingly, SmartForce PLC has
reported that it has shared voting power with respect to 3,927,560 shares of
Centra common stock. SmartForce expressly disclaims beneficial ownership of
any of the shares of Centra common stock covered by such voting agreements.
(3)The information is based on a Schedule 13G filed by GeoCapital, LLC with the
Securities and Exchange Commission on February 14, 2002. The report states
that GeoCapital, LLC is an investment adviser and has sole dispositive power
with respect to the securities identified.
(4)Includes 53,000 shares held of record by Trustees of the Navickas Education
Trust 1997.
(5)The information is based on a Schedule 13G filed jointly by Kern Capital
Management LLC, Robert E. Kern, Jr., and David G. Kern with the Securities
and Exchange Commission on February 12, 2002. The report states that Messrs.
Kern are the controlling members of Kern Capital Management LLC and may be
deemed to be the beneficial owners of, or to share the power to direct the
voting or disposition of, the securities identified. Messrs. Kern expressly
disclaims beneficial ownership of the securities identified.
(6)Certain of the shares were acquired upon early exercise of stock options by
such person and remain subject to repurchase by the Company at the original
option price and subject to the same vesting rates as provided in the
original option agreement. Accordingly, as of February 28, 2002, Messrs.
Mark, Johnson, Gruttadauria and Lesser, held 37,500, 11,719, 9,375 and
91,125 "restricted" shares, respectively, that are subject to repurchase by
Centra if the employment of the officer terminates before the shares are
vested.
Changes in Control -- Voting Agreements
The following officers and directors of Centra have entered into voting
agreements with SmartForce PLC in connection with the proposed merger: Leon
Navickas, David Barrett, Richard D'Amore, Robert Hult, Anthony Mark, Stephen
Johnson, Steven Lesser and Joseph Gruttadauria. By entering into the voting
agreements, these stockholders have irrevocably appointed SmartForce as their
lawful attorney and proxy. These proxies give SmartForce the limited right to
vote the shares of Centra common stock beneficially owned by these Centra
stockholders, subject to the voting agreements (a) in favor of the adoption of
the merger agreement and approval of the merger of SmartForce and Centra, (b)
in favor of any transaction contemplated by the merger agreement and (c) in
favor of any matter that could reasonably be expected to facilitate the merger
and against any matter that is inconsistent with the consummation of the merger
and the other transactions contemplated by the merger agreement. These Centra
stockholders may vote their shares of Centra common stock in their discretion
on all other matters. The voting agreements will terminate upon the earlier to
occur of the termination of the merger agreement and the completion of the
merger.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTION
In 2001, we paid employee recruitment fees of approximately $133,750 to
Lynx, Inc., an entity that is owned and operated by the spouse of Leon
Navickas, our Chairman and Chief Executive Officer.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)The following documents are filed as part of this report:
1. Financial Statements
The following are the consolidated financial statements of the Company
appearing elsewhere in this Annual Report on Form 10-K:
Page
----
Report of Independent Public Accountants............................................................ 42
Consolidated Balance Sheets as of December 31, 2000 and 2001........................................ 43
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001.......... 44
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 2000 and 2001.............................................. 45
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001.......... 46
Notes to Consolidated Financial Statements.......................................................... 47
2. Financial Statement Schedules
Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable or is included in the
consolidated financial statements or in the notes thereto.
3. Exhibits
The following exhibits are filed as part of, or incorporated by reference
in, this Annual Report on Form 10-K.
37
EXHIBIT LIST
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.1 Agreement and Plan of Merger and Reorganization, dated as of January 16, 2002, by and among
SmartForce PLC, Atlantic Acquisition Corp. and Centra Software, Inc. (filed as Exhibit 2.1 to our
Current Report on Form 8-K filed January 22, 2002 and incorporated herein by reference).
3.2(1) Amended and Restated Certificate of Incorporation of Centra Software, Inc
3.4(1) Amended and Restated By-Laws of Centra Software, Inc
4.1(1) Specimen certificate for common stock of Centra Software, Inc.
9.1 Company Voting Agreements, dated as of January 16, 2002, by and between SmartForce PLC,
Centra Software, Inc., and each of Leon Navickas, David Barrett, Richard D'Amore, Robert E.
Hult, Anthony J. Mark, Stephen A. Johnson, Steven N. Lesser and Joseph M. Gruttadauria (Filed
as Exhibit A-2 to Exhibit 2.1 to our Current Report on Form 8-K filed January 22, 2002 and
incorporated herein by reference).
10.1(1) Centra Software, Inc. 1995 Stock Plan, as amended*
10.2(1) Centra Software, Inc. 1999 Stock Incentive Plan*
10.3(1) Centra Software, Inc. 1999 Employee Stock Purchase Plan*
10.4(1) Centra Software, Inc. 1999 Director Stock Option Plan*
10.5(1) Amendments of Incentive Stock Option and/or Stock Restriction Agreements ("Change of Control
Agreement") between Centra Software, Inc. and the following:
(a) Joseph Gruttadauria, dated April 25, 1997*
(b) Joseph Gruttadauria, dated May 8, 1997*
(c) Stephen A. Johnson, dated May 27, 1999*
(d) Steven Lesser, dated May 27, 1999*
(e) Anthony Mark, dated April 25, 1997*
(f) Leon Navickas, dated March 10, 1997*
(g) Leon Navickas, dated May 8, 1997*
10.6(1) Severance Agreements between Centra Software, Inc. and the following:
(a) Joseph Gruttadauria, dated March 24, 1997*
(b) Stephen A. Johnson, dated May 27, 1999*
(c) Steven Lesser, dated May 27, 1999*
(d) Anthony Mark, dated March 10, 1997*
(e) Leon Navickas, dated May 8, 1997*
10.7(1) Form of Indemnity Agreement entered into by Centra Software, Inc. and each of Joseph
Gruttadauria, Stephen A. Johnson, Steven Lesser, Anthony J. Mark and Leon Navickas.
10.8(1) Lease dated July 21, 1999 between Centra Software, Inc. and Trustees of Elandzee Trust, as
amended
10.9(1) Sublease dated May 13, 1997 between Centra Software, Inc. and Robert Half International, Inc.
10.10(1) Sublease dated December 31, 1996 between Centra Software, Inc. and C.P. Clare
10.11(1) Loan and Security Agreement, dated November 5, 1997 between Centra Software, Inc. and Silicon
Valley Bank, as amended
10.12(1) Fourth Amended and Restated Investors' Rights Agreement, dated April 21, 1999, by and among
Centra Software, Inc., Leon Navickas and the persons and entities listed therein, as amended
10.13(1) Form of Indemnity Agreement entered into by Centra Software, Inc. and each of David Barrett,
Richard D'Amore and Jonathan Flint.
10.14 Sublease dated September 21, 2000 between Mindlever.com, Inc. as sublessee and Kaiser
Foundation Health Plan of North Carolina as sublessor, as assigned and assumed by
M-L Acquisition Corp. as successor sublessee and as guaranteed by Centra Software, Inc.
38
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.15 Fourth Loan Modification Agreement dated May 4, 2001 between Centra Software, Inc. and
Silicon Valley Bank.
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
(1)Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (File No. 333-89817) (the "Registration on Form S-1"). The
exhibit number listed above corresponds to the exhibit number listed in the
Registration Statement on Form S-1.
* Management contract or compensation plan.
(b)The Company did not file any reports on Form 8-K during the last quarter
of the period covered by this report.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, as of March 13, 2002.
CENTRA SOFTWARE, INC.
