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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[_] TRANSISTION 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)
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 [_]
The number of shares outstanding of the Registrant's common stock as of August
9, 2002 was 25,624,213.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2002 (unaudited) ............................................... 3
Consolidated Statements of Operations for the three and six months
ended June 30, 2001 and 2002 (unaudited) ................................ 4
Consolidated Statements of Cash Flows for the six months ended June
30, 2001 and 2002 (unaudited) ........................................... 5
Notes to Consolidated Financial Statements (unaudited) .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk .............. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................... 23
Item 2. Changes in Securities and Use of Proceeds ............................... 24
Item 4. Submission of Matters to a Vote of Security Holders ..................... 24
Item 5. Other Information ....................................................... 24
Item 6. Exhibits and Reports on Form 8-K ........................................ 24
Signatures ...................................................................... 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
December 31, June 30,
------------ --------
2001 2002
---- ----
Assets
Current Assets:
Cash and cash equivalents .................................. $ 25,424 $ 29,921
Short-term investments ..................................... 22,759 11,756
Restricted cash ............................................ 100 100
Accounts receivable, net of reserves of approximately
$638 and $954 at December 31, 2001 and June
30, 2002, respectively .................................... 9,654 6,369
Prepaid expenses and other current assets .................. 1,250 1,692
---------- ----------
Total current assets ................................... 59,187 49,838
---------- ----------
Property and Equipment, at cost:
Computers and equipment .................................... 7,593 8,405
Furniture and fixtures ..................................... 945 947
Leasehold improvements ..................................... 531 550
---------- ----------
9,069 9,902
Less: Accumulated depreciation and amortization ............ 4,887 6,193
---------- ----------
4,182 3,709
---------- ----------
Restricted cash ............................................ 549 552
Other assets ............................................... 104 108
Goodwill and other intangible assets, net .................. 6,955 7,169
---------- ----------
$ 70,977 $ 61,376
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt ....................... $ 1,563 $ 1,526
Accounts payable ........................................... 1,463 1,432
Accrued expenses ........................................... 5,808 5,089
Deferred revenue ........................................... 8,165 9,182
---------- ----------
Total current liabilities .............................. 16,999 17,229
---------- ----------
Long-term debt, net of current maturities .................... 2,631 1,879
---------- ----------
Stockholders' equity:
Preferred stock, $0.001 par value-
Authorized-10,000,000 shares, 0 shares issued as of
December 31, 2001 and June 30, 2002
Common stock, $0.001 par value-
Authorized-100,000,000 shares as of December 31,
2001 and June 30, 2002
Issued-26,000,861 and 26,333,806 shares at
December 31, 2001 and June 30, 2002, respectively ....... 26 26
Additional paid-in capital ................................. 110,446 110,986
Accumulated deficit ........................................ (57,725) (67,807)
Deferred compensation ...................................... (1,326) (886)
Accumulated other comprehensive income (loss) .............. (34) 7
Treasury stock (661,606 and 729,950 shares of common
stock at December 31, 2001 and June 30, 2002, at cost) .... (40) (58)
---------- ----------
Total stockholders' equity ............................. 51,347 42,268
---------- ----------
$ 70,977 $ 61,376
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2001 2002 2001 2002
---- ---- ---- ----
Revenues:
License .................................................... $ 7,501 $ 4,244 $ 14,720 $ 8,077
Services ................................................... 2,259 4,224 4,112 7,901
--------- --------- --------- ---------
Total revenues ........................................ 9,760 8,468 18,832 15,978
--------- --------- --------- ---------
Cost of Revenues:
License .................................................... 137 102 283 191
Services(1) ................................................ 1,661 1,503 3,227 3,215
--------- --------- --------- ---------
Total cost of revenues ................................ 1,798 1,605 3,510 3,406
--------- --------- --------- ---------
Gross profit .......................................... 7,962 6,863 15,322 12,572
--------- --------- --------- ---------
Operating Expenses:
Sales and marketing(1) ..................................... 6,702 5,397 13,038 10,544
Product development(1) ..................................... 3,428 2,915 6,062 6,038
General and administrative(1) .............................. 1,916 2,066 3,833 3,950
Compensation charge for issuance of stock options (1) ...... 223 209 447 427
Amortization of goodwill and other intangible assets ....... 329 175 329 350
Merger transaction costs ................................... -- 52 -- 1,239
Restructuring charges ...................................... -- 439 -- 439
Acquired in-process research and development ............... 2,200 -- 2,200 --
--------- --------- --------- ---------
Total operating expenses .............................. 14,798 11,253 25,909 22,987
--------- --------- --------- ---------
Operating loss ............................................. (6,836) (4,390) (10,587) (10,415)
Interest income .............................................. 602 208 1,479 434
Interest and other expense, net .............................. (37) (45) (189) (101)
Loss on sale of short-term investments ....................... -- -- (772) --
--------- --------- --------- ---------
Net loss ................................................... ($6,271) ($4,227) ($10,069) ($10,082)
========= ========= ========= =========
Basic and diluted net loss per share ......................... $ (.26) $ (.17) $ (.42) $ (.40)
========= ========= ========= =========
Basic and diluted weighted average shares outstanding ........ 24,317 25,437 23,994 25,399
========= ========= ========= =========
-----------
(1) Excludes compensation charge for issuance of stock options. The
following summarizes the allocation of the compensation charge for
issuance of stock options:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2002 2001 2002
---- ---- ---- ----
Cost of service revenues ...................................... $ 6 $ 6 $ 12 $ 12
Sales and marketing ........................................... 98 93 196 190
Product development ........................................... 41 34 82 71
General and administrative .................................... 78 76 157 154
---- ---- ---- ----
Total compensation charge for issuance of stock options ..... $223 $209 $447 $427
==== ==== ==== ====
The accompanying notes are an integral part of these consolidated financial
statements.
