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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the annual period ended December 31, 2000
OR
[_TRANSITION]REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period
from _________ to __________
Commission File Number: 000-27861
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CENTRA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3268918
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
430 Bedford Street, Lexington, MA 02420
(Address of Principal Executive Offices)
(781) 861-7000
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of the Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $146,092,000 as of February 28, 2001 based on the
closing price of the Common Stock as reported on the Nasdaq Stock Market for
that date. There were 24,348,677 shares of the Registrant's Common Stock issued
and outstanding on February 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, which is expected to
be filed not later than 120 days after the Registrant's fiscal year ended
December 31, 2000, to be delivered in connection with the Registrant's Annual
Meeting of Stockholders, are incorporated by reference into Part III of this
Form 10-K.
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TABLE OF CONTENTS
Page No.
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PART I.
ITEM 1. BUSINESS.................................................. 3
ITEM 2. PROPERTIES................................................ 10
ITEM 3. LEGAL PROCEEDINGS......................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS... 10
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 27
RISK.....................................................
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES..................... 27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 28
ITEM 11. EXECUTIVE COMPENSATION.................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 28
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K FINANCIAL STATEMENTS............................ 29
SIGNATURES.......................................................... 31
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K, including
information with respect to our future business plans, constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause our results to differ materially from those indicated by such
forward-looking statements. These factors include those set forth below in
under the heading "Factors That Could Affect Future Results" beginning on page
20.
1
PART I.
ITEM 1. BUSINESS
Overview
Centra Software, Inc. was incorporated in Delaware in 1995. We design,
develop, market and support software infrastructure and ASP services for live
eLearning and business collaboration. Our solutions enable real-time, group-
oriented human interaction over corporate networks and the Internet and are
designed to facilitate strategic business processes across the extended
enterprise, including accelerated product introductions, hands-on software
application deployments and change management initiatives, new hire and
employee training, customer interaction and online selling, and other revenue-
generating activities such as priced programs for online education and the
delivery of collaborative services on the Web.
Our products are widely available as packaged software applications, hosted
services, and ASP offerings. Based on a common collaboration framework, these
products and services are optimized to support a range of business
interactions, including real-time virtual classrooms, large-scale Web
conferences, and interactive Web meetings. Each interface includes Centra's
hallmark functionalities of voice-over-IP audio conferencing, software
application sharing, real-time data exchange, shared workspaces, and
capabilities for session recording and playback. Centra's products and services
enable organizations to increase the productivity of its members and enhance
the effectiveness of knowledge transfer while significantly reducing travel,
facilities and telecommunications costs.
As of December 31, 2000, Centra had 440 customers worldwide, across many
industries including Accenture, BroadVision, Century 21, Domino's Pizza, EMC
Corporation, Global Knowledge, McKessonHBOC, Nikko Securities,
PricewaterhouseCoopers, Procter & Gamble, Raymond James, Rockwell Collins,
University of Tennessee, and Viacom. Approximately 9% of our revenue in 2000
came from customers outside of North America.
In October 1999, Centra introduced CentraNow(TM), a free Web meeting
service, and the Centra Business Collaboration Network (CentraBCN), a guide to
free, business-to-business online events powered by CentraNow. As of December
31, 2000, these services were deployed to a member community of more than
50,000 professionals. We believe that this member community gives us a user
base from which to sell our CentraNow ASP meeting services, introduced in June
2000, as well as providing other up-sell and cross-sell opportunities for our
enterprise software business.
To complement and extend our solutions, and to facilitate rapid integration
with third-party products and services for eLearning and collaboration, Centra
has identified, recruited, and actively supports a strategic "ecosystem" of
technology alliances and business partnerships with leading Learning Management
System (LMS) and Learning Content Management System (LCMS) vendors, online
training companies, content developers, and consulting firms. Some of these
partners include Microsoft, Oracle, Cisco, Saba, Docent, WBT Systems, Global
Knowledge, Element K, PricewaterhouseCoopers, and Deloitte Consulting.
Industry Background
We believe that our customer base is made up of businesses operating in a
climate characterized by swift economic changes, a need for stronger focus on
top-line results, bottom-line cost cutting, and improvements in productivity.
Companies continue to seek new ways to utilize the capabilities and the
universal reach of the Internet to accelerate business processes, improve
productivity, create revenue-generating opportunities, leverage employee
knowledge and expertise, and lower operating costs. In order to achieve these
goals, organizations need collaborative technologies that enable the sharing
and exchange of business-critical information with geographically distributed
customers, partners, prospects and employees. To be truly effective, however,
these technologies must be easy to use and support the numerous ways in which
people collaborate
3
and learn, including one-to-one customer and sales interactions, one-to-many
seminar and presentation events, and many-to-many learning and interactive
teamwork sessions.
Many existing Internet-based communication tools, including chat rooms,
instant messaging, Web meetings and screen sharing, address only discrete live
collaboration needs and are not integrated with a common user interface or
back-end management system. As a result, these products do not support the
broad range of live interaction required by business professionals for
effective eLearning and collaboration, and are not suitable for organizations
seeking to simplify and lower costs of ownership for their information
technology systems.
To maximize the return on their infrastructure investments, companies
require a solution that can integrate voice communication, conferencing,
content sharing and group interaction. More than just virtual classrooms, a
complete solution for live eLearning and collaboration must support a broad
range of live and recorded group interactions in a variety of business
contexts, supported by a common collaboration framework. The solution must
allow customers, partners and employees to interact from any location,
regardless of whether they are on a corporate network or a low bandwidth dial-
up connection, and provide anytime, anywhere access to knowledge and
information by blending live online interaction with self-paced recordings.
Finally, an effective live eLearning and collaboration solution must have a
reliable and scalable management environment that can grow to support and
integrate with e-commerce systems, enterprise computer systems, and emerging
Web technologies.
Products and Services
Centra's products and services for live eLearning and business collaboration
enable effective, Web-based interaction with customers, partners and employees
in a variety of business contexts. Unlike other ways people may collaborate,
our solutions enable groups of people to quickly assemble, converse, interact,
share content and work together in real time over intranets, extranets and the
Internet. Our solution integrates reliable voice conferencing, real-time data
exchange and a user interface delivered through a Web browser. Unlike other
solutions, we have also designed and implemented business rules and domain
expertise for eLearning and collaboration into our client and server software.
Centra's technology for real-time collaboration is designed to deliver high
performance and scaleability. Based upon a technological foundation employing
Internet standards and Microsoft platform technologies, Centra's collaboration
software solutions can be deployed on single Microsoft Windows NT servers and
are designed to operate without any special hardware or network technologies.
Our enterprise-class software systems for virtual classrooms, Web conferencing
and Web meetings are designed to scale, as customer usage requires, by adding
additional collaboration servers.
Other core product capabilities include:
Structure and Control. Centra uses its proprietary capability called
Choreography to apply structure and control to Web-based collaboration.
This capability provides a more effective means of orchestrating
interaction between people and content than is typically possible with
other real-time collaboration tools.
Universal Connectivity. Our products enable easy access and
participation by users with a range of networking connectivity from mobile
professionals using laptop PCs connected via low-speed modems to corporate
users behind secure network firewalls and proxy servers. The technology was
designed to provide high reliability and performance over low-bandwidth
private and public networks with connections as low as 28.8 Kbps. Because
all data streams are combined into a single network connection, our
sophisticated connection manager, known as Adaptive Connectivity(TM), can
choose the most reliable method of connecting a user to a live
collaborative event.
Voice-over-IP. Centra products support voice communication over the
Internet as an integral part of the collaborative experience. The
synchronization of voice and content into one unified communication
4
protocol enhances the quality of the user experience and enables users to
participate in Centra-supported events over a single network connection. In
addition, because voice-over-IP uses the Internet, users avoid supplemental
telephone and conference call charges.
Event Recording and Playback. Centra events can be recorded in full
fidelity, including audio, software application sharing, video and user
interactions. This capability, known as Centra Knowledge Object Studio(TM),
enables customers to capture knowledge in industry standard media formats
and publish recorded events for future playback and reuse.
Rich Content and Multimedia. Our products and services support the
delivery of rich content, including packaged and custom courseware, as well
as content in common file formats like Microsoft PowerPoint, Flash, and
.avi video.
Secure Online Work Environments. Our products and services provide
features for secure online work environments through password protection,
user log-in authentication and SSL encryption, and assigned user
privileges.
Flexible, Scaleable, Extensible and Open Systems Architecture. Our
products are designed to permit the addition of distributed collaboration
servers for increased capacity. This architecture provides customers with a
high degree of flexibility to increase system capacity and optimize network
traffic across distributed organizations. Centra also supports open,
published APIs and Internet standards such as XML for integration with
information repositories, learning and content management systems, Web
sites, e-commerce systems and other enterprise applications.
Our currently available enterprise-class solutions consist of four
primary products and our application service provider, or ASP, service.