By:
/S/ LEON NAVICKAS
-----------------------------------
Leon Navickas
Chief Executive Officer
POWER OF ATTORNEY
Know All by These Presents that each individual whose signature appears below
hereby constitutes and appoints Leon Navickas and Stephen A. Johnson, and each
of them, his or her true and lawful attorneys-in-fact and agents with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Security and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing which they, or any
of them, may deem necessary or advisable to be done in connection with this
Annual Report on Form 10-K, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or any substitute or substitutes
for any or all of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities indicated, as of
March 13, 2002.
Signature Title
--------- -----
/S/ LEON NAVICKAS Chief Executive Officer and Director
---------------------- (Principal Executive Officer)
Leon Navickas
/S/ STEPHEN A. JOHNSON Chief Financial Officer, Treasurer and Secretary
---------------------- (Principal Accounting and Financial Officer)
Stephen A. Johnson
/S/ RICHARD D'AMORE Director
----------------------
Richard D'Amore
/S/ DAVID BARRETT Director
----------------------
David Barrett
/S/ ROBERT E. HULT Director
----------------------
Robert E. Hult
40
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants............................................................. 42
Consolidated Balance Sheets as of December 31, 2000 and 2001......................................... 43
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001........... 44
Consolidated Statements of Redeemable Convertible Preferred Stock, Stockholders' Equity (Deficit) and
Comprehensive Loss for the Years Ended December 31, 1999, 2000 and 2001............................ 45
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001........... 46
Notes to Consolidated Financial Statements........................................................... 47
41
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Centra Software, Inc.:
We have audited the accompanying consolidated balance sheets of Centra
Software, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 2001, and the related consolidated statements of operations,
redeemable convertible preferred stock, stockholders' equity (deficit) and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Centra Software, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 16, 2002
42
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31,
------------------
2000 2001
-------- --------
Assets
Current Assets:
Cash and cash equivalents.......................................................... $ 42,015 $ 25,424
Short-term investments............................................................. 23,172 22,759
Restricted cash.................................................................... 100 100
Accounts receivable, net of reserves of approximately $577 and $638 at December 31,
2000 and 2001, respectively...................................................... 4,170 9,654
Prepaid expenses and other current assets.......................................... 1,766 1,250
-------- --------
Total current assets............................................................. 71,223 59,187
-------- --------
Property and Equipment, at cost:
Computers and equipment............................................................ 5,103 7,593
Furniture and fixtures............................................................. 657 945
Leasehold improvements............................................................. 229 531
-------- --------
5,989 9,069
Less: Accumulated depreciation and amortization.................................... 2,610 4,887
-------- --------
3,379 4,182
Restricted cash.................................................................... 400 549
Other assets....................................................................... 62 104
Goodwill and other intangible assets, net.......................................... -- 6,955
-------- --------
$ 75,064 $ 70,977
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt............................................... $ 482 $ 1,563
Accounts payable................................................................... 1,184 1,463
Accrued expenses................................................................... 4,612 5,808
Deferred revenue................................................................... 5,018 8,165
-------- --------
Total current liabilities........................................................ 11,296 16,999
-------- --------
Long-term debt, net of current maturities........................................... 1,894 2,631
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $.001 par value-..................................................
Authorized-10,000,000 shares at December 31, 2000 and 2001.......................
Issued and outstanding-0 shares at December 31, 2000 and 2001.................... -- --
Common stock, $0.001 par value.....................................................
Authorized-100,000,000 shares at December 31, 2000 and 2001......................
Issued-24,977,656 shares at December 31, 2000 and 26,000,861 shares at
December 31, 2001.............................................................. 25 26
Additional paid-in capital......................................................... 105,192 110,446
Accumulated deficit................................................................ (41,043) (57,725)
Deferred compensation.............................................................. (2,260) (1,326)
Cumulative translation adjustment.................................................. -- (34)
Treasury stock (661,606 shares of common stock at December 31, 2000 and 2001,
respectively).................................................................... (40) (40)
-------- --------
Total stockholders' equity..................................................... 61,874 51,347
-------- --------
$ 75,064 $ 70,977
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
43
CENTRA SOFTWARE, INC AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
Years Ended December 31,
---------------------------
1999 2000 2001
------- -------- --------
Revenues:
License.................................................. $ 7,017 $ 18,697 $ 28,815
Services................................................. 1,578 4,276 10,302
------- -------- --------
Total revenues....................................... 8,595 22,973 39,117
------- -------- --------
Cost of Revenues:
License.................................................. 173 314 505
Services(1).............................................. 1,543 3,381 6,552
------- -------- --------
Total cost of revenues............................... 1,716 3,695 7,057
------- -------- --------
Gross profit......................................... 6,879 19,278 32,060
------- -------- --------
Operating Expenses:
Sales and marketing(1)................................... 8,040 22,563 25,481
Product development(1)................................... 4,594 8,481 12,516
General and administrative(1)............................ 2,440 4,977 7,418
Compensation charge for issuance of stock options........ 736 925 887
Acquired in-process research and development............. -- -- 2,200
Amortization of goodwill................................. -- -- 783
Amortization of other intangible assets.................. -- -- 533
------- -------- --------
Total operating expenses............................. 15,810 36,946 49,818
------- -------- --------
Operating loss........................................... (8,931) (17,668) (17,758)
Interest income........................................... 375 3,852 2,227
Interest and other expense, net........................... (67) (42) (379)
Loss on sale of short-term investment (Note 1(d))......... -- -- (772)
------- -------- --------
Net loss................................................. (8,623) (13,858) (16,682)
Accretion of discount on preferred stock.................. 507 649 --
------- -------- --------
Net loss attributable to common stockholders.............. $(9,130) $(14,507) $(16,682)
======= ======== ========
Basic and diluted net loss per share...................... $ (1.39) $ (0.67) $ (0.68)
======= ======== ========
Pro forma basic and diluted net loss per share (Note 1(l)) $ (0.64) $ (0.64)
======= ========
Weighted average shares outstanding:
Basic and diluted........................................ 6,588 21,781 24,449
======= ======== ========
Pro forma basic and diluted (Note 1(l)).................. 15,281 22,608
======= ========
- --------
(1)Excludes compensation charge for issuance of stock options. The following
summarizes the allocation of the compensation charge for issuance of stock
options:
1999 2000 2001
---- ---- ----
Cost of services revenues............................... $ -- $ 24 $ 24
Sales and marketing..................................... 176 401 391
Product development..................................... 75 161 159
General and administrative.............................. 485 339 313
---- ---- ----
Total compensation charge for issuance of stock options. $736 $925 $887
==== ==== ====
The accompanying notes are an integral part of these consolidated financial
statements.