4
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2001 2002
---- ----
Cash Flows from Operating Activities:
Net loss ........................................................... $ (10,069) $ (10,082)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 1,376 1,656
Provision for bad debt ........................................... 122 353
Compensation charge for issuance of stock options ................ 447 439
Loss on sale of short-term investments ........................... 772 --
Acquired in-process research and development ..................... 2,200 --
Adjustment to excess capacity reserve ............................ -- (481)
Changes in assets and liabilities:
Accounts receivable ............................................ (3,776) 3,048
Prepaid expenses and other current assets ...................... 470 (450)
Accounts payable ............................................... (75) (57)
Accrued expenses ............................................... 241 (779)
Deferred revenue ............................................... 1,083 958
----------- -----------
Net cash used in operating activities ........................ (7,209) (5,395)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment ................................. (2,101) (841)
Purchase of short-term investments ................................. (17,273) (26,505)
Sale of short-term investments ..................................... 34,672 37,507
Cash paid for acquisition of Mindlever.com, net of cash acquired ... (3,025) --
Restricted cash .................................................... (244) (3)
Other assets ....................................................... (31) (35)
----------- -----------
Net cash provided by investing activities ..................... 11,998 10,123
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock ............................. 529 490
Treasury stock buy-back ............................................ (18)
Net borrowings on line of credit ................................... 1,808 --
Payments on Mindlever.com debt ..................................... (1,758) --
Payments on term loans ............................................. (153) (785)
Payments on capital lease obligations .............................. (15) (3)
----------- -----------
Net cash provided by (used in) financing activities ........... 411 (316)
----------- -----------
Effect of Foreign Exchange Rate Changes on Cash and Cash
Equivalents ........................................................ 12 85
----------- -----------
Net Increase in Cash and Cash Equivalents ............................ 5,212 4,497
Cash and Cash Equivalents, beginning of period ....................... 42,015 25,424
----------- -----------
Cash and Cash Equivalents, end of period ............................. $ 47,227 $ 29,921
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ........................... $ 90 $ 106
=========== ===========
Purchase of Business:
Tangible net assets acquired, at fair value ........................ $ (3,281) $ --
In-process research and development ................................ 2,200 --
Developed technology and know-how .................................. 2,100 --
Assembled workforce ................................................ 300 --
Goodwill and other intangibles ..................................... 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.
5
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 ("SmartForce") and its
wholly-owned subsidiary, Atlantic Acquisition Corp. ("Atlantic"). Under the
merger agreement, holders of the Company's common stock would have received
0.425 SmartForce American Depository Shares for each share of the Company's
common stock outstanding at the time of the merger.
On April 2, 2002, the Company entered into a Termination Agreement and
Release with SmartForce and Atlantic. Pursuant to the termination agreement, the
parties agreed to terminate the merger agreement and the related voting
agreements, affiliate agreements and proxies.
On April 19, 2002, Centra adopted a stockholder rights plan. The rights
plan is designed to help ensure that all of our stockholders receive fair and
equal treatment in the event of any unsolicited proposal to acquire control of
the Company. As part of the rights plan, we designated 300,000 shares of our
authorized preferred stock as series A preferred stock. The adoption of the
stockholder rights plan will affect the rights of holders of the Company's
common stock, and any issuance of shares of series A preferred stock upon
exercise of the rights will also affect the rights of holders of common stock.
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 has
been renamed to 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 1(i)).
Centra is subject to certain business risks that could affect its 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, and ability to enhance existing
products and services and to develop new products and services. These and other
risks are described under the heading "Factors That Could Affect Future Results"
in the section of this Report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
6
The accompanying consolidated financial statements for the three and six
months ended June 30, 2001 and 2002 are unaudited, have been prepared on a basis
consistent with the December 31, 2001 audited consolidated financial statements
and include normal recurring adjustments which are, in the opinion of
management, necessary for the fair statement of the results of these periods.
These consolidated statements should be read in conjunction with our
consolidated financial statements and notes thereto included in our Form 10-K
for the fiscal year ended December 31, 2001. The results of operations for the
three and six months ended June 30, 2002 are not necessarily indicative of
results to be expected for the entire year or any other period.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Those estimates
and judgments are based on the Company's historical experience, the terms of
existing contracts, management's observance of trends in the industry,
information that Centra obtains from its customers and outside sources, and on
various other assumptions that it believes to be reasonable and appropriate
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ materially from
these estimates under different assumptions or conditions.
(c) Revenue Recognition
Centra derives substantially all of its revenues from the sale of software
licenses, post-contract support (maintenance), application service provider
(ASP) services and other services. Maintenance includes telephone support, bug
fixes and rights to upgrades and enhancements on a when-and-if available basis.
Other services include training, education, basic implementation consulting to
meet specific customer needs, and software application hosting. The hosting fees
include a set-up fee which is deferred ratably over the length of the period
that the hosting services are provided. 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 or more 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 30 days of the invoice date. The
Company has offered extended payment terms greater than 30 days but equal to or
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 application service provider
("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 either 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 revenues consist principally of contract
maintenance, ASP
7
service and consulting services.
(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 consisted of the following at December 31, 2001 and June 30, 2002
(in thousands):
December 31, June 30,
------------ --------
2001 2002
---- ----
Cash and cash equivalents-
Cash ..................................... $ 6,033 $ 3,639
Money market accounts .................... 16,892 26,282
Municipal bonds .......................... 2,499 --
------------ ------------
Total cash and cash equivalents ........ $ 25,424 $ 29,921
============ ============
Centra accounts for 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. At December 31, 2001 and June 30, 2002, the carrying
value of Centra's short-term investments which approximated fair market value,
consisted of the following (in thousands):
December 31, June 30,
------------ --------
2001 2002
---- ----
Short-term Investments-
Municipal bonds (average 267 and 139 remaining days
to maturity for the period ended December 31, 2001
and June 30, 2002, respectively) ......................... 22,759 11,756
------------ ------------
Total short-term investments ............................ $ 22,759 $ 11,756
============ ============
(e) 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 foreign currency translation adjustments.
Six Months
Ended June 30,
--------------
2001 2002
---- ----
(in thousands)
Net loss ............................................... $ (10,069) $ (10,082)
Foreign currency translation adjustment ................ 7 41
------------ ------------
Comprehensive loss .................................... $ (10,062) $ (10,041)
============ ============
(f) Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings Per Share, (SFAS No. 128) for all periods presented. In
accordance with SFAS No. 128, basic and diluted net loss per share has been
computed by dividing net loss by the weighted-average number of shares of common
stock outstanding during the period, less shares subject to repurchase of
484,000 and 584,000 for the three and six months ended June 30, 2001 and 94,000
for the three and six months ended June 30, 2002, respectively.
Options to purchase a total of 5,002,000 and 5,975,000 shares of common
stock have not been included in the computation of diluted earnings per share
above for the three and six months ended June 30, 2001 and 2002, respectively.
Inclusion of these shares would have an antidilutive effect, as Centra has
recorded a loss for all periods presented. Common stock outstanding as of
December 31, 2001 and June 30, 2002 includes 54,438 shares issued in connection
with the Company's acquisition of
8
MindLever.com in April, 2001. These shares were released from escrow after April
30, 2002 pursuant to the MindLever merger agreement. These shares have been
included in the computation of diluted earnings per share above for the three
and six months ended June 30, 2002.