Many of these products and services are available in localized language
editions, including Danish, French, German, Greek, Japanese, Korean,
Portuguese, and Spanish. They include:
Centra Symposium(TM) 4.0. Centra Symposium software is designed for
virtual classrooms and highly interactive teamwork. Its real-time
collaboration features include full-duplex voice over the Internet,
integrated Web-based video conferencing, full-feature application sharing,
breakout rooms, whiteboards, slide mark-up, Web touring, text chat, real-
time feedback, quizzes, surveys and graded assessments.
Centra Conference(TM) 3.0. Centra Conference software is designed for
large-scale Web conferences, seminars, events and corporate communications
over corporate networks and the Internet. Its integrated capabilities for
voice over the Internet eliminates the need for additional teleconference
equipment and services required by some competing solutions for real-time
communication.
Centra eMeeting(TM) 3.0. Centra eMeeting software provides an easy-to-
use virtual meeting facility where users can schedule, organize and run
their own Web meetings with co-workers, customers, suppliers, partners, and
prospects. Using Centra eMeeting, individuals can create business meetings
with others inside or outside the corporate firewall, using a personal
meeting room for spontaneous meetings, or using Centra's Speed Scheduler
feature to organize a meeting for a later date and time.
Centra Knowledge Object Studio(TM). Centra Knowledge Object Studio
provides easy to use software tools for business and learning professionals
to create recorded multimedia "knowledge objects" in industry standard
media formats. These tools provide capabilities for the capture, editing,
indexing and publishing of recorded Centra sessions for distribution on CD-
ROM, streamed playback from a media server such as Microsoft Windows Media
Server, or used as content in a live virtual classroom sessions.
CentraNow ASP(TM). Centra's ASP service for live eLearning and
collaboration, known as CentraNow, shares the same collaboration framework
and core capabilities as Centra's enterprise server products. CentraNow is
offered as a hosted application on an application service provider, or ASP,
basis, so that users can access and use the service via the Internet
without having to acquire their own copy of
5
the software or server hardware. CentraNow is designed to extend the
benefits of virtual classrooms, online conferences and Web meetings to any
business professional, team leader or departmental or enterprise buyer.
Unlike Centra's enterprise server products, CentraNow subscription packages
and event services are primarily sold through Centra's North American
telesales channel.
Product Development
In July 1997, we began commercial shipment of our first software product,
Centra Symposium. We continue to devote a substantial portion of our resources
to developing new products and services, and enhancing our existing products
and services. Our product development expenses were $3.1 million in 1998, $4.6
million in 1999 and $8.5 million in 2000. As of December 31, 2000, our product
development organization consisted of 72 employees. We believe that our ability
to continue to attract and retain a technically skilled development
organization is critical to our success.
Professional Services
Centra provides comprehensive customer assistance programs, including
support services, education and consulting. Our services organization consisted
of 35 employees as of December 31, 2000.
Consulting. We offer a wide range of professional consulting services to
customers to facilitate the efficient and cost-effective use of our products
and services. Our consulting group is responsible for the deployment and
implementation of our products. Services include installation, deployment and
implementation, development support and training.
Education. We provide education programs to assist presenters, content
developers, event managers, systems administrators, help-desk support
professionals, implementation specialists and other professionals in the use of
our products and services. We offer a comprehensive series of online classes
using Centra's products to provide knowledge and skills to successfully deploy,
use and maintain our products and services. These courses focus on the
technical aspects of our products, as well as business issues and processes
related to live eLearning and business collaboration.
Support. Our standard maintenance agreement gives customers access to new
software releases and related technical support. Our support team helps resolve
technical inquiries and is available over the Web and by telephone, e-mail and
fax. This group is also responsible for maintaining technical information on
our products.
Sales and Marketing
Distribution
We sell our products and services through a direct sales force and a
telesales organization. As of December 31, 2000, our sales organization
consisted of 54 sales and pre-sales consulting professionals located in nine
domestic locations and an office in the United Kingdom. Our direct sales force
primarily focuses on selling Centra's enterprise server products to Global 2000
companies, universities, governments, and other large organizations. We utilize
direct sales teams consisting of both sales and technical professionals who
work directly with potential customers to provide proposals, demonstrations and
presentations designed to meet the specific needs of each customer.
Augmenting the efforts of our direct sales force outside of North America,
we also sell Centra products indirectly through relationships with value-added
resellers and distributors. As of December 31, 2000, Centra had relationships
with 27 resellers throughout Europe, the Middle East, Pacific Rim, India,
Brazil, and Africa, and master distributors in Japan and Korea. We intend to
increase our direct sales force, both domestically and abroad, and to authorize
additional distributors and resellers in selected international markets.
We market and sell priced subscriptions to our CentraNow ASP services
primarily through our North American telesales organization. Our telesales team
also works with our direct sales force to convert subscribers into enterprise
server customers. We intend to increase the number of our telesales
representatives.
6
Pricing
We derive revenues from server software licenses, user licenses and software
maintenance. A variety of licensing models are used to support the business
needs of different types of customers. These licensing models include named-
user licenses, concurrent-user licenses, time-limited licenses and revenue-
sharing. In addition, we offer our customers hosting and convenient ASP
services to outsource the administration of their live eLearning and
collaboration operations. Hosting customers pay a set-up fee and monthly
services fees in addition to license fees for the purchased software. The
CentraNow ASP currently offers a free meeting service for up to five registered
participants, as well as fee-based subscriptions in varying configurations. We
typically provide our professional services on a time-and-materials basis.
Prices for Centra systems vary based upon both the number of system users and
the level of use.
Marketing
We focus our marketing efforts on creating awareness of our solution among
business executives considering enterprise-level live eLearning and
collaboration solutions, as well as individual and departmental users suitable
for the CentraNow ASP. We conduct a variety of marketing programs worldwide to
educate our target market and have engaged in marketing activities such as
online seminars, direct marketing, Web marketing, trade shows, press and
industry analyst relations, and user conferences. The marketing organization
works closely with our customers and direct sales organization to capture,
organize and prioritize customer feedback to help guide our product development
efforts.
We have entered into agreements with several systems integrators and
training companies to integrate our products and services into their offerings.
These relationships are aimed at increasing market awareness of our software
infrastructure and assist us with sales lead generation. For example, we have
entered into a relationship with PricewaterhouseCoopers that enables them to
incorporate Centra solutions into their application deployment methodology. We
have similar relationships with Deloitte Consulting and Global Knowledge that
provide additional marketing resources, awareness and account access to
increase our reach into the marketplace.
Business Strategy
Our goal is to be the leading provider of products and services for live
eLearning and business collaboration. Key elements of our strategy to achieve
this goal include:
Increase Customer Propagation. We believe that our existing customers
will be a significant source of revenues as they implement our products
across their organizations. We have licensed our products and services to
over 440 customers, many of whom initially implemented our products within
specific departments or for identified business processes, such as sales,
services, marketing and training. As customers continue to use our live
eLearning and collaboration solutions, we believe there are opportunities
to up-sell and cross-sell our products and services across additional
departments and business processes throughout the extended enterprise.
Achieve Broader Global Reach. We believe that international customers
represent a significant opportunity for our products and services. We have
established European sales operations based in the United Kingdom and have
engaged Macnica to serve as our master distributor in Japan and ADA
Infotech to serve as our master distributor in Korea. We intend to continue
to increase our global presence by expanding our worldwide field sales and
services organization and by entering into additional relationships with
distributors.
Effect Multi-Channel Customer Acquisition. Centra sells its products and
ASP services through a multi-channel sales model that includes a direct
sales force, telesales organization, OEM relationships, distributors and
resellers. This enables Centra to target a broad set of buyers across all
industries and geographies and diversify revenue streams. We intend to
increase our direct sales force, both domestically and abroad, and to
authorize additional distributors and resellers in selected international
markets.
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Increase Visibility in New and Existing Vertical Markets. Centra has
developed customer relationships with organizations in nearly every
relevant vertical market sector including financial services and insurance,
manufacturing, consulting, software, pharmaceutical and telecommunications.
We plan to leverage our strong reference base to expand customer
installations within these vertical markets. In addition, we plan to deploy
resources and initiate sales and marketing programs that will allow us to
capitalize on other vertical market opportunities, such as government,
universities and training organizations.
Expand Our Ecosystem of Solution Partners. We seek to continue
developing technological alliances and marketing relationships with other
companies to take advantage of the market opportunity for live eLearning
and collaboration. These relationships are intended to increase market
awareness of our products and services, and create additional distribution
channels. We intend to enter into marketing relationships with additional
companies in eLearning, application software, and professional services
markets.
Enhance Our Collaboration Technology. We believe, based on our awareness
of competitive products, that our technology enables us to offer the most
complete solution for live eLearning and business collaboration. Our voice-
over-IP conferencing technology and our open and scaleable systems
architecture were developed to meet companies' demands for a real-time
collaboration solution with broad reach that can be easily integrated with
their existing computer systems. We have invested over five years in the
development of the collaborative technologies that provide the foundation
for Centra's products and services. We intend to continue to devote
significant resources to the development of new and innovative products and
services to support live eLearning and collaboration based on our proven
systems architecture.