44
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS FOR THE YEARS ENDED
DECEMBER 31, 1999, 2000 and 2001
(In Thousands, Except Share and Per Share Data)
Redeemable
Convertible
Preferred Stock Common Stock
------------------- --------------------
Additional Cumulative
Carrying $0.001 Paid-in Accumulated Deferred Translation
Shares Value Shares Par Value Capital Deficit Compensation Adjustment
----------- -------- ---------- --------- ---------- ----------- ------------ -----------
Balance, December 31, 1998........... 6,469,490 $18,498 3,742,689 $ 3 $ 693 $(17,354) $ -- $ --
Sales of Series E redeemable
convertible preferred stock, net of
issuance costs of $52................ 2,695,000 13,475 -- -- -- (52) -- --
Deferred compensation related to
grants of common stock options....... -- -- -- -- 2,722 -- (2,722) --
Amortization of deferred
compensation......................... -- -- -- -- -- -- 736 --
Accretion of series A and B
redeemable convertible preferred
stock discount....................... -- 507 -- -- -- (507) -- --
Sale of common stock................. -- -- 1,422,234 2 355 -- -- --
Repurchase of common stock........... -- -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- (8,623) -- --
Comprehensive loss for the year
ended December 31, 1999.............. -- -- -- -- -- -- -- --
--------- ------- ---------- --- -------- -------- ------- ------
Balance, December 31, 1999........... 9,164,490 32,480 5,164,923 5 3,770 (26,536) (1,986) --
Deferred compensation related to
grants of common stock options....... -- -- -- -- 1,199 -- (1,199) --
Amortization of deferred
compensation......................... -- -- -- -- -- -- 925 --
Accretion of series A and B
redeemable convertible preferred
stock discount....................... -- 649 -- -- -- (649) -- --
Accrual of dividends paid on series A
and B redeemable convertible
preferred stock...................... -- (6,479) -- -- -- -- -- --
Conversion of redeemable
convertible preferred stock into
common stock......................... (9,164,490) (26,650) 13,746,735 14 26,636 -- -- --
Issuance of common stock in initial
public offering, net of issuance
costs of $7,268...................... -- -- 5,750,000 6 73,226 -- -- --
Proceeds from other issuance of
common stock......................... -- -- 315,998 -- 361 -- -- --
Net loss............................. -- -- -- -- -- (13,858) -- --
Comprehensive loss for the year
ended December 31, 2000.............. -- -- -- -- -- -- -- --
--------- ------- ---------- --- -------- -------- ------- ------
Balance, December 31, 2000........... -- -- 24,977,656 25 105,192 (41,043) (2,260) --
Amortization of deferred
compensation......................... -- -- -- -- (47) -- 934 --
Translation adjustment............... -- -- -- -- -- -- -- (34)
Issuance of common stock in
connection with the acquisition of
Mindlever............................ -- -- 509,775 -- 3,830 -- -- --
Proceeds from other issuance of
common stock......................... -- -- 513,430 1 1,471 -- -- --
Net loss............................. -- -- -- -- -- (16,682) -- --
Comprehensive loss for the year
ended December 31, 2001.............. -- -- -- -- -- -- -- --
--------- ------- ---------- --- -------- -------- ------- ------
Balance, December 31, 2001........... -- $ -- 26,000,861 $26 $110,446 $(57,725) $(1,326) $ (34)
========= ======= ========== === ======== ======== ======= ======
Treasury
Stock
------------- Total
Stockholders'
Equity Comprehensive
Shares Cost (Deficit) Loss
------- ----- ------------- -------------
Balance, December 31, 1998........... 455,339 $ (14) $(16,672) $ --
Sales of Series E redeemable
convertible preferred stock, net of
issuance costs of $52................ -- -- (52) --
Deferred compensation related to
grants of common stock options....... -- -- -- --
Amortization of deferred
compensation......................... -- -- 736 --
Accretion of series A and B
redeemable convertible preferred
stock discount....................... -- -- (507) --
Sale of common stock................. -- -- 357 --
Repurchase of common stock........... 206,267 (26) (26) --
Net loss............................. -- -- (8,623) (8,623)
Comprehensive loss for the year
ended December 31, 1999.............. -- -- -- (8,623)
------- ----- -------- --------
Balance, December 31, 1999........... 661,606 (40) (24,787)
Deferred compensation related to
grants of common stock options....... -- -- -- --
Amortization of deferred
compensation......................... -- -- 925 --
Accretion of series A and B
redeemable convertible preferred
stock discount....................... -- -- (649) --
Accrual of dividends paid on series A
and B redeemable convertible
preferred stock...................... -- -- -- --
Conversion of redeemable
convertible preferred stock into
common stock......................... -- -- 26,650 --
Issuance of common stock in initial
public offering, net of issuance
costs of $7,268...................... -- -- 73,232 --
Proceeds from other issuance of
common stock......................... -- -- 361 --
Net loss............................. -- -- (13,858) (13,858)
Comprehensive loss for the year
ended December 31, 2000.............. -- -- -- (13,858)
------- ----- -------- --------
Balance, December 31, 2000........... 661,606 (40) 61,874
Amortization of deferred
compensation......................... -- -- 887 --
Translation adjustment............... -- -- (34) (34)
Issuance of common stock in
connection with the acquisition of
Mindlever............................ -- -- 3,830 --
Proceeds from other issuance of
common stock......................... -- -- 1,472 --
Net loss............................. -- -- (16,682) (16,682)
Comprehensive loss for the year
ended December 31, 2001.............. -- -- -- $(16,716)
------- ----- -------- ========
Balance, December 31, 2001........... 661,606 $ (40) $ 51,347
======= ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
45
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
---------------------------
1999 2000 2001
------- -------- --------
Cash Flows from Operating Activities:
Net loss................................................................................. $(8,623) $(13,858) $(16,682)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 613 1,335 3,575
Compensation charge for issuance of stock options...................................... 736 925 887
Acquired in-process research and development........................................... -- -- 2,200
Loss on sale of short-term investments................................................. -- -- 772
Changes in assets and liabilities:
Restricted cash...................................................................... -- (100) --
Accounts receivable.................................................................. (899) (1,503) (5,243)
Prepaid expenses and other current assets............................................ (321) (1,256) 511
Accounts payable..................................................................... 145 623 (228)
Accrued expenses..................................................................... 1,850 1,832 (9)
Deferred revenue..................................................................... 821 3,472 2,921
------- -------- --------
Net cash used in operating activities............................................... (5,678) (8,530) (11,296)
------- -------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment....................................................... (1,291) (3,238) (2,964)
Purchase of short-term investments....................................................... -- (23,697) (50,531)
Sale of short-term investments........................................................... -- 525 50,172
Cash paid for the acquisition of Mindlever, net of cash acquired......................... -- -- (3,272)
Restricted cash.......................................................................... -- (400) (149)
Other assets............................................................................. (746) 702 (23)
------- -------- --------
Net cash used in investing activities............................................... (2,037) (26,108) (6,767)
------- -------- --------
Cash Flows from Financing Activities:
Proceeds from initial public offering, net of issuance costs............................. -- 73,232 --
Proceeds from sale of preferred stock.................................................... 13,423 -- --
Proceeds from issuance of common stock................................................... 357 361 1,471
Payments of dividends to preferred shareholders.......................................... -- (6,479) --
Purchase of treasury stock............................................................... (26) -- --
Proceeds from term loans................................................................. 209 2,000 2,500
Payments on Mindlever debt............................................................... -- -- (1,758)
Payments on term loans................................................................... (323) (307) (673)
Payments on capital lease obligations.................................................... (26) (32) (18)
------- -------- --------
Net cash provided by financing activities........................................... 13,614 68,775 1,522
------- -------- --------
Effect of Foreign Exchange Rate Change on Cash and Cash Equivalents...................... -- -- (50)
------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....................................... 5,899 34,137 (16,591)
Cash and Cash Equivalents, beginning of period............................................. 1,979 7,878 42,015
------- -------- --------
Cash and Cash Equivalents, end of period................................................... $ 7,878 $ 42,015 $ 25,424
======= ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................................................. $ 74 $ 60 $ 226
======= ======== ========
Supplemental Disclosure of Non-cash Financing Activities:
Accretion of discount on series A and series B redeemable convertible preferred stock.... $ 507 $ 649 $ --
======= ======== ========
Conversion of redeemable convertible preferred stock into 13,746,735 shares of common stock $ -- $ 26,650 $ --
======= ======== ========
Purchase of Business:
Net liabilities assumed, at fair value................................................... -- -- $ (3,281)
In-process research and development...................................................... -- -- 2,200
Developed technology and know-how........................................................ -- -- 2,100
Assembled workforce...................................................................... -- -- 300
Goodwill................................................................................. -- -- 5,873
Cash paid................................................................................ -- -- (2,850)
Acquisition costs incurred............................................................... -- -- (512)
------- -------- --------
Fair value of stock issued............................................................. $ -- $ -- $ 3,830
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
46
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Operations and Significant Accounting Policies
Centra Software, Inc., together with its wholly owned subsidiaries, (Centra
or the Company), is a leading provider of software and services that support
live eLearning and real-time business collaboration.