(g) 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. Centra's revenues are as follows (based
on location of customer):
Three months Six months ended
ended June 30, June 30,
----------------------------------------
2001 2002 2001 2002
------------------- -------- --------
United States ..................... 71% 81% 74% 74%
Europe ............................ 19% 16% 17% 20%
Other ............................. 10% 3% 9% 6%
There are no significant long-lived assets located outside of the United
States.
(h) 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, are no longer amortized. Instead, these
assets are reviewed for impairment on a periodic basis, at least annually. This
statement was effective for the Company in the first quarter of its fiscal year
ending December 31, 2002
The Company adopted the provisions of Statement 141 and Statement 142
effective January 1, 2002. Statement 141 requires that upon adoption of
Statement 142, that the Company evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and to make
any necessary reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of Statement
142, the Company was required to reassess the useful lives and residual values
of all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset was identified as having an indefinite useful
life, the Company was required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss is measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
As of January 1, 2002, the Company ceased amortizing goodwill and
reclassified assembled workforce to goodwill. The Company obtained a third party
appraisal as of January 1, 2002 and does not believe these assets are impaired
and, accordingly, the adoption of SFAS No. 142 is expected to reduce the
Company's amortization expense by approximately $1.3 million in fiscal 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 an annual basis, or when
circumstances indicate that there may be an impairment.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Company performed an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. The Company
identified its reporting unit as the Company as a whole and determined the
carrying value of the Company and compared it to the carrying amount of the
reporting unit. At that time, since the fair value of the Company, as determined
through an independent valuation, exceeded the carrying amount of the Company,
the Company concluded that there was no indication that goodwill may
9
be impaired. Had the net book value of the Company exceeded the fair value, the
Company would have been required to perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which should be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with Statement 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss would have been recognized as the cumulative effect
of a change in accounting principle in the Company's statement of earnings. The
Company is required to perform this two step evaluation annually, or more often
if an indicator of impairment is present. The Company is currently evaluating
the annual requirement to determine the date at which this annual evaluation
will be performed.
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 adoption of this statement did not
have a material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and FASB Statement No. 44, Accounting for Intangible
Assets of Motor Carriers. This Statement Amends FASB Statement No. 4 and FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company does not believe the impact of adopting SFAS No. 143,
SFAS No. 144, or SFAS No. 145 will have a material impact on its financial
statements.
In June 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
The Company does not believe that the impact of adopting SFAS No. 146 will have
a material impact on the financial statements.
(i) MindLever.com Acquisition
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, 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 in the amount of 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 APB 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.
10
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.
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 a company. Assembled workforce was being amortized
over a period of three years until the adoption of SFAS 142 in January 2002,
when the Company ceased amortization and will be assessed annually for
impairment.
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
and was being amortized over a period of five years until the adoption of SFAS
142 in January 2002, when the Company ceased amortization of goodwill upon
adoption of SFAS 142.
Accumulated amortization of developed technology, assembled workforce and
goodwill was $816,667, $66,667 and $782,878, respectively as of June 30, 2002.
Amortization of developed technology for the remainder of 2002 will be $350,000,
$700,000 for 2003 and $233,000 for 2004.
Unaudited pro forma operating results for the Company for the three and six
months ended June 30, 2001, assuming the acquisition of MindLever occurred at
the beginning of fiscal 2001 are as follows (in thousands, except per share
data):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2001
---- ----
Net revenues $ 9,845 $ 19,223
Net loss (4,601) (11,198)
Net loss per share-basic and diluted $ (.19) $ (.46)
In accordance with the transitional disclosure requirements of SFAS 142,
the following tables present net income and basic earnings per share for all
periods presented, as well as for the year ended December 31, 2001, adjusted to
exclude amortization expense recognized in those periods related to goodwill and
other intangible assets that are no longer being amortized (in thousands, except
per share data):
11
Three months ended Six months ended Twelve months ended
June 30, June 30, December 31,
-------- -------- ------------
2001 2002 2001 2002 2001
---- ---- ---- ---- ----
Reported net loss .......................... ($6,271) ($4,227) ($10,069) ($10,082) ($16,682)
Add back: Goodwill amortization ............ 196 -- 196 -- 783
Add back: Other intangible amortization .... 16 -- 16 -- 66
--------- --------- --------- --------- --------
Adjusted net loss .......................... ($6,059) ($4,227) ($ 9,857) ($10,082) ($15,833)
========= ========= ========= ========= ========
Three months ended Six months ended Twelve months ended
Basic earnings per share: June 30, June 30, December 31,
-------- -------- ------------
2001 2002 2001 2002 2001
---- ---- ---- ---- ----
Reported net loss .......................... ($0.26) ($0.17) ($0.42) ($0.40) ($0.68)
Add back: Goodwill amortization ............ 0.01 -- 0.01 -- 0.03
Add back: Other intangible amortization .... -- -- -- -- --
--------- --------- --------- --------- --------
Adjusted net loss .......................... ($0.25) ($0.17) ($0.41) ($0.40) ($0.65)
========= ========= ========= ========= ========
Amortization expense for periods prior to 2001 was not affected as there
was no amortization of goodwill or acquired intangibles in these periods. 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 period.
(j) Restructuring Charges
We incurred a charge of $439,000 for the three months ended June 30, 2002,
related to the reduction of workforce in April 2002. The charges consist
primarily of severance payments, benefits and outplacement services. We paid
$355,000 of these charges during the quarter and will pay $84,000 for the
remainder of 2002.
(2) Legal Proceedings
Securities Class Action Lawsuit
Centra, certain of its officers and directors and the managing underwriters
of Centra's initial public offering have been named as defendants in an action
filed in the United States District Court for the Southern District of New York.
The plaintiff filed an initial complaint filed on December 6, 2001 and purported
to serve the Centra defendants on or about March 18, 2002. The original
complaint has been superceded by an amended complaint ("complaint") filed in
April 2002. The action, captioned In re Centra Software, Inc. Initial Public
Offering Securities Litigation, No. 01 CV 10988, which is being coordinated with
an action captioned In re IPO-Related Securities Litigation, No. 21 MC 92, is
purportedly brought on behalf of the class of persons who purchased Centra's
common stock between February 3, 2000 and December 6, 2000. The complaint
asserts claims under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint
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. Centra intends to vigorously defend
against the allegations, which it believes lack merit. The underwriter
defendants and the Centra defendants joined in motions to dismiss the
above-reference action on July 3 and July 15, 2002 respectively. Reponses to the
motions to dismiss are expected from plaintiffs, but to date no response has
been filed and no action has been taken by the Court. On August 6, 2002
plaintiffs offered to voluntarily dismiss the individuals named in the
above-referenced action without prejudice. The individuals named anticipate
accepting this offer in the near term.