As a result, Centra expects to deliver the industry's first scaleable,
single-server platform for the consolidated management of live eLearning
and collaboration in 2001. The new enterprise system, known as CentraOne,
is intended to accelerate global deployments utilizing a thin-client
architecture that delivers full-function collaboration environments
directly to the desktop through a browser interface over low-bandwidth
network connections. We expect it to streamline system administration
functions with features for managing large numbers of users through a
single back-end management system.
Competition
The market for live eLearning and collaboration solutions is immature,
competitive, rapidly evolving and subject to rapid technological change. We
expect that the intensity of our competition will increase in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered. These include suppliers addressing segments of Centra's
overall target market with products and services for virtual classrooms, Web
conferences, Web meetings, and related technologies for real-time
collaboration.
Some of our competitors have longer operating histories, greater financial,
technical, marketing and other resources than we do. In addition, many of our
competitors have well-established relationships with our current and potential
customers. In the past, we have lost potential customers to competitors for
various reasons, including lower prices and other incentives not matched by us.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
8
We believe that the principal competitive factors affecting our market
include a significant base of reference customers, the breadth and depth of the
offered solution, the global reach of distribution channels, product quality
and reliability, customer and professional services quality, core technology,
product features and price. Although we believe that our solution competes
favorably with respect to these factors, our market is relatively new and is
developing rapidly. As the market continues to develop, we may not be able to
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
technical and other resources.
Intellectual Property
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
We license rather than sell our products and require our customers to enter
into license agreements, which impose restrictions on the licensees' ability to
utilize the software. In addition, we seek to avoid disclosure of our trade
secrets through a number of means, including but not limited to requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. We cannot be
sure that any of our proprietary rights with respect to CentraNow will be
viable or of value in the future since the validity, enforceability and type of
protection of certain proprietary rights in Internet-related technologies are
uncertain and still evolving.
We presently have three U.S. patent applications pending. It is possible
that no patent will be issued from our patent applications, or that the patents
that we have applied for, if issued, or any other patents we might obtain in
the future, may be successfully challenged. It is also possible that we may not
develop proprietary products or technologies that are patentable, that any
patent issued to us may not provide us with any competitive advantages, or that
the patents of others will materially adversely affect our business, operating
results and financial condition.
We rely on technology that we license from third parties, including software
that is integrated with our proprietary software and used in our products and
services to perform key functions. If we are unable to continue to license any
of this software on commercially reasonable terms, we could face delays in
releases of our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. These delays
could have a material adverse effect on our business, operating results and
financial condition.
Centra(R) is a registered trademark in the United States. We also have filed
applications to register the Centra trademark in the European Union and Japan.
In addition, we have filed applications to register CentraNow and Adaptive
Connectivity as trademarks in the United States.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain or use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of Internet-related solutions will
increasingly be subject to infringement claims as the number of
9
products and competitors in our industry grows and the functionality of
products in different industries increasingly overlaps. Furthermore, former
employers of our current and future employees may assert that our employees
have improperly disclosed confidential or proprietary information to us. Any
such claims, with or without merit, could be time-consuming to defend, divert
management's attention and resources, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements which may not be available on terms acceptable to us or at all. In
addition, parties making these claims may be able to obtain an injunction,
which could prevent us from selling our products in the United States or
abroad. A successful infringement claim against us, and our failure or
inability to license the infringed rights or develop or license technology with
comparable functionality, could have a material adverse effect on our business,
operating results and financial condition.
Employees
As of December 31, 2000, we had a total of 201 employees, including 72 in
product development, 63 in sales and marketing, 35 in customer support,
professional services and training and 31 in administration and finance. Of
these employees, 186 were located in the United States and 15 were located
outside the United States. None of our employees is represented by a collective
bargaining agreement, nor have we experienced any work stoppage. We consider
our relations with our employees to be good.
ITEM 2. PROPERTIES
Our headquarters occupy approximately 49,000 square feet in Lexington,
Massachusetts, under a lease that expires on June 30, 2005. We have a right to
extend the lease until June 30, 2015. These current facilities are expected to
meet our needs through December 31, 2001, at which time we may expand our
facilities by entering into one or more additional leases at our current
location or lease space at another location. In addition, we lease sales and
service offices in the United States in the metropolitan areas of Atlanta,
Chicago, Philadelphia, San Mateo, California and Washington, D.C. and London,
Paris and Basel, Switzerland internationally. Each of these offices generally
is leased under an agreement with a remaining term of 12 months or less.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CTRA." Public trading of the common stock commenced on February 3, 2000. Prior
to that, there was no public market for the common stock. The following table
sets forth, for the periods indicated, the high and low sales price per share
of the common stock as reported on Nasdaq National Market, during each quarter
the stock has been publicly traded.
High Low
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Year Ended December 31, 2000:
First Quarter ended March 31, 2000 (beginning February 3,
2000)..................................................... $40.38 $18.00
Second Quarter ended June 30, 2000......................... $21.00 $ 5.56
Third Quarter ended September 30, 2000..................... $17.31 $ 6.25
Fourth Quarter ended December 31, 2000..................... $ 8.31 $ 2.75
As of March 22, 2001, there were approximately 269 holders of record of our
common stock. This number does not include stockholders for whom shares are
held in a "nominee" or "street" name.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any earnings, if any, for use in our business and do
not anticipate paying any cash dividends in the foreseeable future.
On February 8, 2000 we completed the initial public offering of our common
stock. The shares of common stock sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(the "Registration Statement") (Registration No. 333-89817) that was declared
effective by the Securities and Exchange Commission on February 3, 2000. The
5,000,000 shares offered under our Registration Statement were sold at a price
of $14.00 per share. FleetBoston Robertson Stephens Inc., Chase Securities
Inc., and Dain Rauscher Wessels, the managing underwriters of the offering,
also exercised an over-allotment option on March 2, 2000 for 750,000 shares.
The over-allotment shares were sold at a price of $14.00 per share. The
aggregate proceeds from the offering were $80.5 million. Our total expenses in
connection with the offering were approximately $7.3 million, of which
approximately $5.6 million was for underwriting discounts and commissions to
underwriters and $1.7 million was for other expenses paid to persons other than
directors or officers of our company or persons owning more than 10 percent of
any class of equity securities of Centra Software, Inc. Our net proceeds from
the offering were approximately $73.2 million. From the effective date through
December 31, 2000, we used approximately $6.5 million for payments of dividends
to preferred shareholders, $6.4 million to fund operations, $3.0 million for
capital expenditures, $303,000 to pay amounts outstanding under our loans and
$23.2 million was invested in short-term investments. As of December 31, 2000,
we had approximately $57.0 million, including short-term investments, of net
proceeds remaining, and pending use of these proceeds, we intend to invest such
proceeds primarily in high-quality short-term investments.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
Year Ended December 31,
--------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
License........................ -- $ 234 $ 3,356 $ 7,017 $ 18,697
Service........................ -- 55 870 1,578 4,276
------- ------- ------- ------- --------
Total revenues............... -- 289 4,226 8,595 22,973
------- ------- ------- ------- --------
Cost of revenues:
License........................ -- 75 185 173 314
Service(1)..................... -- 130 919 1,543 3,381
------- ------- ------- ------- --------
Total cost of revenue........ -- 205 1,104 1,716 3,695
------- ------- ------- ------- --------
Gross profit................. -- 84 3,122 6,879 19,278
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing(1)......... 607 2,465 5,066 8,040 22,563
Product development(1)......... 1,564 3,042 3,078 4,594 8,481
General and administrative(1).. 463 983 1,442 2,440 4,977
Compensation charge for
issuance of stock options(1).. -- -- -- 736 925
------- ------- ------- ------- --------
Total operating expenses..... 2,634 6,490 9,586 15,810 36,946
------- ------- ------- ------- --------
Operating loss............... (2,634) (6,406) (6,464) (8,931) (17,668)
Interest income, net............. 65 35 211 308 3,810
------- ------- ------- ------- --------
Net loss......................... (2,569) (6,371) (6,253) (8,623) (13,858)
Accretion of discount on
preferred stock................. 373 506 506 507 649
------- ------- ------- ------- --------
Net loss attributable to common
stockholders.................... $(2,942) $(6,877) $(6,759) $(9,130) $(14,507)
======= ======= ======= ======= ========
Basic and diluted net loss per
share........................... $ (0.75) $ (1.33) $ (1.16) $ (1.39) $ (0.67)
======= ======= ======= ======= ========
Weighted average shares
outstanding..................... 3,935 5,156 5,845 6,588 21,781
======= ======= ======= ======= ========
Pro forma basic and diluted net
loss per share.................. $ (0.64) $ (0.64)
======= ========
Pro forma weighted average shares
outstanding..................... 15,281 22,608
======= ========
--------
(1) Excludes charge for stock-based compensation. See note (1) to consolidated
statements of operations on page F-4.