On January 16, 2002, the Company entered into an Agreement and Plan of
Merger and Reorganization with SmartForce PLC, and its wholly owned subsidiary,
Atlantic Acquisition Corp. Under the merger agreement, holders of the Company's
common stock will receive 0.425 SmartForce American Depositary Shares for each
share of the Company's common stock outstanding at the time of the merger. The
merger, expected to close in the second calendar quarter of 2002, is subject to
certain conditions including regulatory approvals and the approval of the
merger by the Company's stockholders and SmartForce's shareholders.
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., which
subsequently was renamed as Centra RTP, Inc., a wholly-owned subsidiary of the
Company, the Company acquired MindLever, a provider of management systems for
learning content, by merging it with and into M-L Acquisition Co. The Company
acquired MindLever for approximately $2.9 million in cash, the issuance of
509,745 shares of common stock valued at approximately $3.8 million and
acquisition costs in the approximate amount of $512,000, for a total purchase
price of approximately $7.2 million. The acquisition was accounted for using
the purchase method in accordance with Accounting Principles Board (APB)
Opinion No. 16. Accordingly, the results of operations of MindLever have been
included in the results of operations of the Company from the date of
acquisition (see Note 2).
Centra is subject to certain business risks that could affect future
operations and financial performance. These risks include, but are not limited
to, rapid technological changes, significant competition, dependence on key
individuals, quarterly performance fluctuations, ability to enhance existing
products and services and to develop new products and services.
The accompanying consolidated financial statements reflect the application
of certain accounting policies, as described in this note and elsewhere in the
notes to consolidated financial statements.
(a) Basis of Presentation
The consolidated financial statements include the accounts of Centra and its
wholly-owned subsidiaries, Centra Software Europe Limited, which was
incorporated in the United Kingdom, Centra Software Securities Corporation, a
Massachusetts securities corporation, Centra RTP, Inc. a Delaware corporation,
Centra Software Southern Europe SAS, which was incorporated in France, and
Centra Software Nordic ApS, which was incorporated in Denmark. All significant
intercompany transactions and balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
(c) Revenue Recognition
Centra derives substantially all of its revenues from the sale of software
licenses, post-contract support (maintenance), and other services. Maintenance
includes telephone support, bug fixes and rights to unspecified
47
upgrades and enhancements on a when-and-if available basis. Other services
include training, basic implementation consulting to meet specific customer
needs, software application hosting and application service provider (ASP)
services. Centra executes contracts that govern the terms and conditions of
each software license, maintenance arrangement and other services arrangements.
These contracts may be elements in a multiple-element arrangement. Revenue
under multiple-element arrangements, which may include several different
software products and services sold together, is allocated to each element
based on the residual method in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position 98-9, Software
Revenue Recognition with Respect to Certain Arrangements.
Centra uses the residual method when vendor-specific objective evidence of
fair value does not exist for one of the delivered elements in the arrangement.
Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. Centra has established sufficient
vendor-specific objective evidence for the value of its consulting, training,
and other services, based on the price charged when these elements are sold
separately. Accordingly, software license revenues are recognized under the
residual method in arrangements in which software is licensed with consulting,
training, and other services.
Revenues from license fees are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collectability is probable. Advance payments are recorded as
deferred revenue until the products are shipped, services are delivered or
obligations are met. Centra's products do not require significant
customization. Billings to customers are generally due within 90 days of the
invoice date. The Company has offered extended payment terms greater than 90
days but less than 12 months to certain of its customers, for which license
revenue is recognized upon shipment. These customers are well capitalized and
typically have entered into enterprise-wide license arrangements with the
Company. The Company believes that it has sufficient history of collecting all
amounts within the stated terms under these types of arrangements to conclude
that the fee is fixed or determinable at the time of license revenue
recognition.
Revenues related to maintenance and software application hosting are
recognized on a straight-line basis over the period that the maintenance and
hosting services are provided. Revenues related to ASP services are recognized
on a straight-line basis over the period that the ASP services are provided, or
on an as-used basis if defined in the contract. Revenues allocable to
implementation, consulting and training services are recognized as the services
are performed, ratably over a subscription period, or upon completing project
milestones if defined in the agreement.
(d) Cash Equivalents and Short-Term Investments
Centra considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Centra's cash
equivalents consist of money market accounts and highly rated commercial paper,
municipal bonds and corporate bonds, and, with cash, consist of the following
at December 31, 2000 and 2001 (in thousands):
December 31,
---------------
2000 2001
------- -------
Cash and cash equivalents-
Cash.............................. $ 1,059 $ 6,033
Money market accounts............. 6,095 16,892
Commercial paper.................. 18,911 --
Municipal bonds................... 15,450 2,499
Corporate notes and bonds......... 500 --
------- -------
Total cash and cash equivalents. $42,015 $25,424
======= =======
48
Centra accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, investments for
which Centra has the positive intent and the ability to hold to maturity are
reported at amortized cost, which approximates fair market value. At December
31, 2000 and 2001, Centra's short-term investments consisted of the following
(in thousands);
December 31,
---------------
2000 2001
------- -------
Short-term Investments-
Commercial paper (average 48 remaining days to maturity)......................... $ 9,914 $ --
Corporate notes and bonds (average 153 remaining days to maturity)............... 9,244 --
Municipal bonds (average 243 and 267 remaining days to maturity in 2000 and 2001,
respectively).................................................................. 4,014 22,759
------- -------
Total short-term investments................................................... $23,172 $22,759
======= =======
In January 2001, the Company liquidated, prior to maturity, certain
short-term obligations of California-based utilities when their ratings dropped
to below investment grade. This resulted in a realized loss of approximately
$772,000.
(e) Depreciation and Amortization
Centra provides for depreciation and amortization of property and equipment
using the straight-line method and has charged to operations amounts to
allocate the cost of assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- -------------
Computers and equipment 2-3 years
Furniture and fixtures. 3 years
Leasehold improvements. Life of lease
(f) Long-Lived Assets
In accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and For Long-Lived Assets to Be Disposed Of, Centra reviews its
long-lived assets (which consists of property and equipment, goodwill and other
intangibles) for impairment as events and circumstances indicate the carrying
amount of an asset may not be recoverable. Centra evaluates the realizability
of its long-lived assets based on profitability and cash flow expectations for
the related asset. Management believes that, as of each of the balance sheet
dates presented, none of Centra's long-lived assets were impaired (see Note
1(n)).
(g) Product Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed, requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based upon Centra's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by Centra
between the establishment of technological feasibility and the point at which
the product is ready for general release have not been significant.
Accordingly, Centra has charged all such costs to product development expenses
in the accompanying consolidated statements of operations.
(h) Disclosure of Fair Value of Financial Instruments and Concentration of
Credit Risk
The estimated fair values of the Company's financial instruments, which
includes cash equivalents, short-term investments, restricted cash, accounts
receivable, accounts payable, and long-term debt approximate their carrying
values due to the short-term nature of these instruments.