Potential Patent Infringement Lawsuit
In July 2002, a complaint was filed in the United States District Court for
the District of Maryland, naming as defendants Centra and seven other
collaboration companies. As of August 7, 2002, Centra had not been served with
the complaint. The
12
complaint, purportedly brought on behalf on an individual named Eric Hamilton,
alleges that Centra's CentraOne, Symposium, eMeeting, and Conference products
infringe Mr. Hamilton's patent. The complaint seeks to enjoin Centra and the
other defendants from using any device shown to infringe any of Mr. Hamilton's
patent rights and requests that the defendants be required to recall all
originals, copies, facsimiles or duplicates of the accused products. The
complaint also seeks treble damages in an unspecified amount. If Centra is
served with process, it will defend itself vigorously against the allegations,
which it believes lack merit.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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 identify such forward-looking statements. The
forward-looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward-looking statements.
Factors that might cause such a difference include, among other things, those
set forth under "Overview", "Liquidity and Capital Resources", and "Factors That
Could Affect Future Results" and those appearing elsewhere in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company assumes no obligation to update these forward-looking statements to
reflect actual results or changes in factors or assumptions affecting
forward-looking statements.
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 and collaboration delivery and services which include features such as
voice-over-the-Internet, software application sharing, real-time data exchange,
shared workspaces, record and playback, content creation 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.
Through June 30, 2002, our revenues were derived from licenses of our
software products, from related maintenance, and from the delivery of
implementation consulting, training, education, 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 which is recognized over the contract period and 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 recognized ratably over the service period.
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, South Africa and Central America.
Revenues from sales outside the United States were 29% of total revenues or $2.9
million for the three month period ended June 30, 2001, and 19% of total
revenues or $1.6 million for the three month period ended June 30, 2002.
Revenues from sales outside the United States were 26% of total revenues or $4.8
million for the six month period ended June 30, 2001, and 26% of total revenues
or
13
$4.1 million for the six month period ended June 30, 2002. Since 1999 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 our ASP service
operations locally 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 are attributable to providing our
services, and (c) direct costs related to our hosting and ASP service offerings.
Our operating expenses are classified into seven general categories: sales
and marketing, product development, general and administrative, compensation
charge for issuance of stock options, amortization of intangible assets, merger
transaction costs and restructuring charges.
. 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, user group
meetings 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 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 in 1999 and 2000
and the deemed fair market value of the options for financial reporting
purposes.
. Amortization of intangible assets represents the amortization, over a
three year period, of the valuation of the developed technology and
know-how acquired in connection with our April 2001 acquisition of
Mindlever.
. Merger transaction costs represent the costs that were incurred
through June 30, 2002 related to the proposed merger of Centra Software,
Inc. and SmartForce PLC. The proposed merger was terminated as of April 2,
2002.
. Restructuring charges represent the charges that were incurred for the
three months ended, June 30, 2002 related to a reduction in the Company's
workforce in April, 2002.
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.
We have experienced substantial losses in each fiscal period since our
inception. As of June 30, 2002, we had an accumulated deficit of $67.8 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 services infrastructure which have been only partially offset by our
revenues to date. We expect to maintain the same level or slightly increase our
expenditures in all areas in order to execute our business plan to expand
further internationally and to develop broader, more comprehensive indirect
sales channels.
Additionally, although we have experienced revenue growth in the past, we
have recently experienced declining revenues and increased losses. We may not be
able to increase our revenues or to attain profitability and, if we do achieve
profitability, we
14
may not be able to sustain profitability for any future periods. Accordingly, we
expect to incur additional losses during 2002. 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.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including those related to revenue recognition and the
valuation of long-lived assets. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies most significantly
affect the portrayal of our financial condition and require management's most
difficult and subjective judgments.
Revenue Recognition
Not only is revenue recognition a key component of our results of
operations, the timing of our revenue recognition also determines the timing of
certain expenses, such as commissions. In measuring revenues, we follow the
specific guidelines of SOP 97-2 "Software Revenue Recognition," and SOP 98-9
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," and related authoritative literature. Certain judgments of
management, however, affect the application of this policy. Revenue results are
difficult to predict and any shortfall or delay in recognizing revenue could
cause our operational results to vary significantly from quarter to quarter. We
maintain allowances for estimated losses resulting from the inability of our
customers to make required payments. However, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances for bad debts would be required.
Centra derives substantially all of its revenues from the sale of software
licenses, post-contract support (maintenance), application service provider
(ASP) services and other services. Maintenance includes telephone support, bug
fixes and rights to upgrades and enhancements on a when-and-if available basis.
Other services include training, education, basic implementation consulting to
meet specific customer needs, and software application hosting. The hosting fees
include a set-up fee which is deferred ratably over the length of the period
that the hosting services are provided. 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 or more 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 30 days of the invoice date. The
Company has offered extended payment terms greater than 30 days but equal to or
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
15
provided. Revenues related to ASP services are recognized on a straight-line
basis over the period that the application service provider ("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 either 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 revenues consist principally of contract
maintenance, ASP service and consulting services.
A/R Valuation
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of the Company's customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
Valuation of Long-Lived Assets
The acquisition of MindLever, Inc. on April 30, 2001 was accounted for in
accordance with APB Opinion No. 16. The Company adopted SFAS No. 142 during the
first quarter of fiscal year 2002 without a material impact on its financial
position or results of operations. Under SFAS No. 142, goodwill is not amortized
but is reviewed at least annually for impairment (or more frequently if
impairment indicators arise). Separable intangible assets that are not deemed to
have indefinite lives are amortized over their useful lives. The Company is
currently evaluating the annual requirement to determine the date at which this
annual evaluation will be performed.
The Company is required to assess the impairment of long-lived assets,
identifiable intangibles and goodwill whenever events and circumstances indicate
that the carrying value may not be recoverable. Factors we consider important
that could trigger an impairment review include the following:
- significant underperformance relative to expected historical or
projected future operating results;
- significant changes in the manner of our use of the acquired assets or
the strategy of our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained period; and
- our market capitalization relative to net book value.
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If we
determined that the carrying value of long-lived assets and goodwill might not
be recoverable based upon the existence of one or more indicators of impairment,
we would measure any impairment based on a projected discounted cash flow
method. While we believe that our estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect our
evaluations.
16
RESULTS OF OPERATIONS
The following table sets forth operating data expressed as percentages of
total revenues for each period indicated.