December 31,
--------------------------------------------
1996 1997 1998 1999 2000
------ ------- -------- -------- -------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-
term investments................ $ 964 $ 8,079 $ 1,979 $ 7,878 $65,187
Working capital.................. 681 7,241 1,541 5,828 59,927
Total assets..................... 1,503 9,238 4,753 13,296 75,064
Term loan, net of current
maturities...................... 55 158 530 376 1,894
Redeemable convertible preferred
stock........................... 4,240 17,992 18,498 32,480 -0-
Total stockholders' equity
(deficit)....................... (3,105) (9,977) (16,672) (24,787) 61,874
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We design, develop, market and support software infrastructure and ASP
services for live eLearning and Internet business collaboration. Our products
provide Internet infrastructure for comprehensive live collaboration and
include features such as voice-over-the-Internet, software application sharing,
real-time data exchange and shared workspaces. Our products to date have been
sold primarily to the Global 2000 market with product offerings and network
service solutions for corporate eLearning and training, collaborative sales and
marketing, and one-to-one customer, partner and employee relationships. We
offer the following products:
. Centra Symposium, an enterprise Web application for highly interactive
eLearning and team collaboration;
. Centra Conference, an enterprise Web application for live interactive
seminars and corporate briefings for large dispersed audiences;
. Centra eMeeting, an enterprise Web application for ad-hoc virtual
meetings where users can schedule, organize and run their own meetings;
. Centra Knowledge Object Studio, an easy to use tool that enables
customers to capture and re- use knowledge from live interactive
sessions; and
. CentraNow ASP, a network service for live, voice-enabled business
meetings and events.
Through December 31, 2000, our revenues were derived from licenses of our
software products, from related maintenance, and from the delivery of
implementation consulting, training, hosting and ASP services. We price
licenses 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 software upgrades and technical
support 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. In August 1999, we began providing hosting services
for customers on a temporary basis under hosting agreements, with terms ranging
from six to twelve months, to outsource the administration and infrastructure
necessary to operate our enterprise application software. The hosting fees
include a set-up fee and monthly service fees, in addition to license fees for
the software. We also offer CentraNow both as a free service with limited
functionality and as a priced ASP service offering with expanded functionality.
We derive substantially all of our revenues from the sale of software
licenses, post-contract support (maintenance), and other services. Maintenance
includes telephone technical support, bug fixes and rights to upgrades and
enhancements on a when-and-if available basis. Professional services include
training, basic implementation consulting to meet specific customer needs,
hosting and ASP services. We execute contracts that governs the terms and
conditions of each software license and maintenance arrangement and
professional service arrangement. 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, are
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.
We use the residual method when vendor-specific objective evidence of fair
value does not exist for one of the delivered elements in an arrangement. Under
the residual method, the fair value of the undelivered elements is deferred and
subsequently recognized. We have established sufficient vendor specific
objective evidence for professional services, training and maintenance and
support 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 professional
services, training, and maintenance and support services.
13
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. Our products do not require
significant customization.
Revenues related to maintenance, hosting and ASP services are recognized on
a straight-line basis over the period that the maintenance, hosting and ASP
services are provided and revenues allocable to implementation, consulting and
training services are recognized as the services are performed.
We record as deferred revenues any billed amounts due from customers in
excess of revenues recognized.
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 sales and service operations based in
the United Kingdom and have master distributors in Japan and Korea, in
addition we have value added resellers throughout Europe, the Middle East,
Pacific Rim, India, Brazil and Africa. Revenues from international sales
excluding Canada were $503,000 and $1,983,000 or 6% and 9% of our total
revenues for 1999 and 2000, respectively. During 1999, we began to invest in
the infrastructure necessary to expand our global operations, including the
formation and staffing of our European subsidiary. We expect to continue to
invest in our international operations as we expand our international direct
and indirect channels and enhance our marketing efforts to increase worldwide
market share. We anticipate that revenues derived from outside the United
States will increase both in terms of percentage of revenues and absolute
dollars.
Our cost of license revenues includes royalties due to third parties for
technology included in our products, as well as costs of product
documentation, media used to deliver our products and fulfillment. Our cost of
service revenues includes (a) salaries and related expenses for our
consulting, education, technical support and information technology services
organizations, (b) an overhead allocation consisting primarily of our
facilities, communications and depreciation expenses, and (c) direct costs
related to our hosting and ASP services.
Our operating expenses are classified into four general categories: sales
and marketing, product development, general and administrative, and
compensation charges for issuance of stock options.
. Sales and marketing expenses consist primarily of (a) salaries and other
related costs for sales and marketing personnel and (b) costs associated
with marketing programs, including trade shows and seminars, advertising,
public relations activities and new product launches.
. Product development expenses consist primarily of employee salaries and
benefits, fees for outside consultants and related costs associated with
the development of new products, the enhancement of existing products,
purchase of third party source code, quality assurance, testing,
documentation and third party product 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 charges for issuance of stock options represent the
amortization, over the vesting period of the options, of the difference
between the exercise price of options granted to employees and the deemed
fair market value of the options for financial reporting purposes.
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.
14
Our previously outstanding series A and series B preferred stock had
participation rights that allowed holders to receive a premium equal to 150% of
their original investment upon the redemption, liquidation and automatic
conversion of the preferred stock into common stock. For financial reporting
purposes, we discounted the value of series A and series B preferred stock by
the value of these participating rights. We had been increasing the carrying
value of the series A and series B preferred stock for the liquidation premium
and participation discount through charges to stockholders' deficit over the
redemption period. This increase is also reflected in the accretion of discount
on preferred stock in our statement of operations. Upon the automatic
conversion of the series A and series B preferred stock into common stock in
February 2000, $649,000 in unamortized participation discount on the series A
and series B preferred stock was accreted.
We have experienced substantial losses in each fiscal period since our
inception. As of December 31, 2000, we had an accumulated deficit of $41.0
million. These losses and our accumulated deficit have resulted from our
initial lack of substantial revenues, as well as the significant costs incurred
in the development of our products and services and in the preliminary
establishment of our infrastructure. We expect to increase our expenditures in
all areas in order to execute our business plan, and to expand further
internationally, particularly in sales and marketing. The planned increase in
sales and marketing expense will result principally from the hiring of
additional sales force personnel and from marketing programs to increase brand
awareness. Accordingly, we expect to experience additional losses in 2001.
Although we have experienced significant revenue growth in recent periods,
our recent rate of revenue growth may not be sustainable. We may not be able to
continue to increase our revenues or to attain profitability and, if we do
achieve profitability, we may not be able to sustain profitability for any
period. We believe that period-to-period comparisons of our historical
operating results may not be meaningful, and you should not rely upon them as
an indication of our future financial performance. See "Factors That Could
Affect Future Results" below.
Results of Operations
The following table sets forth operating data expressed as percentages of
total revenues for each period indicated.
Year Ended December 31,
-----------------------------
1998 1999 2000
-------- -------- -------
Consolidated Statement of Operations Data:
Revenues:
License...................................... 79 % 82 % 81 %
Service...................................... 21 18 19
-------- -------- -------
Total revenues............................. 100 100 100
Cost of revenues:
License...................................... 4 2 1
Service...................................... 22 18 15
-------- -------- -------
Total cost of revenues..................... 26 20 16
-------- -------- -------
Gross margin................................... 74 80 84
Operating expenses:
Sales and marketing.......................... 120 94 98
Product development.......................... 73 53 37
General and administrative................... 34 28 22
Compensation charge for issuance of stock
options..................................... -- 9 4
-------- -------- -------
Total operating expenses................... 227 184 161
-------- -------- -------
Operating loss................................. (153) (104) (77)
Interest income, net........................... 5 3 17
-------- -------- -------
Net loss....................................... (148)% (101)% (60)%
======== ======== =======
15
Comparison of 2000 and 1999
Revenues. Total revenues increased by $14.4 million, or 167%, to $23.0
million for 2000, from $8.6 million for 1999. The increase was attributable to
an increase in our customer base resulting in substantial growth in license and
service revenues.
. License revenues increased by $11.7 million, or 166%, to $18.7 million
for 2000, from $7.0 million for 1999. The increase was attributable to
the continued expansion of our sales force, increased revenues from our
value-added reseller partners, expanded sales to our existing customer
base, and an increase in the average selling prices of software licenses.
. Service revenues increased by $2.7 million, or 171%, to $4.3 million for
2000, from $1.6 million for 1999. The increase related primarily to an
increase in maintenance support contracts to new and existing customers
and consulting services sold to new customers. Service revenues
represented 19% of total revenues for 2000 and 18% of total revenues for
1999.
Cost of license revenues. Cost of license revenues increased by $141,000, or
81%, to $314,000 for 2000, from $173,000 for 1999. Cost of license revenues was
2% of license revenues for both 2000 and 1999. We anticipate that cost of
license revenues will increase in the future in absolute dollars due to
additional customers licensing our products and the licensing of additional
technologies from third parties.