49
Financial instruments that potentially expose Centra to concentrations of
credit risk consist mainly of cash and cash equivalents, short-term investments
and accounts receivable. Centra maintains its cash and cash equivalents,
short-term investments and restricted cash principally in domestic financial
institutions and investments of high credit rating. Centra's accounts
receivable are derived primarily from sales of software products and services.
Centra performs credit evaluations of its customers and generally does not
require collateral. Except for the loss discussed in Note 1(d), Centra does not
believe that significant credit risk, beyond amounts provided for, exists at
December 31, 2000 and 2001. The carrying amounts of Centra's financial
instruments approximate fair market values at December 31, 2000 and 2001.
For the years ended December 31, 1999, 2000 and 2001, no customer accounted
for greater than 10% of revenues. As of December 31, 2000, Centra had one
customer who accounted for 10% of accounts receivable. As of December 31, 2001,
no customer accounted for greater than 10% of accounts receivable.
(i) Foreign Currency Translation
The financial statements of Centra's non-U.S. subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. During the years
ended December 31, 1999 and 2000, the Company determined that the functional
currency of Centra's foreign subsidiary was the U.S. dollar and, accordingly,
all assets and liabilities of the foreign subsidiary were translated using the
exchange rate at the balance sheet date, except for property and equipment and
stockholders' equity, which were translated at historical rates. Revenues and
expenses were translated at average rates during the period, except for
depreciation and amortization, which were translated at historical rates.
Transaction and translation gains and losses are included in the accompanying
consolidated statements of operations for the years ended December 31, 1999 and
2000, and were not material to the financial statements taken as a whole.
Beginning in 2001, with the expansion of the operations of the Company's
foreign subsidiaries, the Company determined the functional currency of its
foreign subsidiaries to be the local currency and, accordingly, the financial
results of the foreign subsidiaries for the year ended December 31, 2001 are
translated into U.S. dollars using exchange rates in effect at period-end for
assets and liabilities and average exchange rates during the reporting period
for the results of operations. Adjustments resulting from translation of
foreign subsidiaries' financial statements are included as a component of
stockholders' equity. Transaction gains and losses are included in the
accompanying consolidated statements of operations.
(j) Comprehensive Loss
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The only components of comprehensive loss reported by
the Company are net loss and, in 2001, foreign currency translation adjustment.
Year Ended December 31,
---------------------------
1999 2000 2001
------- -------- --------
(in thousands)
Net loss............................... $(8,623) $(13,858) $(16,682)
Foreign currency translation adjustment -- -- (34)
------- -------- --------
Comprehensive loss..................... $(8,623) $(13,858) $(16,716)
======= ======== ========
(k) Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share, for all periods presented. Pursuant to Securities
and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 98, common
stock and redeemable convertible preferred stock issued or granted for nominal
consideration
50
prior to the anticipated effective date of Centra's initial public offering
must be included in the calculation of basic and diluted net loss per share as
if they had been outstanding for all periods presented. The common shares
issued for the series A and series B redeemable convertible participating
preferred stock upon conversion, redemption or liquidation were for nominal
consideration due to the liquidation premium paid to the holders of series A
and series B. Accordingly, the shares issued at the time the series A and
series B preferred stock converted to common stock have been included in the
calculation of basic and diluted net loss per share from date of issuance. In
accordance with SFAS No. 128, basic and diluted net loss per share has been
computed by dividing the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase, into the net
loss attributable to common stockholders, which includes both the accretion of
the discount and the liquidation premium on the series A and series B preferred
stock.
(l) Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of redeemable convertible preferred stock not
included in the computation of basic and diluted net loss per share that
automatically converted upon the completion of Centra's initial public offering
(using the if-converted method) from the original date of issuance. Upon
consummation of the initial public offering in February 2000, all of the
outstanding redeemable convertible preferred stock converted into an aggregate
of 13,746,735 shares of common stock.
Historical and pro forma basic and diluted net loss per share are as follows:
Years Ended December 31,
------------------------------------
1999 2000 2001
------- -------- --------
(in thousands, except per share data
Historical:
Net loss attributable to common stockholders............................... $(9,130) $(14,507) $(16,682)
======= ======== ========
Basic and diluted shares:
Weighted average shares of common and series A and B preferred stock
outstanding.............................................................. 7,857 22,403 24,878
Less: Weighted average shares subject to repurchase........................ (1,269) (622) (429)
------- -------- --------
Weighted average shares of common and series A and B preferred stock
outstanding used in computing basic and diluted net loss per share....... 6,588 21,781 24,449
------- -------- --------
Basic and diluted net loss per share....................................... $ (1.39) $ (0.67) $ (0.68)
======= ======== ========
Pro Forma:
Net loss attributable to common stockholders............................... $(9,130) $(14,507)
Less: Accretion of unamortized discount on series A and B preferred stock.. 649 --
------- --------
Net loss................................................................... $(9,779) $(14,507)
======= ========
Weighted average shares of common and series A and B preferred stock
outstanding used in computing basic and diluted net loss per share....... 6,588 21,781
Adjustment to reflect the assumed conversion of series C, D and E preferred
stock from the date of issuance.......................................... 8,693 827
------- --------
Weighted average shares used in computing pro forma basic and diluted net
loss per share........................................................... 15,281 22,608
======= ========
Pro forma basic and diluted net loss per share............................. $ (0.64) $ (0.64)
======= ========
51
Options to purchase a total of 1,377,413, 3,754,016 and 5,072,181 common
shares have not been included in the computation of diluted loss per share for
the years ended December 31, 1999, 2000 and 2001, respectively. These shares
are considered antidilutive, as Centra recorded a loss for all periods
presented.
Common stock outstanding as of December 31, 2001, includes 54,438 shares
issued but held in escrow in connection with the Company's acquisition of
MindLever.com in April 2001. These shares will be released from escrow on April
30, 2002, subject to the indemnity provisions of the merger agreement. These
shares have not been included in the computation of diluted earnings per share
above for the year ended December 31, 2001.
(m) Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information regarding
operating segments and establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified
as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision maker,
or decision making group, in making decisions regarding resource allocation and
assessing performance.
Centra operates solely in one segment, the development and marketing of
software products and related services, and therefore there is no impact to
Centra's financial statements of adopting SFAS No. 131. Centra's revenues are
as follows (based on location of customer):
Year Ended
December 31,
-------------
1999 2000 2001
---- ---- ----
United States 91% 88% 74%
Europe....... 3% 9% 17%
Other........ 6% 3% 9%
There are no significant long-lived assets located outside of the United
States.
(n) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method.
This statement is effective for all business combinations initiated after June
30, 2001.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill, as well as certain other intangible assets
determined to have indefinite lives, will no longer be amortized. Instead,
these assets will be reviewed for impairment on a periodic basis, at least
annually. This statement is effective for the Company in the first quarter of
its fiscal year ending December 31, 2002. As of January 1, 2002, the Company
will cease amortizing goodwill and reclassify assembled workforce to goodwill.
The Company does not believe these assets are currently impaired. The adoption
of SFAS No. 142 is expected to reduce the Company's amortization expense by
approximately $1.3 million in 2002 and 2003, $1.2 million in 2004 and 2005 and
$400,000 in 2006. The Company will continue to review these assets for
impairment on at least an annual basis.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30,
52
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Under SFAS No. 144 it is required that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions. The provisions
of this statement are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material impact on its financial
statements.