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
Consolidated Statement of Operations Data:
Revenues:
License ......................................... 77 % 50 % 78 51
Services ........................................ 23 50 22 49
Total revenues ........................... 100 100 100 100
Cost of revenues:
License ......................................... 1 1 2 1
Services ........................................ 17 18 17 20
Total cost of revenues ................... 18 19 19 21
Gross margin ....................................... 82 81 81 79
Operating expenses:
Sales and marketing ............................. 69 64 69 66
Research and development ........................ 35 35 32 38
General and administrative ...................... 20 24 20 25
Compensation charge for issuance of stock
options . ..................................... 2 2 2 3
Amortization of intangible assets ............... 3 2 2 2
Acquired in-process research and development .... 23 - 12 -
Merger transaction costs ........................ - 1 - 8
Restructuring Charge ............................ - 5 - 3
Total operating expenses ................. 152 133 137 144
Operating loss ...................................... (70) (52) (56) (65)
Other income(loss), net ............................ 6 2 3 2
---------- ---------- ---------- ----------
Net loss ........................................... (64) % (50) % (53) % (63)
- ---------------------------------------------------------==========--==========--==========--==========
Comparison of three months ended June 30, 2001 and 2002
Revenues. Total revenues decreased by $1.3 million, or 13%, to $8.5 million for
the three months ended June 30, 2002, from approximately $9.8 million for the
three months ended June 30, 2001. The decrease was attributable to a significant
decrease in license revenue transactions, offset by increased service revenues.
License revenues decreased by $3.3 million, or 44%, to $4.2 million for the
three months ended June 30, 2002, from $7.5 million for the three months ended
June 30, 2001. The decrease resulted from a decrease in the number of license
transactions. Other factors also contributed to the decrease, including a
continuing difficult economic environment resulting in longer sales cycles and
reduced productivity of the Company's sales force. Although we believe some of
these factors may be temporary, we cannot predict the timing of when or if these
factors would reverse in future periods.
Services revenues increased by $1.9 million, or 83%, to $4.2 million for the
three months ended June 30, 2002, from $2.3 million for the three months ended
June 30, 2001. The increase was primarily related to an increase in the number
of customers under maintenance support contracts, ASP services revenue, and to a
lesser extent, an increase in consulting and hosting services. We expect service
revenues, including ASP, to increase in absolute dollars in future periods.
Cost of license revenues. Cost of license revenues decreased by $35,000, or
26%, to $102,000 for the three months ended June 30, 2002, from $137,000 for the
three months ended June 30, 2001. The decrease was primarily attributable to
lower license revenue levels. We anticipate that cost of license revenues will
increase in the future both in terms of absolute dollars as licensing revenues
from our products increase and as a percent of license revenues due to the
licensing of additional technologies from third parties.
Cost of services revenues. Cost of services revenues decreased by $158,000, or
10%, to
17
$1.5 million for the three months ended June 30, 2002, from $1.7 million for the
three months ended June 30, 2001. The decrease was the result of a decrease in
the startup and support services required in the prior year to build out our ASP
service capacity. We anticipate that the cost of services revenues will increase
in absolute dollars to the extent that we continue to generate new customers and
grow associated license and service revenues. We believe that 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 overall utilization rates of our service personnel and our ASP
services capacity.
Sales and marketing expenses. Sales and marketing expenses decreased by $1.3
million, or 19%, to $5.4 million for the three months ended June 30, 2002, from
$6.7 million for the three months ended June 30, 2001. The decrease was mainly
attributable to a decrease in marketing programs, including advertising, trade
shows, and promotional expenses, and to a lesser extent a decrease in
commissions expense due to lower revenues. We expect that sales and marketing
expenses will increase in absolute dollars in future periods.
Product development expenses. Product development expenses decreased by
$513,000, or 15%, to $2.9 million for the three months ended June 30, 2002, from
$3.4 million for the three months ended June 30, 2001. The decrease primarily
resulted from a decrease in headcount and the related headcount spending and
consulting costs. We believe that continued investment in product development is
critical to achieving our strategic objectives and, as a result, we expect
product development expenses will increase in absolute dollars in future periods
as additional product development personnel are added and additional investments
are made into third party source code.
General and administrative expenses. General and administrative expenses
increased by $150,000, or 8%, to $2.1 million for the three months ended June
30, 2002, from $1.9 million for the three months ended June 30, 2001. The
increase was due primarily to an increase in the cost of Directors and Officers
Liability insurance. We expect that general and administrative expenses will
remain relatively constant in absolute dollars for the foreseeable future.
Compensation charge for issuance of stock options. We incurred a charge of
$209,000 for the three months ended June 30, 2002, as compared to $223,000 for
the three months ended June 30, 2001, related to the issuance of stock options
to employees and non-employees during 1999 and 2000. These options, which vest
over periods up to five years, will result in additional compensation expense of
approximately $886,000 through September 2003.
Amortization of intangible assets. We recognized amortization on developed
technology and know-how acquired from Mindlever in April 2001 in the amount of
$175,000 for the three months ended June 30, 2002. In conjunction with our
acquisition of MindLever in April 2001, we allocated approximately $5.9 million
to goodwill, $2.1 million to developed technology and know-how and $300,000 to
assembled workforce. As of January 1, 2002 in accordance with SFAS 142, goodwill
and assembled workforce were no longer amortized. Instead, these assets are
reviewed for impairment on an annual basis. The adoption of SFAS No. 142 is
expected to reduce the Company's amortization expense by approximately $1.3
million in fiscal 2002 and 2003, $1.2 million in 2004 and 2005 and $400,000 in
2006.
Merger transaction costs. We incurred a charge of $52,000 for the three months
ended June 30, 2002, related to the proposed merger of the Company and
SmartForce PLC. The merger was terminated on April 2, 2002. The costs consisted
primarily of legal fees. The Company does not expect to incur any further costs
related to this transaction.
Restructuring charges. We incurred charges of $439,000 for the three months
ended June 30, 2002, related to a reduction of the Company's workforce in April,
2002. The charges consist primarily of severance payments, benefits and
outplacement services. The Company does not expect to incur any further charges
related to this restructuring.
Other income, net. Other income, net of interest and other expense, decreased
by $402,000 to $163,000 for the three months ended June 30, 2002, from $565,000
for the three months ended June 30, 2001. Other income consists primarily of
interest on cash and short-term investments. The decrease resulted from lower
average interest rates on invested cash and short-term investments and a lower
average cash balance for the three months ended June 30, 2002 compared to the
three months ended June 30, 2001.
Comparison of six months ended June 30, 2001 and 2002
Revenues. Total revenues decreased by $2.8 million, or 15%, to $16.0 million
for the six months ended June 30, 2002, from approximately $18.8 million for the
six months ended June 30, 2001. The decrease was attributable to a significant
decrease in license revenues offset by increased service revenues.
18
License revenues decreased by $6.6 million, or 45%, to $8.1 million for the six
months ended June 30, 2002, from $14.7 million for the six months ended June 30,
2001. The decrease resulted from a decrease in the number of license
transactions. Other factors also contributed to the decrease, including a
difficult economic environment resulting in longer sales cycles and reduced
productivity of the Company's sales force.