Cost of service revenues. Cost of service revenues increased by $1.8
million, or 119%, to $3.4 million for 2000, from $1.5 million for 1999. The
increase was due primarily to an increase in the number of technical support,
consulting and education personnel providing services to our customers. Cost of
service revenues was 79% of service revenues for 2000 and 98% of service
revenues for 1999. The decrease as a percentage of service revenues was due
primarily to the growth in service revenues resulting from a larger installed
customer base. We anticipate that the cost of service revenues will continue to
increase in absolute dollars to the extent that we continue to generate new
customers and associated license and service revenues. Cost of service revenues
as a percentage of service 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.
Sales and marketing expenses. Sales and marketing expenses increased by
$14.5 million, or 181%, to $22.6 million for 2000, from $8.0 million for 1999.
The increase was primarily attributable to increased marketing programs,
including advertising, trade shows and public relations. To a lesser extent,
the increase was related to an increase in the number of direct sales,
telemarketing and sales management employees and to an increase in sales
commissions and bonuses related to increased revenues over the previous year.
Sales and marketing expenses were 98% of total revenues for 2000 and 94% of
total revenues for 1999. We expect that sales and marketing expenses will
continue to increase in absolute dollars to support marketing programs for new
product launches, international expansion and increased sales efforts.
Product development expenses. Product development expenses increased by $3.9
million, or 85%, to $8.5 million for 2000, from $4.6 million for 1999. The
increase primarily resulted from salaries associated with newly hired product
development personnel, increased fees for outside consultants and, to a lesser
extent, costs for the localization of the current products. Product development
expenses were 37% of total revenues for 2000 and 53% of total revenues for
1999. The decrease as a percentage of total revenues was due primarily to the
increase in total revenues. We believe that continued investment in product
development is critical to attaining our strategic objectives, and, as a
result, we expect product development expenses will continue to increase in
absolute dollars as additional product development personnel are added.
General and administrative expenses. General and administrative expenses
increased by $2.5 million, or 104%, to $5.0 million for 2000, from $2.4 million
for 1999. The increase primarily resulted from salaries associated with newly
hired personnel, related operational costs required to manage our growth and
costs associated with being a public company. General and administrative
expenses were 22% of total revenues for 2000 and 28% of total revenues for
1999. The decrease as a percentage of total revenues was due primarily to
16
the increase in total revenues. We expect that general and administrative
expenses will continue to increase in absolute dollars as we continue to add
administrative personnel to support our expanding operations and as we incur
additional costs related to the growth of our business.
Compensation charge for issuance of stock options. We incurred a charge of
$925,000 for 2000, an increase of $189,000 from $736,000 in 1999, related to
the issuance of stock options to employees and non-employees during 1999 and
2000. These options vest over periods up to four years, which will result in
additional compensation expense of approximately $2.3 million for periods
ending subsequent to December 31, 2000. If all options vest in accordance with
the original terms, we expect to incur charges of $883,000 in 2001, $883,000 in
2002 and $494,000 in 2003.
Interest income, net. Interest income, net increased by $3.5 million, or
1137%, to $3.8 million for 2000, from $308,000 for 1999. The increase resulted
from a higher average cash balance for 2000 compared to 1999 due to the receipt
of proceeds from our initial public offering in February 2000.
Net loss. Net loss increased by $5.2 million, or 61%, to $13.8 million for
2000, from $8.6 million for 1999. The increase was due to increased operating
expenses, partially offset by increased revenues.
Comparison of 1999 and 1998
Revenues. Total revenues increased by $4.4 million, or 103%, to $8.6 million
for 1999, from $4.2 million for 1998. The increase was attributable to an
increase in our customer base resulting in substantial growth in license and
service revenues.
. License revenues increased by $3.7 million, or 109%, to $7.0 million for
1999, from $3.4 million for 1998. The increase was attributable to the
expansion of our sales force, increased sales productivity due to the
addition of new sales management personnel, expanded sales to our
existing customer base, and an increase in the average selling prices of
software licenses resulting from the introduction and release of Centra
99 in April 1999.
. Service revenues increased by $708,000, or 81%, to $1.6 million for 1999,
from $870,000 for 1998. The increase related primarily to an increase in
maintenance support contracts and consulting services sold to new
customers. Service revenues represented 18% of total revenues for 1999
and 21% of total revenues for 1998.
Cost of license revenues. Cost of license revenues decreased by $12,000, or
6%, to $173,000 for 1999, from $185,000 for 1998. Cost of license revenues was
2% of license revenues for 1999 and 6% of license revenues for 1998. The
decrease was attributable to a decrease in royalty obligations to third parties
resulting from our purchase in 1999 of technology that we previously licensed.
Cost of service revenues. Cost of service revenues increased by $624,000, or
68%, to $1.5 million for 1999, from $919,000 for 1998. The increase was due
primarily to an increase in the number of technical support, consulting and
education personnel providing services to our customers. Cost of service
revenues was 98% of service revenues for 1999 and 106% of service revenues for
1998. The decrease as a percentage of service revenues was due primarily to the
growth in service revenues resulting from a larger installed customer base.
Sales and marketing expenses. Sales and marketing expenses increased by $3.0
million, or 59%, to $8.0 million for 1999, from $5.1 million for 1998. The
increase was primarily attributable to an increase in the number of direct
sales, telemarketing and sales management employees. To a lesser extent, the
increase was related to an increase in marketing programs, including trade
shows, and advertising and public relations related to product launch
activities. Sales and marketing expenses were 94% of total revenues for 1999
and 120% of total revenues for 1998. The decrease as a percentage of total
revenues was due primarily to the increase in total revenues.
17
Product development expenses. Product development expenses increased by $1.5
million, or 49%, to $4.6 million for 1999, from $3.1 million for 1998. The
increase primarily resulted from salaries associated with newly hired product
development personnel, increased fees for outside consultants and, to a lesser
extent, the purchase of certain source code. Product development expenses were
53% of total revenues for 1999 and 73% of total revenues for 1998. The decrease
as a percentage of total revenues was due primarily to the increase in total
revenues.
General and administrative expenses. General and administrative expenses
increased by $1.0 million, or 69%, to $2.4 million for 1999, from $1.4 million
for 1998. The increase primarily resulted from salaries associated with newly
hired personnel and related operational costs required to manage our growth.
General and administrative expenses were 28% of total revenues for 1999 and 34%
of total revenues for 1998. The decrease as a percentage of total revenues was
due primarily to the increase in total revenues.
Compensation charge for issuance of stock options. We incurred a charge of
$736,000 for 1999 related to the issuance of stock options to employees and
non-employees during 1999.
Interest income, net. Interest income, net increased by $97,000, or 46%, to
$308,000 for 1999, from $211,000 for 1998. The increase resulted from a higher
average cash balance for 1999 compared to 1998 due to the receipt of proceeds
from our sale of equity securities in April 1999.
Net loss. Net loss increased by $2.3 million, or 38%, to $8.6 million for
1999, from $6.3 million for 1998. The increase was due to increased operating
expenses, partially offset by increased revenues.
18
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for 1999 and 2000. You should read the following table in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
Report. We have prepared this unaudited information on a basis consistent with
the audited consolidated financial statements contained in this filing and this
information includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our
financial position and operating results for the quarters presented. You should
not draw any conclusions about our future results from the results of
operations for any quarter.
Quarter Ended,
------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June
31, 30, 30, 31, 31, 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- --------- --------
(in thousands)
Consolidated Statement
of Operations Data:
Revenues:
License............... $ 686 $ 1,503 $ 2,345 $ 2,483 $ 3,150 $ 4,054 $ 5,187 $ 6,306
Service............... 340 337 371 530 643 961 1,148 1,524
------- ------- ------- ------- ------- ------- ------- --------
Total revenues...... 1,026 1,840 2,716 3,013 3,793 5,015 6,335 7,830
------- ------- ------- ------- ------- ------- ------- --------
Cost of revenues:
License............... 36 55 47 35 31 31 154 98
Service............... 327 320 411 485 649 741 829 1,162
------- ------- ------- ------- ------- ------- ------- --------
Total cost of
revenues........... 363 375 458 520 680 772 983 1,260
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 663 1,465 2,258 2,493 3,113 4,243 5,352 6,570
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing... 1,356 1,861 2,001 2,822 4,152 5,091 6,243 7,077
Product development... 1,122 1,041 975 1,456 1,806 2,339 2,229 2,107
General and
administrative....... 417 492 635 896 953 1,144 1,216 1,664
Compensation charge
for issuance of stock
options.............. 21 103 112 500 234 240 228 223
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses........... 2,916 3,497 3,723 5,674 7,145 8,814 9,916 11,071
------- ------- ------- ------- ------- ------- ------- --------
Operating loss.......... (2,253) (2,032) (1,465) (3,181) (4,032) (4,571) (4,564) (4,501)
Interest income, net.... 5 80 126 97 588 1,091 1,065 1,066
------- ------- ------- ------- ------- ------- ------- --------
Net loss................ (2,248) (1,952) (1,339) (3,084) (3,444) (3,480) (3,499) (3,435)
Accretion of discount on
preferred stock........ 127 127 126 127 649 -- -- --
------- ------- ------- ------- ------- ------- ------- --------
Net loss attributable to
common stockholders.... $(2,375) $(2,079) $(1,465) $(3,211) $(4,093) $(3,480) $(3,499) $(3 ,435)
======= ======= ======= ======= ======= ======= ======= ========
Our total revenues have increased each period primarily due to increased
acceptance of our products, the expansion of our sales force and increased
service revenues as our installed customer base has grown. Total cost of
revenues also have generally increased over the periods presented due to
increased royalty costs and an increase in the number of customer support
personnel.