(o) Accrued Expenses
Accrued expenses at December 31, 2000 and 2001 consist of the following (in
thousands):
December 31,
-------------
2000 2001
------ ------
Payroll and payroll-related costs $1,554 $2,119
Other accrued expenses........... 3,058 3,689
------ ------
$4,612 $5,808
====== ======
(2) MindLever.com Acquisition
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., a
wholly-owned subsidiary of the Company, the Company acquired MindLever, a
provider of management systems for learning content, by merging it with and
into M-L Acquisition Co. The Company acquired MindLever for approximately $2.9
million in cash, the issuance of 509,745 shares of common stock valued at
approximately $3.8 million and acquisition costs in the approximate amount of
$512,000, for a total purchase price of approximately $7.2 million. The
acquisition was accounted for using the purchase method in accordance with
Accounting Principles Board (APB) Opinion No. 16. Accordingly, the results of
operations of MindLever have been included in the results of operations of the
Company from the date of acquisition.
The following table summarizes the allocation of the purchase price (in
thousands):
Amount
-------
Acquisition of Mindlever:
Net liabilities assumed, at fair value ($3,281)
In-process research and development... 2,200
Developed technology and know-how..... 2,100
Assembled workforce................... 300
Goodwill.............................. 5,873
-------
$7,192
=======
As part of the purchase price allocation, all intangible assets acquired
from MindLever were identified and valued by a third-party appraiser. It was
determined that technology assets and assembled workforce had value. As a
result of this identification and valuation process, the Company allocated
$2.2 million of the purchase price to in-process research and development
projects. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete research and development
projects. At the date of acquisition, the development of the projects had
not yet reached technical feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these costs were
expensed as of the date of acquisition.
53
In making its purchase price allocation, management considered the present
value of future cash flows, an analysis of project accomplishments and
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The
revenue projection used to value the in-process research and development was
based on estimates of relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting cash flows from such projects
are based on management's estimates of costs of sales, operating expenses, and
income taxes from such projects.
As a result of the identification and valuation of intangibles acquired, the
Company also allocated $2.1 million and $300,000 to developed technology and
know-how and assembled workforce, respectively. Developed technology represents
technology and know-how related to MindLever's current learning content
management solution. Developed technology is being amortized over a period of
three years. Assembled workforce is the presence of a skilled workforce that is
knowledgeable about company procedures and possesses expertise in certain
fields that are important to continued profitability and growth of the company.
Assembled workforce is being amortized over a period of three years.
The excess of the purchase price over the fair value of the identifiable
intangible net assets of approximately $5.9 million was allocated to goodwill.
Unidentifiable intangible assets are being amortized over a period of five
years.
Accumulated amortization of developed technology, assembled workforce and
goodwill was $467,000, $66,000 and $783,000, respectively, as of December 30,
2001.
Unaudited pro forma operating results for the Company, assuming the
acquisition of MindLever occurred January 1, 2000, are as follows:
Years Ended December 31,
-----------------------
2000 2001
-------- --------
(in thousands, except
per share data)
Revenues.................................... $ 24,161 $ 39,508
Net loss attributable to common stockholders (19,355) (17,808)
Net loss per share, basic and diluted....... $ (0.83) $ (0.73)
For purposes of these pro forma operating results, the in-process research
and development was assumed to have been written off prior to the pro forma
periods, so that the operating results presented include only recurring costs.
(3) Income Taxes
Centra provides for federal and state income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates. The components of Centra's
net deferred tax assets are approximately as follows at December 31, 2000 and
2001 (in thousands):
54
2000 2001
-------- --------
Net operating loss carryforwards............................... $ 11,793 $ 15,865
Tax credit carryforwards....................................... 730 1,135
Other temporary differences.................................... 2,472 5,285
-------- --------
14,995 22,285
Deferred tax liability in connection with Mindlever acquisition -- (750)
-------- --------
Valuation allowance............................................ (14,995) (21,535)
-------- --------
Net deferred tax asset......................................... $ -- $ --
======== ========
Deferred tax liability in connection with the Mindlever acquisition resulted
from the acquired intangibles excluding goodwill and in-process research and
development.
Centra has generated taxable losses from operations since inception and,
accordingly, has no taxable income available to offset the carryback of net
operating losses. Centra has provided a full valuation allowance for its
deferred tax assets since, in the opinion of management, realization of these
future benefits is not sufficiently assured.
As of December 31, 2001, Centra had federal tax net operating loss (NOL)
carryforwards and tax credit carryforwards available to offset future taxable
income, if any, of approximately $39,466,000 and $1,135,000, respectively.
These carryforwards expire through 2021, and are subject to review and possible
adjustment by the Internal Revenue Service. As of December 31, 2000 and 2001,
approximately $102,000 and $1,664,000, respectively, of the NOL carryforward is
attributable to amounts generated from the exercise of stock options.
The U.S. Internal Revenue Code of 1986, as amended (the Code), contains
provisions that may limit the net operating loss and tax credit carryforwards
available to be used in any given year upon the occurrence of certain events,
including changes in the ownership interests of significant stockholders. In
the event of a cumulative change in ownership in excess of 50% over a
three-year period, the amount of the NOL carryforwards and tax credit
carryforwards that Centra can utilize in any one year may be limited. In the
event of a change in ownership, as defined, the annual limitation on the use of
the existing NOL and tax credit carryforwards is equal to an amount determined
by multiplying the value of Centra at the time of the ownership change by the
U.S. applicable federal rate of interest, as determined by the U.S. Internal
Revenue Service. Centra has completed several financings since its inception
and has not determined whether its NOL's and tax credit carryforwards have been
limited by these financings.
A reconciliation of the federal statutory rate to Centra's effective tax
rate is as follows:
December 31,
---------------------
1999 2000 2001
----- ----- -----
Income tax provision at federal statutory rate (34.0)% (34.0)% (34.0)%
Increase in tax resulting from
State tax provision, net of federal benefit... (6.0) (6.0) (6.0)
Increase in valuation allowance............... 40.0 40.0 40.0
----- ----- -----
Effective tax rate............................ 0% 0% 0%
===== ===== =====
55
(4) Long-Term Debt
(a) Term Loan Facility and Capital Leases
On December 22, 2000 and May 4, 2001, Centra amended its equipment line of
credit agreement to allow for $2.0 million and $2.5 million of additional
borrowings, respectively, of which $4.1 million was outstanding at December 31,
2001. Interest is payable monthly based on the prime rate (4.75% at December
31, 2001) plus 0.50%. Amounts outstanding are payable in 36 equal monthly
installments beginning on October 1, 2001. Additionally, at December 31, 2001,
Centra had outstanding borrowings under the original equipment line of credit
of $58,000, bearing interest at prime rate plus 1.0% per annum. All borrowings
are secured by substantially all of Centra's assets. This amended line of
credit requires Centra to maintain a minimum balance of cash, cash equivalents
and short-term investments of $30 million.
In addition to the above equipment line of credit and term loan facility,
Centra also has two capital leases. These leases bear interest at a rate of
10.5% per annum and are payable through December 2004. As of December 31, 2000
and 2001, obligations under these capital leases amounted to $20,000 and
$11,000, respectively.
(b) Maturities of Long-Term Debt
Future principal maturities of Centra's long-term obligations as of December
31, 2001 are as follows (in thousands):
Year
----
2002 $1,563
2003 1,503
2004 1,128
------
$4,194
======
(5) Commitments and Contingencies
(a) Commitments
Centra conducts its operations in leased facilities and is obligated to pay
monthly rent through December 2005. As of December 31, 2001, the minimum future
rental payments under the operating lease agreements are approximately as
follows (in thousands):
Year
----
2002 $2,127
2003 1,957
2004 1,805
2005 851
------
$6,740
======
Rent expense charged to operations was approximately $570,000, $1,286,000
and $1,978,000 for the years ended December 31, 1999, 2000 and 2001,
respectively.