Services revenues increased by $3.8 million, or 93%, to $7.9 million for the six
months ended June 30, 2002, from $4.1 million for the six months ended June 30,
2001. The increase was primarily related to an increase in the number of
customers under maintenance support contracts, ASP services revenue, and to a
lesser extent, an increase in consulting, education and hosting services.
Cost of license revenues. Cost of license revenues decreased by $92,000, or
33%, to $191,000 for the six months ended June 30, 2002, from $283,000 for the
six months ended June 30, 2001. The decrease was primarily attributable to lower
license revenue levels. We anticipate that cost of license revenues will
increase in the future both in terms of absolute dollars as licensing revenues
from our products increase and as a percent of license revenues due to the
licensing of additional technologies from third parties.
Cost of service revenues. Cost of service revenues decreased slightly by
$12,000 for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001.
Sales and marketing expenses. Sales and marketing expenses decreased by $2.5
million, or 19%, to $10.5 million for the six months ended June 30, 2002, from
$13.0 million for the six months ended June 30, 2001. The decrease was mainly
attributable to a decrease in marketing programs, including advertising, trade
shows, and promotional expenses, and to a lesser extent a decrease in
commissions expense due to lower license revenues.
Product development expenses. Product development expenses decreased slightly
by $24,000 for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001.
General and administrative expenses. General and administrative expenses
increased slightly by $117,000, or 3%, to $4.0 million for the six months ended
June 30, 2002, from $3.8 million for the six months ended June 30, 2001.
Compensation charge for issuance of stock options. We incurred a charge of
$427,000 for the six months ended June 30, 2002, as compared to $447,000 for the
six months ended June 30, 2001, related to the issuance of stock options to
employees and non-employees during 1999 and 2000. These options which vest over
periods up to five years, will result in additional compensation expense of
approximately $886,000 through September 2003.
Amortization of intangible assets. We recognized amortization on developed
technology and know-how acquired from Mindlever in April 2001 in the amount of
$350,000 for the six months ended June 30, 2002 compared to $329,000 for
amortization of goodwill, developed technology and assembled workforce for the
six months ended June 30, 2001.
Merger transaction costs. We incurred a charge of $1.2 million for the six
months ended June 30, 2002, related to the proposed merger of the Company and
SmartForce PLC. The costs consist primarily of advisory fees, legal fees,
retainer fees and other related expenses associated with the proposed merger.
The Company does not expect to incur any further costs related to this
transaction.
Restructuring charges. We incurred charges of $439,000 for the six months ended
June 30, 2002, related to a reduction of the Company's workforce in April, 2002.
The charges consist primarily of severance payments, benefits and outplacement
services. The Company does not expect to incur any further charges related to
this restructuring.
Other income, net. Other income, net of interest and other expense, decreased
by $957,000 to $333,000 for the six months ended June 30, 2002, from $1.3
million for the six months ended June 30, 2001. Other income consists primarily
of interest on cash and short-term investments. The decrease resulted from a
lower average cash balance and lower average interest rates on invested cash and
short-term investments for the six months ended June 30, 2002 compared to the
six months ended June 30, 2001.
Loss on sale of short-term investments. In January, 2001, we liquidated, prior
to maturity, certain short-term debt obligations of California-based utilities
when their ratings dropped to below investment grade which resulted in a
realized loss of approximately $772,000 for the six months ended June 30, 2001.
19
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, we had cash and cash equivalents of $29.9 million and
short-term investments of $11.8 million, an increase of $4.5 million of cash and
cash equivalents from $25.4 million at December 31, 2001 and a decrease of $11.0
million of short-term investments from $22.8 million as of December 31, 2001.
The net combined decrease of $6.5 million for cash, cash equivalents and
short-term investments resulted primarily from cash used to fund operations,
including cash used of approximately $1.2 million for merger transaction costs
incurred related to the proposed merger of the Company and SmartForce PLC and
approximately $355,000 for restructuring charges related to a reduction of the
Company's workforce in April, 2002, and to a much smaller extent, purchases of
fixed assets and payments on term loans. Our working capital as of June 30, 2002
was $32.6 million, compared to $42.2 million as of December 31, 2001.
Net cash used in operating activities was $5.4 million for the six months
ended June 30, 2002, primarily the result of operating losses incurred during
the quarter of $10.1 million, offset by a decrease in accounts receivable of
$3.0 million, non-cash expenses of $2.5 million and an increase in deferred
revenue of $958,000. Also contributing, to a lesser extent, to the net cash used
in operating activities was a decrease in accrued expenses and accounts payable
and an increase in prepaid expenses. Net cash used in operating activities was
$7.2 million for the six months ended June 30, 2001, primarily due to operating
losses incurred during the quarter, as well as an increase in accounts
receivable, partially offset by non-cash expenses, including a loss on the sale
of certain short-term obligations of California-based utilities, and partially
offset by an increase in accrued expenses and deferred revenue.
Net cash provided by investing activities was $10.1 million for the six
months ended June 30, 2002, resulting from net sales and maturities of
short-term investments partially offset by purchases of property and equipment
to support operations. Net cash provided from investing activities was $12.0
million for the six months ended June 30, 2001, resulting from net sales and
maturities of short-term investments partially offset by purchases of property
and equipment.
Net cash used in financing activities was $316,000 for the six months ended
June 30, 2002 resulting from payments made under term loans and capital lease
obligations, partially offset by receipts from the exercise of stock options.
Net cash provided by financing activities was $411,000 for the six months ended
June 30, 2001 resulting from net borrowings under a term loan and receipts from
the exercise of stock options, partially offset by payments made for debt and
under term loans and capital lease obligations.
On May 4, 2001, we amended our equipment line of credit agreement to allow
for $4.5 million in borrowings, of which approximately $3.4 million was
outstanding at June 30, 2002. Interest is payable monthly based on the prime
rate (4.75% at June 30, 2002) plus .5%. Amounts outstanding are payable in 36
equal monthly installments beginning on October 1, 2001. Additionally, at June
30, 2002, we had outstanding borrowings under the original equipment line of
credit of $23,000, bearing interest at the rate of prime plus 1% per annum. All
borrowings are secured by substantially all of our assets. This amended line of
credit requires us 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 June 30, 2002.
Capital expenditures totaled $2.1 million and $841,000 for the six month
periods ended June 30, 2001 and 2002, respectively. Our capital expenditures
consisted 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 the number of customers that we provide
services to under our ASP offering, improve and expand our information systems
and replace older and outdated computer hardware with newer equipment. Since
inception, we have generally funded capital expenditures either through the use
of working capital or with equipment bank loans.