19
Operating expenses have experienced significant variations from quarter to
quarter primarily as the result of the timing and number of additions of
personnel and related compensation costs for sales and marketing, product
development and general and administrative expenses. In addition, variations in
sales and marketing are also related to the timing, number and significance of
specific marketing activities, such as advertising, trade shows, product
launches and other promotional activities. Operating expenses will continue to
increase as we grow our infrastructure to support our expanding operations.
Factors That Could Affect Future Results
From time to time, information provided by us, statements made by our
employees or information included in our filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" involving risks and uncertainties. In
particular, statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this Report relating
to the management's expectations concerning our future results of operations
and the sufficiency of capital to meet working capital and capital expenditure
requirements may be forward-looking statements. The words "expect,"
"anticipate," "internal," "plan," "believe," "seek," "estimate" and similar
expressions are intended to identify such forward-looking statements. Such
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that could cause our future results to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf. Many of these factors are beyond our ability to control or
predict. Readers are accordingly cautioned not to place undue reliance on
forward-looking statements. Centra disclaims any intent or obligation to update
publicly any forward-looking statements, whether in response to new information
or future events or otherwise. Important factors that may cause our actual
results to differ from such forward-looking statements include, but are not
limited to the factors discussed below.
A variety of factors, many of which are outside of our control, may affect
our quarterly operating results. These factors include:
. the evolution of the market for live eLearning and business collaboration
solutions;
. market acceptance of our products and services;
. our success and timing in developing and introducing new products and
enhancements to existing products;
. the introduction of products and services by our competitors;
. changes in pricing policies by us or our competitors;
. the length of our sales cycle;
. changes in customer buying patterns; and
. market entry by new competitors.
In addition to the foregoing, the following additional factors could cause
material fluctuations in our future operating results on a quarterly or annual
basis, which could materially adversely affect our business, financial
condition, operating results and stock price:
Our limited operating history makes it difficult to evaluate our future
prospects.
Our company was founded in April 1995 and has a limited operating history,
which makes it difficult for investors to evaluate our future prospects. We
began shipping our first product in July 1997 and began to operate our latest
product, CentraNow(TM) ASP service, in June 2000.
We have incurred substantial losses in the past and may not achieve
profitability in the future.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, we may not remain profitable for any substantial
20
period of time. If we fail to achieve profitability within the time frame
expected by investors, the market price of our common stock may fall. We had
net losses of $6.3 million in 1998 and $8.6 million in 1999 and $13.9 million
in 2000. As a result of ongoing operating losses, we had an accumulated deficit
of $41.0 million at December 31, 2000. We expect to continue to incur
significant sales and marketing and research and development expenses, and, as
a result, we will need to generate significant revenues to achieve and maintain
profitability. We may not sustain our growth or generate sufficient revenues to
attain profitability.
Disappointing quarterly results could cause the market price of our common
stock to fall.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of securities analysts or
investors, the price of our common stock could fall substantially. Our
quarterly revenues and operating results may fluctuate for numerous reasons,
including the other risks identified in this Report.
Most of our expenses, such as employee compensation and rent, are relatively
fixed. Moreover, our expense levels are based, in part, on our expectations
regarding future revenue increases. As a result, any shortfall in revenues in
relation to our expectations could cause significant changes in our operating
results from quarter to quarter and could result in increased quarterly losses.
Our sales cycle makes it difficult to predict our quarterly operating results.
We have a long sales cycle because we generally need to educate potential
customers regarding the benefits of our live online eLearning and business
collaboration products and services prior to sale. Our sales cycle varies
depending on the size and type of customer contemplating a purchase and whether
we have conducted business with a potential customer in the past. Potential
customers frequently need to obtain approvals from multiple decision makers
within their organization prior to making purchase decisions. Our long sales
cycle, which can range from several weeks to several months or more, makes it
difficult to predict the quarter in which sales may occur. Delays in sales
could cause significant variability in our revenues and operating results for
any particular period.
The development of a market for our live eLearning and business collaboration
products and services is uncertain.
The market for live eLearning and business collaboration products and
services is immature and rapidly evolving. If the market for eLearning and
business collaboration solutions does not grow at the rate we expect, this will
have a material adverse effect on our business, operating results and financial
condition. As is typical for new and rapidly evolving industries, customer
demand for recently introduced eLearning and business collaboration products
and services is highly uncertain.
We expect to depend on sales of our Centra Symposium(TM) solution for
substantially all of our revenues for the foreseeable future.
We anticipate that revenues from our Centra Symposium(TM) product and
related services will continue to constitute substantially all of our revenues
for the foreseeable future. Consequently, any decline in the demand for Centra
Symposium(TM) or its failure to achieve broad market acceptance, would
seriously harm our business.
Our business may depend on our ability successfully to develop and achieve
market acceptance of ASP-based versions of our product and service offerings.
We began operating our CentraNow(TM) ASP service in June 2000. In addition,
during 2000 we introduced application service provider, or ASP, versions of our
Centra Symposium(TM), Centra Conference(TM) and Centra eMeeting(TM) products.
To date, we have limited experience with deploying our products and services as
an application service provider. If an ASP-based model becomes popular in our
market, then achieving broad and
21
timely acceptance of our ASP services could be critical to our future success.
Our ability successfully to develop our ASP offerings is subject to a number of
significant risks, many of which are outside our control, including:
. our system's ability to support large numbers of users is unproven;
. whether the market will accept purchasing our products as a service
rather than a perpetual license has not been determined.
We face significant competition from other technology companies and we may not
be able to compete effectively.
The market for live eLearning and collaboration solutions is immature,
competitive, rapidly evolving and subject to rapid technological change. We
expect that the intensity of our competition will increase in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could seriously harm our
business. Competitors vary in size and in the scope and breadth of the products
and services offered. We encounter competition with respect to different
aspects of our collaboration solution from a variety of software and services
vendors. In addition, bigger companies with more resources than we have could
enter our market and either reduce our sales or require us to lower our prices,
or both.
Some of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources than we do. They
have significantly greater name recognition and a larger installed base of
customers. In addition, many of our competitors have well-established
relationships with our current and potential customers. In the past, we have
lost potential customers to competitors for various reasons, including lower
prices and other incentives not matched by us. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Our success depends on our ability to expand our sales force and distribution
channels.
To increase our revenues, we must increase the size of our sales force, the
number of our indirect channel partners, including value-added resellers and
systems integrators and the number of our alliance partners, including
technology, content and service providers. As of December 31, 2000, our sales
organization consisted of 54 professionals. We intend to increase our sales
organization substantially over the next twelve months. However, there is
intense competition for sales personnel in our business, and we cannot assure
that we will be successful in attracting, integrating, motivating and retaining
new sales personnel. Our existing or future channel partners and alliance
partners may choose to devote greater resources to marketing and supporting the
products of other companies. In addition, we may face conflicts among our sales
force and our channel and alliance partners. Our inability to increase our
direct sales force and our number of indirect channel partners and alliance
partners may limit our future revenue growth and hurt our future operating
results.
We must hire and retain skilled personnel in a competitive labor market.
Qualified personnel are in great demand throughout the software and Internet
industries. Our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled employees, particularly sales and
marketing personnel, professional services personnel, software engineers and
other senior personnel. As of December 31, 2000, we had 201 employees. We
intend to increase our employee headcount substantially over the next twelve
months. However, if we fail to attract and retain the highly trained technical
personnel that are integral to our direct sales, professional services and
product development teams, the rate at which we can generate sales and develop
new products or product enhancements may be limited. This could have a material
adverse effect on our business, operating results and financial condition.
22
If we lose the services of our chief executive officer, chief operating officer
or any other member of our management team, our business could suffer.
Our future success depends to a significant degree on the skill, experience
and efforts of Leon Navickas, our chief executive officer, Anthony Mark, our
president and chief operating officer, and the other members of our management
team. The loss of any member of our management team could have a material
adverse effect on our business. We do not have employment agreements with any
of our executive officers.
Future regulations could be enacted that either directly restrict our business
or indirectly impact our business by limiting the growth of electronic
commerce.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws
or regulations could limit the market for our products and services. Although
they might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose
companies involved in e-commerce to liability, which could limit the growth of
Web use and e-commerce generally and thereby reduce demand for our products and
services. Such legislation or regulation could dampen the growth in Web usage
and decrease its acceptance as a medium of communications and commerce.
Our failure to manage our rapid growth effectively could hurt our business.