(b) Contingencies
In December 2001, a complaint was filed in the United States District Court
for the Southern District of New York, naming as defendants Centra, certain of
its officers and directors and the managing underwriters of Centra's initial
public offering. As of March 13, 2002, neither Centra nor the named individuals
had been served with the complaint, and therefore were not yet formal parties
to the suit. The complaint, purportedly brought on
56
behalf of the class of persons who purchased Centra's common stock between
February 3, 2000 and December 6, 2000, alleges that, in connection with
Centra's initial public offering in February 2000, the underwriters received
undisclosed commissions from certain investors in exchange for allocating
shares to them and also agreed to allocate shares to certain customers in
exchange for the agreement of those customers to purchase additional shares in
the after-market at pre-determined prices. The complaint asserts that Centra's
registration statement and prospectus for the offering were materially false
and misleading due to their failure to disclose these alleged arrangements. The
complaint seeks damages in an unspecified amount against Centra and the named
individuals. If Centra is made a defendant in the action, it intends to
vigorously defend against the allegations, which it believes lack merit.
(6) Redeemable Convertible Preferred Stock
Centra had 9,164,490 authorized shares of preferred stock, of which
1,133,000, 1,416,490, 1,670,000, 2,250,000 and 2,695,000 were designated as
series A redeemable convertible participating preferred stock (series A
preferred stock), series B redeemable convertible participating preferred stock
(series B preferred stock), series C redeemable convertible preferred stock
(series C preferred stock), series D redeemable convertible preferred stock
(series D preferred stock) and series E redeemable convertible preferred stock
(series E preferred stock), respectively. During 1995, Centra sold 1,133,000
shares of series A preferred stock for $1.00 per share. During 1996, Centra
sold 1,416,490 shares of series B preferred stock at $2.25 per share for gross
proceeds of $3,187,000. During 1997, Centra sold 1,670,000 shares of series C
preferred stock for $2.50 per share for gross proceeds of $4,175,000, and
2,250,000 shares of series D preferred stock for $4.00 per share for gross
proceeds of $9,000,000. During 1999, Centra sold 2,695,000 shares of series E
preferred stock for $5.00 per share for gross proceeds of $13,475,000.
Series A and series B preferred stockholders had rights that allowed them to
receive a cash payment equal to 150% of their original investment upon
redemption, liquidation or automatic conversion plus the common shares into
which the series A and the series B preferred stock converted. A cash payment
of approximately $6,479,000 was made to the series A and series B preferred
stockholders in satisfaction of this right, upon the completion of the
Company's initial public offering. Centra attributed $113,000 and $354,000 of
value to these rights of the series A and series B preferred stock,
respectively, by decreasing the carrying value of the preferred stock and
increasing additional paid-in capital in equal amounts at the date of issuance.
Centra increased ratably over the redemption period the carrying value of the
series A and series B preferred stock by accreting the discount and the
liquidation premium, representing the cash payment in excess of the original
investment. For the years ended December 31, 1999 and 2000, Centra recorded
accretion of $507,000 and $649,000, respectively.
Each outstanding share of series A, series B, series C, series D and series
E preferred stock was convertible into common stock at the rate of 1.5 shares
of common stock for each share of preferred stock, adjusted for certain
dilutive events. Conversion was automatic and occurred immediately prior to the
closing of Centra's initial public offering of common stock, resulting in the
issuance of a total of 13,746,735 common shares.
57
(7) Stockholders' Equity (Deficit)
(a) Authorized Shares
Upon the closing of Centra's proposed initial public offering, its
certificate of incorporation was amended and restated to change its authorized
capital stock to 100,000,000 shares of $0.001 par value common stock and
10,000,000 shares of $0.001 par value preferred stock.
(b) Stock Option and Stock Purchase Plans
1995 Stock Plan
In 1995, Centra adopted the 1995 Stock Plan (the 1995 Plan), which provides
for the granting of incentive stock options to employees of Centra and
nonqualified stock options to any directors, officers, employees or consultants
of Centra. Options to purchase 3,852,000 shares of common stock may be issued
pursuant to the 1995 Plan, plus an additional 385,500 shares, as defined under
the 1995 Plan. Option and stock pricing is determined by Centra's Board of
Directors and all options to date have been granted at the fair market value
determined by the Board of Directors. Options and stock granted under the 1995
Plan generally vest as follows: 25% on the one-year anniversary date, and then
6.25% on each subsequent quarter over the next three years, and expire no later
than 10 years from the date of grant. There are no shares available for grant
under the 1995 Plan.
Centra allowed for the immediate exercise of certain stock options granted
under the 1995 Plan. The shares received upon exercise are subject to
repurchase by Centra at the original option exercise price of $0.001 to $0.33
per share, subject to vesting at the same rates as provided in the original
option agreements. A total of 2,464,907 shares have been issued upon the
immediate exercise of certain stock options granted under the 1995 Plan, of
which 288,281 shares are subject to repurchase rights at December 31, 2001.
During the year ended December 31, 1999, Centra exercised its rights under the
stock repurchase agreements and repurchased 206,267 shares. These shares were
repurchased at original issuance price. There were no shares repurchased for
the years ended December 31, 2000 and 2001. As of December 31, 2001, the
Company had repurchased a total of 661,606 shares under the 1995 Plan, which
are included in treasury stock on the accompanying balance sheet.
1999 Stock Incentive Plan
In November 1999, Centra adopted the 1999 Stock Incentive Plan (the 1999
Plan). A total of 5,100,000 shares of common stock have been reserved for
issuance under the 1999 Plan. The 1999 Plan authorizes the grant of incentive
options and nonqualified options. The 1999 Plan also provides for awards of
stock appreciation rights, performance shares, restricted stock and other
stock-based awards.
Incentive options may be granted under the 1999 Plan to employees of the
Company and its affiliates within the meaning of the Internal Revenue Code,
including officers and directors of the Company as well as officers and
directors of affiliates who are also employees. The exercise price of incentive
options granted under the 1999 Plan must be at least equal to the fair market
value of our common stock on the date of grant. The exercise price of incentive
options granted to an optionee who owns stock possessing more than 10% of the
voting power of the outstanding capital stock must be at least equal to 110% of
the fair market value of the common stock on the date of grant.
Under the terms of the 1999 Plan, Centra may grant nonqualified options to
employees, directors and non-employees. There are no limits on the exercise
price of nonqualified options granted under the 1999 Plan.
The 1999 Plan is administered by the compensation committee of the Board of
Directors. The compensation committee selects the individuals to whom options
will be granted and determines the option exercise price and other terms of
each award, subject to the provisions of the 1999 Plan.
58
1999 Director Option Plan
In November 1999, Centra adopted the 1999 Director Option Plan (Director
Plan). The Director Plan provides for the grant of stock options to those
directors who are not employees of Centra or one of its subsidiaries. Only
non-statutory options may be granted under the Director Plan. The maximum
number of shares of common stock as to which options may be granted under the
Plan is 200,000. As of December 31, 2001, no options had been granted under the
Director Plan.
The Director Plan is administered by the Board of Directors. The option
exercise price for each option granted under the Director Plan is the fair
market value of the common stock as of the date of grant. Payment of the option
exercise price is to be made in cash for the full exercise price of the
options. Options are not assignable or transferrable except by will or the laws
of descent and distribution. They terminate on the earlier of 10 years after
the date of grant or 60 days after the optionee ceases to serve as a director,
except in the event of death or disability.
Options to purchase 884,934 shares of common stock were available for grant
under the 1999 Plan and the Director Plan at December 31, 2001.