Days sales outstanding in accounts receivable at June 30, 2002 was 68 days,
a decline of 11 days compared with days sales outstanding at December 31, 2001
of 79 days.
We expect to continue to experience growth in our capital expenditures,
cost of revenues and, to a lesser extent, 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, cash
equivalents and short-term investments of approximately $41.7 million 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 and indirect sales channels, develop new or
enhanced products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
20
requirements. Also, our amended line of credit requires us to maintain a minimum
balance of $30 million in cash, cash equivalents and short-term investments. 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 were to raise additional funds
through the issuance of equity securities, the percentage ownership of our
existing stockholders would be reduced. Furthermore, such securities could have
rights, preferences or privileges senior to our common stock.
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, are no longer amortized. Instead, these
assets are reviewed for impairment on a periodic basis, at least annually. This
statement was effective for the Company in the first quarter of its fiscal year
ending December 31, 2002
The Company adopted the provisions of Statement 141 and Statement 142
effective January 1, 2002. Statement 141 requires that upon adoption of
Statement 142, that the Company evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and to make
any necessary reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of Statement
142, the Company was required to reassess the useful lives and residual values
of all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset was identified as having an indefinite useful
life, the Company was required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss is measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
As of January 1, 2002, the Company ceased amortizing goodwill and
reclassified assembled workforce to goodwill. The Company obtained a third party
appraisal as of January 1, 2002 and does not believe these assets are impaired
and, accordingly, the adoption of SFAS No. 142 is expected to reduce the
Company's amortization expense by approximately $1.3 million in fiscal 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 an annual basis, or when
circumstances indicate that there may be an impairment.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Company performed an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. The Company
identified its reporting unit as the Company as a whole and determined the
carrying value of the Company and compared it to the carrying amount of the
reporting unit. At that time, since the fair value of the Company, as determined
through an independent valuation, exceeded the carrying amount of the Company,
the Company concluded that there was no indication that goodwill may be
impaired. Had the net book value of the Company exceeded the fair value, the
Company would have been required to perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which should be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with Statement 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss would have been recognized as the cumulative effect
of a change in accounting principle in the Company's statement of earnings. The
Company is required to perform this two step evaluation annually, or more often
if an indicator of impairment is present. The Company is currently evaluating
the annual requirement to determine the date at which this annual evaluation
will be performed.
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
21
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 adoption of this statement did not have a material impact on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and FASB Statement No. 44, Accounting for Intangible
Assets of Motor Carriers. This Statement Amends FASB Statement No. 4 and FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company does not believe the impact of adopting SFAS No. 143,
SFAS No. 144, or SFAS No. 145 will have a material impact on its financial
statements.
In June 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
The Company does not believe that the impact of adopting SFAS No. 146 will have
a material impact on the financial statements.
FACTORS THAT COULD AFFECT FUTURE RESULTS
As defined under the safe harbor provisions of The Private Securities
Litigation Reform Act of 1995, some of the matters discussed in this filing
contain "forward-looking statements" regarding future events that are subject to
risks and uncertainties. The following factors, among others, could cause actual
results to differ materially from those described by such statements. These
factors include, but are not limited to: achieving market acceptance for our
CentraOne 6.0 Web collaboration platform, our ASP network service and our Centra
eMeeting and Knowledge Center products, quarterly fluctuations in operating
results attributable to the timing and amount of orders for our products and
services, failure to effect, or if effected, to manage anticipated growth,
failure to enhance our existing products and services and to develop and
introduce new products and services and other risk factors contained in the
section titled "Factors That Could Affect Future Results" beginning on page 22
of our annual report on Form 10-K for the period ended December 31, 2001. If any
of these factors actually occur, our business, financial condition or results of
operations could be seriously harmed and the trading price of our common stock
could decline.
In the future, we may acquire additional businesses or product lines. Our
previously 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 benefits
expected in the transaction can actually be realized. The process of integrating
acquired companies into our business may also result in unforeseen difficulties
which may absorb significant management attention that 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 or business combination, our management
could spend a significant amount of time and effort identifying and completing
the transaction. 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 intangibles. Also, we could spend a considerable amount of
time, money and management effort pursuing a potential business combination, and
then decide not to proceed with the transaction. In such an event, as in the
case of our recent merger negotiations with SmartForce, we would not likely be
able to recoup expenses incurred during the negotiations.
Item 3. 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 a significant
22
portion of our international 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 U.S. interest rates,
particularly because our investments are in short-term instruments and our
long-term debt and available line of credit require interest payments calculated
at fixed and variable rates. Based on the nature and current levels of our
investments and debt, however, we have concluded that we face no material market
risk exposure.
In January 2001, we liquidated, prior to maturity, certain short-term
obligations of California based utilities when their ratings dropped to below
investment grade which resulted in a realized loss of approximately $772,000.
Our current investing policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. We 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.
PART II. OTHER INFORMATION
Item 1. 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.
Securities Class Action Lawsuit
Centra, certain of its officers and directors and the managing underwriters
of Centra's initial public offering have been named as defendants in an action
filed in the United States District Court for the Southern District of New York.
The plaintiff filed an initial complaint filed on December 6, 2001 and purported
to serve the Centra defendants on or about March 18, 2002. The original
complaint has been superceded by an amended complaint ("complaint") filed in
April 2002. The action, captioned In re Centra Software, Inc. Initial Public
Offering Securities Litigation, No. 01 CV 10988, which is being coordinated with
an action captioned In re IPO-Related Securities Litigation, No. 21 MC 92, is
purportedly brought on behalf of the class of persons who purchased Centra's
common stock between February 3, 2000 and December 6, 2000. The complaint
asserts claims under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint
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. Centra intends to vigorously defend
against the allegations, which it believes lack merit. The underwriter
defendants and the Centra defendants joined in motions to dismiss the
above-reference action on July 3 and July 15, 2002 respectively. Reponses to the
motions to dismiss are expected from plaintiffs, but to date no response has
been filed and no action has been taken by the Court. On August 6, 2002
plaintiffs offered to voluntarily dismiss the individuals named in the
above-referenced action without prejudice. The individuals named anticipate
accepting this offer in the near term.
Potential Patent Infringement Lawsuit
In July 2002, a complaint was filed in the United States District Court for
the District of Maryland, naming as defendants Centra and seven other
collaboration companies. As of August 7, 2002, Centra had not been served with
the complaint. The complaint, purportedly brought on behalf on an individual
named Eric Hamilton, alleges that Centra's CentraOne, Symposium, eMeeting, and
Conference products infringe Mr. Hamilton's patent. The complaint seeks to
enjoin Centra and the other defendants from using any device shown to infringe
any of Mr. Hamilton's patent rights and requests that the defendants be required
to recall all originals, copies, facsimiles or duplicates of the accused
products. The complaint also seeks treble damages in an unspecified amount. If
Centra is served with process, it will defend itself vigorously against the
allegations, which it believes lack merit.