Our failure to manage our rapid growth effectively could have a material
adverse effect on the quality of our products, our ability to retain key
personnel, and our business, operating results and financial condition. We have
been experiencing a period of rapid growth that has been placing a significant
strain on all of our resources. From January 1, 2000 to December 31, 2000, the
number of our employees increased from 117 to 201. To manage our future growth,
if any, effectively, we must continue to enhance our information technology
infrastructure, financial and accounting systems, controls and personnel,
integrate a significant number of new hires, and manage expanded operations in
geographically distributed locations. In addition, we may need to identify and
move to alternative facilities to accommodate our growth, which could disrupt
our business and hurt our operating results.
Our future success will depend on our ability to enhance our existing products
and services and to develop and introduce new products and services.
We believe our future success will depend in large part on our ability to
enhance and broaden our live eLearning and business collaboration products and
services to meet the evolving needs of the market. Our market is characterized
by rapidly changing technologies, frequent new product and service
introductions, and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. To achieve our goals, we need to respond effectively to
technological changes and new industry standards and developments. In the past,
we have experienced delays in the introduction of new products. In addition,
our product enhancements must meet the requirements of our current and
prospective customers and must achieve significant market acceptance. We could
also incur substantial costs if we need to modify our products, services or
information technology infrastructure to adapt to these changes, standards and
developments.
As we continue to expand our international operations, we will face new
business risks that we have not encountered previously.
In addition to our North American operations, we have established sales,
marketing and service operations in the United Kingdom, and sales offices in
Switzerland and France. In addition, we are seeking to establish sales or
operations offices or staff in Japan and Singapore. This expansion will require
additional resources and management attention and will subject us to new
regulatory, economic and political risks. Given our limited
23
experience in international markets, we cannot be sure that our international
expansion will be successful. In addition, we will face new risks in doing
business internationally. These risks could reduce demand for our products and
services, lower the prices at which we can sell our products and services, or
otherwise have an adverse effect on our operating results. Among the risks we
believe are most likely to affect us are:
. longer payment cycles and problems in collecting accounts receivable;
. adverse changes in trade and tax regulations;
. the absence or significant lack of legal protection for intellectual
property rights;
. the adoption of data privacy laws or regulations;
. political and economic instability; and
. currency risks.
Our success depends on our ability to protect our proprietary rights.
Our success depends to a significant degree upon the protection of our
software and other proprietary technology. If we fail to protect our
proprietary rights, other companies might copy our technology and introduce
products or services which compete with ours, without paying us for our
technology. This could have a material adverse effect on our business,
operating results and financial condition. Our proprietary technology includes
the Centra(R), CentraNow(TM), Adaptive Connectivity(TM) and other trademarks
and three patent applications, none of which has been issued. We depend upon a
combination of patent and trademark laws, license agreements, non-disclosure
and other contractual provisions to protect proprietary and distribution rights
in our products. In addition, we attempt to protect our proprietary information
and those of our vendors and partners through confidentiality and license
agreements with our employees and others. Although we have taken steps to
protect our proprietary technology, they may be inadequate. Existing trade
secret, copyright and trademark laws offer only limited protection. Moreover,
the laws of other countries in which we market our products may afford little
or no effective protection of our intellectual property. If we resort to legal
proceedings to enforce our intellectual property rights, the proceedings could
be burdensome and expensive, even if we were to prevail.
Claims by other companies that we infringe their proprietary technology could
force us to redesign our products or otherwise hurt our financial condition.
If we were to discover that any of our products violated third-party
proprietary rights, there can be no assurance that we would be able to
reengineer the product or to obtain a license on commercially reasonable terms,
if at all, to continue offering the product without substantial reengineering.
We do not conduct comprehensive patent searches to determine whether the
technology used in our products infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly developing
technology environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies. Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business. Furthermore, a party making such a
claim could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from selling our products or cause our customers to stop using our
products.
Our business could be adversely affected if our products contain errors.
Software products as complex as ours may contain undetected errors or "bugs"
that result in product failures. From time to time we have identified errors in
our products after commercial introduction of the products. While we have not
been materially harmed by errors in the past, the occurrence of errors in the
future could result in loss of or delay in revenues, loss of market share,
diversion of product development resources, injury to our reputation or damage
to our efforts to build brand awareness, any of which could have a material
adverse effect on our business, operating results and financial condition.
24
We could incur substantial costs resulting from product liability claims
relating to our customers' use of our products and services.
Many of the business interactions supported by our products and services are
critical to our customers' businesses. Any failure in a customer's business
interaction or other collaborative activity caused or allegedly caused by our
products and services could result in a claim for substantial damages against
us, regardless of our responsibility for the failure. Although we maintain
general liability insurance, including coverage for errors and omissions, there
can be no assurance that our existing coverage will continue to be available on
reasonable terms or will be available in amounts sufficient to cover one or
more large claims, or that the insurer will not disclaim coverage as to any
future claim.
We may require additional funds.
We expect that our current cash, cash equivalents and short term investments
to be adequate to provide us with sufficient working capital for at least the
next 12 months. However, our current plans and projections may prove to be
inaccurate or our expected cash flow may prove to be insufficient to fund our
operations because of product delays, unanticipated expenses or other
unforeseen difficulties. Therefore, we may need to raise additional capital in
order to fund the development and marketing of our products and services.
Our ability to obtain additional financing will depend on a number of
factors, including market conditions, our operating performance and investor
interest, particularly in business collaboration software companies. These
factors may make the timing, amount, terms and conditions of any financing
unattractive. They may also result in our incurring additional indebtedness or
accepting stockholder dilution. If adequate funds are not available or are not
available on acceptable terms, we may have to forego strategic acquisitions or
investments, defer our product development activities, or delay our continued
rollout of new products and product versions. Any of these actions may
seriously harm our business and operating results.
Our historical operating results may not be indicative of future performance.
Because of the foregoing factors, our operating results are difficult to
forecast. We believe that period-to-period comparisons of our operating results
are not meaningful, and investors should not rely on them as indicative of our
future performance. Investors should also evaluate our prospects in light of
the risks, expenses and difficulties commonly encountered by comparable early-
stage companies in new and rapidly emerging markets. We cannot assure investors
that we will successfully address the risks and challenges that face us. In
addition, although we have experienced significant revenue growth recently, we
cannot assure investors that our revenues will continue to grow or that we will
become or remain profitable in the future.
Liquidity and Capital Resources
On February 3, 2000, we completed our initial public offering of 5,000,000
shares of common stock. Additionally, on March 2, 2000, the underwriters of the
initial public offering exercised their over-allotment option to purchase an
additional 750,000 shares. At the offering price of $14.00 per share, we
received $73.3 million from these transactions, net of underwriting discounts
and commissions and offering costs.
As of December 31, 2000, we had cash and cash equivalents of $42.0 million
and short term investments of $23.2 million, an increase of $34.1 million from
$7.9 million of cash and cash equivalents and of $23.2 million from no short
term investments as of December 31, 1999. This increase primarily resulted from
our initial public offering in February, 2000, reduced by cash used to fund
operations in 2000. Our working capital as of December 31, 2000 was
$59.9 million, compared to $5.8 million as of December 31, 1999.
Net cash used in operating activities was $8.5 million for 2000, primarily
due to operating losses reduced by noncash expenses, as well as increases in
account receivables and prepaid expenses, partially offset by increases in
deferred revenue and accrued expenses. Our operating activities resulted in net
cash outflows of $5.7 million for 1999 and $6.5 million for 1998. The operating
cash outflows resulted primarily from operating
25
losses reduced by noncash expenses and increases in accounts receivable,
partially offset by increases in accounts payable, accrued expenses and
deferred revenues.
Our investing activities resulted in a net cash outflow of $26.1 million for
2000, due primarily to purchases of short term investments and, to a lesser
extent, purchases of property and equipment. Our investing activities resulted
in net cash outflows of $2.0 million for 1999 and $181,000 for 1998. Our
investing activities consist principally of purchases of short-term debt
instruments and property and equipment.
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 resolved in a realized loss of approximately $772,000.
This loss event occurred during the Company's first quarter of 2001 and
therefore will be reflected in the results of that period.
Net cash provided by financing activities in 2000 was $68.8 million
reflecting the net proceeds of $73.3 million received from our initial public
offering, partially offset by a $6.5 million in payments to the series A and B
preferred shareholders that were due upon completion of the public offering.
Our financing activities resulted in a net cash inflow of $13.6 million in 1999
and $632,000 in 1998, due primarily to the sale of our equity securities. Our
financing activities principally consist of sales of our preferred and common
stock and the issuance and repayment of bank loans.
On December 22, 2000, we amended our equipment line of credit agreement to
allow $2.0 million of additional borrowings, all of which was outstanding at
December 31, 2000. Interest on the borrowings is payable monthly based on the
prime rate (9.5% at December 31, 2000) plus .50%. Amounts outstanding shall be
payable in 36 equal monthly installments beginning on September 22, 2001.
Additionally, at December 31, 2000, we had outstanding borrowings under
previous equipment lines of credit of $356,000, bearing interest at 9.5% 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.