The following is a summary of common stock option and restricted stock
activity under the 1995 and 1999 Plans:
Weighted
Number of Average
Shares Exercise Price Exercise Price
---------- -------------- --------------
Outstanding, December 31, 1998..................... 1,092,920 $0.07- 0.27 $0.21
Granted......................................... 1,816,675 0.27- 8.00 1.22
Exercised....................................... (1,422,234) 0.17- 0.33 0.25
Canceled........................................ (109,948) 0.17- 5.00 0.38
---------- ----------- -----
Outstanding, December 31, 1999..................... 1,377,413 0.07- 8.00 1.48
Granted......................................... 2,750,675 0.27-11.00 6.13
Exercised....................................... (259,571) 0.17- 5.00 0.27
Canceled........................................ (114,501) 0.27-10.88 5.56
---------- ----------- -----
Outstanding, December 31, 2000..................... 3,754,016 0.07-11.00 4.84
Granted......................................... 1,879,900 4.13-13.85 6.12
Exercised....................................... (356,455) 0.17-11.00 2.05
Canceled........................................ (205,280) 0.17-11.00 5.81
---------- ----------- -----
Outstanding, December 31, 2001..................... 5,072,181 $0.07-13.85 $5.47
========== =========== =====
Exercisable common stock options, December 31, 2001 1,530,914 $0.07-13.70 $4.90
========== =========== =====
Exercisable common stock options, December 31, 2000 390,936 $0.07- 8.00 $1.78
========== =========== =====
Exercisable common stock options, December 31, 1999 67,687 $0.07- 5.00 $0.46
========== =========== =====
59
The range of exercise prices for common stock options outstanding and
options exercisable at December 31, 2001 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$0.07- 0.17 59,845 5.3 years $0.17 59,845 $0.17
0.27- 0.33 452,993 6.9 years 0.28 262,620 0.27
0.67 27,301 7.6 years 0.67 11,590 0.67
3.13- 5.88 1,778,153 8.9 years 4.08 340,989 4.06
6.00-13.85 2,753,889 8.7 years 7.38 855,870 7.04
----------- --------- --------- ----- --------- -----
$0.07-13.85 5,072,181 8.6 years $5.47 1,530,914 $4.90
=========== ========= ========= ===== ========= =====
In connection with stock options grants to employees and non-employees
during the years ended December 31, 1999 and 2000, Centra recorded deferred
compensation of $2,722,000 and $1,199,000, respectively, which represents the
aggregate difference between the option exercise price and the deemed fair
market value of the common stock determined for financial reporting purposes
for grants to employees and the fair market value of the options for the
non-employees. The deferred compensation will be recognized as an expense over
the vesting period of the underlying stock options. Centra recorded
compensation expense of $736,000, $925,000 and $887,000 during the years ended
December 31, 1999, 2000 and 2001, respectively, related to these options.
1999 Employee Stock Purchase Plan
In November 1999, Centra adopted the 1999 Employee Stock Purchase Plan (the
Stock Purchase Plan). The Stock Purchase Plan initially authorized the issuance
of up to a total of 1,500,000 shares of Centra's common stock to participating
employees. As of December 31 of each year, Centra increases the number of
shares reserved for issuance under the Stock Purchase Plan automatically by 2%
of the total number of shares of our common stock then outstanding or, if less,
300,000 shares. As of December 31, 2001, there were 2,100,000 shares authorized
for issuance under the Stock Purchase Plan.
Under the terms of the Stock Purchase Plan, the option exercise price is an
amount equal to 85% of the fair market value of one share of common stock on
either the first or last day of the offering period, whichever is lower. In the
event of a change in control of Centra, the Stock Purchase Plan will terminate
and shares will be purchased with the payroll deductions accumulated to date by
participating employees.
The Stock Purchase Plan is administered by the compensation committee of the
Board of Directors. Employees purchased 56,427 and 156,975 shares of the
Company's common stock in the plan during the fiscal years ended December 31,
2000 and 2001, respectively.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock options
to be included in the statements of operations or disclosed in the notes to the
financial statements. Centra accounts for stock-based compensation for
employees and directors under APB Opinion No. 25 and elected the
disclosure-only alternative under SFAS No. 123. Centra records the fair market
value of stock options granted to non-employees in the consolidated statement
of operations in accordance with Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. The
60
Company has computed the pro forma disclosures required under SFAS No. 123 for
stock options granted to employees and directors using the Black-Scholes option
pricing model. The assumptions used are as follows:
Year Ended December 31,
---------------------------------
1999 2000 2001
--------- ----------- -----------
Risk-free interest rate 4.8%-6.1% 5.84%-6.72% 4.57%-5.39%
Expected dividend yield -- -- --
Expected lives......... 7.5 years 7.5 years 7.5 years
Expected volatility.... 85% 100% 109%
The expected volatility factor for fiscal 1999 was based on actual
volatility factors for comparable public software companies as the stock was
not publicly traded. Expected volatility factors for fiscal 2000 and 2001 are
based on the Company's historical volatility. The weighted average fair value
of grants, granted at fair market value during the years ended December 31,
1999, 2000 and 2001 was $6.48, $5.33 and $5.43 per share, respectively. The
weighted average exercise price of grants at fair market value during the years
ended December 31, 1999, 2000 and 2001, was $8.00, $6.18 and $6.12,
respectively. During 1999, Centra granted certain options with an exercise
price below the deemed fair market value of the common stock. The weighted
average exercise price and weighted average fair value of these options was
$1.56 and $3.17, respectively.
The pro forma effects of applying SFAS No. 123 are as follows for the years
ended December 31, 1999, 2000 and 2001:
Year Ended December 31,
---------------------------
1999 2000 2001
------- -------- --------
(in thousands, except per
share data)
Net loss attributable to common stockholders-
As reported................................. $(9,130) $(14,507) $(16,682)
Pro forma................................... $(9,815) $(16,729) $(22,826)
Basic and diluted loss per share-
As reported................................. $ (1.39) $ (0.67) $ (0.68)
Pro forma................................... $ (1.49) $ (0.77) $ (0.93)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because Centra's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
(8) Employee Benefit Plan
Centra has adopted an employee benefit plan (the 401(k) Plan) under Section
401(k) of the Internal Revenue Code. The 401(k) Plan allows employees to make
pretax contributions up to the maximum allowable amount set by the Internal
Revenue Service. Under the 401(k) Plan, Centra may match a portion of the
employee contribution up to a defined maximum and provide profit sharing to
employees at its discretion. Centra made no contributions to the 401(k) Plan
for the years ended December 31, 1999, 2000 and 2001.
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(9) Valuation and Qualifying Accounts
The following is a summary of the allowance for doubtful accounts (in
thousands):
Balance Charged Balance
Beginning to End of
Years Ended of Year Expense Write-offs Year
----------- --------- ------- ---------- -------
December 31, 1999 $100 $190 $ 96 $194
December 31, 2000 194 410 28 577
December 31, 2001 577 448 387 638
(10) Quarterly Statement of Operations Information (unaudited)
The following table presents a summary of quarterly results of operations
for 2000 and 2001:
Quarter Ended,
------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands, except per share data)
Total revenues................. $ 3,793 $ 5,015 $ 6,335 $ 7,830 $ 9,072 $ 9,760 $ 9,236 $11,049
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 3,113 4,243 5,352 6,570 7,360 7,962 7,417 9,321
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders................. (4,093) (3,480) (3,499) (3,435) (3,798) (6,271) (3,999) (2,614)
------- ------- ------- ------- ------- ------- ------- -------
Basic and diluted net loss per
share attributable to common
stockholders................. $ (0.23) $ (0.15) $ (0.15) $ (0.15) $ (0.16) $ (0.26) $ (0.16) $ (0.10)
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