23
Item 2. Changes in Securities and Use of Proceeds
(a-b) On April 19, 2002, we adopted a stockholder rights plan. The rights
plan is designed to help ensure that all of our stockholders receive
fair and equal treatment in the event of any unsolicited proposal to
acquire control of our company. As part of the rights plan, we
designated 300,000 shares of our authorized preferred stock as series
A preferred stock. The adoption of our stockholder rights plan will
affect the rights of holders of our common stock, and any issuance of
shares of series A preferred stock upon exercise of the rights of
holders of common stock.
As part of the stockholders rights plan, our board of directors
declared a distribution of one right for each outstanding share of
our common stock. These rights are to be issued to our stockholders
of record as of May 15, 2002. We will issue the rights with respect
to shares of common stock issued before the rights become exercisable
and, in certain circumstances, with respect to shares of common stock
issued after the rights become exercisable. Each right, when it
becomes exercisable will initially entitle the holder to purchase
from us one one-thousandth (1/1,000) of a share of series A preferred
stock for $29.00.
(c) In the six months ended June 30, 2002, we granted options to purchase
1,494,125 shares of our common stock and we issued 176,139 shares of
our common stock upon the exercise of employee stock options and
issued 156,806 shares through purchases made under our employee stock
purchase plan.
(d) Use of Proceeds from Sales of Registered Securities
On February 8, 2000 we closed 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
proceeds from the offering were $80.5 million. Our net proceeds from
the offering were approximately $73.2 million. From the effective
date through June 30, 2002, we used approximately $6.5 million for
payments of dividends to preferred shareholders, $23.0 million to
fund operations, $2.4 million for capital expenditures, $1.7 million
for payment of MindLever debt, $3.3 million for the MindLever
acquisition and $1.8 million to pay amounts outstanding under our
loans. As of June 30, 2002, we had approximately $34.5 million of net
proceeds remaining, and pending use of these proceeds, we intend to
invest such proceeds primarily in highly liquid money market accounts
and government backed securities as defined in our current investment
policy.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on June 26, 2002. Two
substantive matters were submitted to a vote of the security holders: (1) the
election of two Class III Directors to serve until the 2005 annual meeting and
(2) a proposal to amend our 1999 Stock Incentive Plan to increase the number of
shares of common stock available for issuance under the plan by 1,000,000, to
6,100,000 shares.
As of May 15, 2002, the record date for the meeting, there were outstanding
25,650,791 shares of common stock entitled to vote at the meeting. At the
meeting, 23,721,008 shares were represented in person or by proxy. At the
meeting, the vote with respect to each substantive matter proposed to the
stockholders was as follows:
Election of Class III Directors:
VOTES FOR: AUTHORITY WITHHELD:
Leon Navickas 22,897,241 823,767
David Barrett 23,271,092 449,916
Amendment of 1999 Stock Incentive Plan:
VOTES FOR: VOTES AGAINST: ABSTENTIONS:
19,041,066 4,522,930 58,012
Item 5. Other Information
Certification Under Sarbanes-Oxley Act
Our chief executive officer and chief financial officer have furnished to
the SEC the certification accompanying this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
2.1 Termination Agreement and Release dated as of April 2, 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 April 8, 2002 and incorporated herein
by reference).
3.1 Amended and Restated Certificate of Incorporation (filed as
exhibit 3.2 to the Company's Registration Statement, on Form
S-1, File No. 333-89817 and incorporated herein by reference.)
3.2 Amended and Restated By-Laws (filed as exhibit 3.4 to the
Company's Registration Statement, on Form S-1, File No.
333-89817 and incorporated herein by reference.)
4.1 Rights Agreement dated as of April 19, 2002, between Centra
24
Software, Inc. and American Stock Transfer and Trust Company
as Rights Agent (filed as exhibit 4.1 to our Current Report on
Form 8-K filed April 22, 2002).
4.2 Certificate of Designation, Preferences and Rights of Series A
Participating Cumulative Preferred Stock of Centra Software,
Inc. (filed as exhibit 4.2 to our Current Report on Form 8-K
filed April 22, 2002).
4.3 Form of Right Certificate (filed as exhibit 4.3 to our Current
Report on Form 8-K filed April 22, 2002).
10.1 Amended and Restated 1999 Stock Incentive Plan (Filed as
Appendix A to our Definitive Proxy Statement for Annual
Meeting of Stockholders, filed May 24, 2002, and
incorporated herein by reference).
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 8, 2002, regarding the
termination of the proposed merger of the Company with and
into a wholly owned subsidiary of SmartForce PLC.
A report on Form 8-K was filed on April 22, 2002, regarding
the Company's adoption of a stockholders rights plan.
A report on Form 8-K was filed on July 16, 2002, regarding a
change in the Company's certifying accountants.
25
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of August 14, 2002.
Centra Software, Inc.
By: Stephen A. Johnson
-----------------------------
Stephen A. Johnson
Chief Financial Officer,
Treasurer, and Secretary (duly
authorized officer and principal
financial and accounting officer)
26
EXHIBIT INDEX
(a) Exhibits
Exhibit Description
2.1 Termination Agreement and Release dated as of April 2, 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 April 8, 2002 and incorporated herein
by reference).
3.1 Amended and Restated Certificate of Incorporation (filed as
exhibit 3.2 to the Company's Registration Statement, on Form
S-1, File No. 333-89817 and incorporated herein by reference.)
3.2 Amended and Restated By-Laws (filed as exhibit 3.4 to the
Company's Registration Statement, on Form S-1, File No.
333-89817 and incorporated herein by reference.)
4.1 Rights Agreement dated as of April 19, 2002, between Centra
Software, Inc. and American Stock Transfer and Trust Company
as Rights Agent (filed as exhibit 4.1 to our Current Report on
Form 8-K filed April 22, 2002).
4.2 Certificate of Designation, Preferences and Rights of Series A
Participating Cumulative Preferred Stock of Centra Software,
Inc. (filed as exhibit 4.2 to our Current Report on Form 8-K
filed April 22, 2002).
4.3 Form of Right Certificate (filed as exhibit 4.3 to our Current
Report on Form 8-K filed April 22, 2002).
10.1 Amended and Restated 1999 Stock Incentive Plan (filed as
Appendix A to our Definitive Proxy Statement for Annual
Meeting of Stockholders, filed May 24, 2002, and
incorporated herein by reference).
27