Capital expenditures totaled $3.2 million for 2000, $1.3 million for 1999
and $472,000 for 1998. Our capital expenditures consisted of purchases of
operating assets to manage our operations, including computer hardware and
software, office furniture and equipment and leasehold improvements. Purchases
of computer equipment represent the largest component of our capital
expenditures. We expect capital expenditures to increase for the foreseeable
future as we increase our number of employees, increase the size of our
operating facilities, and improve and expand our information systems. Since
inception, we have generally funded capital expenditures either through the use
of working capital or with equipment bank loans.
As of December 31, 2000, we had net operating loss carryforwards of $29.4
million and research and development credit carryforwards of $726,000. The net
operating loss and credit carryforwards will expire at various dates, beginning
in 2001, if not used. Under the provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to offset taxable
income. A full valuation allowance has been established in our financial
statements to reflect the uncertainty of our ability to use available tax loss
carryforwards and other deferred tax assets.
We expect to continue to experience significant growth in our capital
expenditures and operating expenses, particularly sales and marketing and
product development expenses, for the foreseeable future in order to execute
our business plan. We believe that our existing cash balances will be
sufficient to finance our operations through at least the next 12 months.
However, thereafter, we may need to raise additional funds to support more
rapid expansion of our sales force, develop new or enhanced products or
services, respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or acceptable to us. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our existing
stockholders would be reduced. Furthermore, the securities would likely have
rights, preferences or privileges senior to our common stock.
26
Recent Accounting Pronouncements
In June 1999, Financial Accounting Standards Board ("FASB") issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133, which defers the effective date
of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The adoption of this
statement did not have a material impact on the accompanying financial
statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB No. 25. The
interpretation clarifies the application of APB No. 25 in certain situations,
as defined. The interpretation was effective on July 1, 2000 but covers certain
events having occurred after December 15, 1998. The adoption of this
interpretation did not have a material impact on the accompanying financial
statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition. On March 24, 2000,
the SEC deferred implementation of SAB 101 until the second calendar quarter of
2000, and on June 26, 2000, implementation was further deferred until the
fourth quarter of calendar 2000. We were required to comply with this guidance
no later than the fourth quarter of fiscal 2000. The adoption of this guidance
did not have a material impact on the accompanying financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since our sales are currently priced in U.S. dollars and translated to local
currency amounts, a strengthening of the dollar could make our products less
competitive in foreign markets. Interest income and expense are sensitive to
changes in the general level of U.S. interest rates, particularly since our
investments are in short-term instruments and our long-term debt and available
line of credit require interest payments calculated at variable rates. Based on
the nature and current levels of our investments and debt, however, we have
concluded that there is no material market risk exposure.
In January, 2001, we liquidated, prior to maturity, certain short-term debt
obligations of California based electric utilities when their ratings dropped
to below investment grade which resulted in a realized loss of approximately
$772,000. This loss event occurred during the Company's first quarter of 2001
and therefore will be reflected in the results of that period.
Our general investing policy is to limit the risk of principal loss and to
ensure the safety of invested funds by limiting market and credit risk. We
currently use a registered investment manager to place our investments in
highly liquid money market accounts and government backed securities. All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
listed in Item 14 (a) (1) and begin at page F-1 of this report.
The quarterly financial information required by this Item 8 is included in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and
executive officers of the Company is incorporated herein by reference to the
information set forth under the caption "Directors and Executive Officers"
contained in the Company's Definitive Proxy Statement for its Annual Meeting of
Stockholders expected to be filed with the Securities and Exchange Commission
on or before March 30, 2001 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation
is incorporated herein by reference to the information set forth under the
caption "Remuneration of Executive Officers and Directors" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item with respect to security ownership of
management and certain beneficial owners of the Company is incorporated herein
by reference to the information set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item with respect to certain relationships
and related transactions is incorporated herein by reference to the information
set forth under the caption "Related Party Transaction" contained in the Proxy
Statement.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following are the consolidated financial statements of the Company
appearing elsewhere in this Annual Report on Form 10-K:
Page
----
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the Years Ended December 31, 1998,
1999 and 2000............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
2. Financial Statement Schedules
Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable or is included in the
Financial Statement notes thereto.
3. Exhibits
The following exhibits are filed as part of, or incorporated by reference
into, this Report:
Exhibit
Number Exhibit Description
------- -------------------
3.2(1) Amended and Restated Certificate of Incorporation of Centra
Software, Inc.
3.4(1) Amended and Restated By-Laws of Centra Software, Inc.
4.1(1) Specimen certificate for common stock of Centra Software, Inc.
10.1(1) Centra Software, Inc. 1995 Stock Plan, as amended*
10.2(1) Centra Software, Inc. 1999 Stock Incentive Plan*
10.3(1) Centra Software, Inc. 1999 Employee Stock Purchase Plan*
10.4(1) Centra Software, Inc. 1999 Director Stock Option Plan*
10.5(1) Amendments of Incentive Stock Option and/or Stock Restriction
Agreements ("Change of Control Agreement") between Centra Software,
Inc. and the following:
(a) Joseph Gruttadauria, dated April 25, 1997*
(b) Joseph Gruttadauria, dated May 8, 1997*
(c) Stephen A. Johnson, dated May 27, 1999*
(d) Steven Lesser, dated May 27, 1999*
(e) Anthony Mark, dated April 25, 1997*
29
Exhibit
Number Exhibit Description
------- -------------------
(f) Leon Navickas, dated March 10, 1997*
(g) Leon Navickas, dated May 8, 1997*
10.6(1) Severance Agreements between Centra Software, Inc. and the
following:
(a) Joseph Gruttadauria, dated March 24, 1997*
(b) Stephen A. Johnson, dated May 27, 1999*
(c) Steven Lesser, dated May 27, 1999*
(d) Anthony Mark, dated March 10, 1997*
(e) Leon Navickas, dated May 8, 1997*
10.7(1) Form of Indemnity Agreement entered into by Centra Software, Inc.
and each of Joseph Gruttadauria, Stephen A. Johnson, Steven
Lesser, Anthony J. Mark and Leon Navickas.
10.8(1) Lease dated July 21, 1999 between Centra Software, Inc. and
Trustees of Elandzee Trust, as amended
10.9(1) Sublease dated May 13, 1997 between Centra Software, Inc. and
Robert Half International, Inc.
10.10(1) Sublease dated December 31, 1996 between Centra Software, Inc. and
C.P. Clare
10.11(1) Loan and Security Agreement, dated November 5, 1997 between Centra
Software, Inc. and Silicon Valley Bank, as amended
10.12(1) Fourth Amended and Restated Investors' Rights Agreement, dated
April 21, 1999, by and among Centra Software, Inc., Leon Navickas
and the persons and entities listed therein, as amended
10.13(1) Form of Indemnity Agreement entered into by Centra Software, Inc.
and each of David Barrett, Richard D'Amore and Jonathan Flint.
10.14 Lease dated April 27, 2000 between Centra Software, Inc. and
Trustees of Elandzee Trust, as amended
10.15 Third Loan Modification Agreement dated December 22, 2000 between
Centra Software, Inc. and Silicon Valley Bank.
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
--------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (File No. 333-89817.) The exhibit number listed above
corresponds to the exhibit number listed in the Registration Statement.
* Management contract or compensation plan.
(b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 2000.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, as of March 28, 2001.
Centra Software, Inc.
/s/ Leon Navickas
By: _________________________________
Leon Navickas
Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby constitutes and
appoints Leon Navickas and Stephen A. Johnson, and each of them, his or her
true and lawful attorneys-in-fact and agents with full power of substitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this annual report on Form 10-K,
and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Security and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing which they, or any of them, may
deem necessary or advisable to be done in connection with this annual report on
Form 10-K, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or any substitute or substitutes for any or all of them,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities indicated, as of
March 28, 2001.
Signature Title
--------- -----
/s/ Leon Navickas Chief Executive Officer and Director
______________________________________ (Principal Executive Officer)
Leon Navickas
/s/ Stephen A. Johnson Chief Financial Officer, Treasurer and
______________________________________ Secretary (Principal Accounting and
Stephen A. Johnson Financial Officer)
/s/ Richard D'Amore Director
______________________________________
Richard D'Amore
/s/ David Barrett Director
______________________________________
David Barrett
/s/ Robert E. Hult Director
______________________________________
Robert E. Hult
31
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the Years Ended December 31, 1998,
1999 and 2000............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Centra Software, Inc.:
We have audited the accompanying consolidated balance sheets of Centra
Software, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 2000, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Centra Software, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 22, 2001
(except for the matter
discussed in Note 1(d)
as to which the date
is January 29, 2001)
F-2
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
December 31,
-----------------
1999 2000
-------- -------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,878 $42,015
Short term investments.................................... -- 23,172
Restricted cash........................................... -- 100
Accounts receivable, net of reserves of approximately $194
and $577 at December 31, 1999 and 2000, respectively..... 2,667 4,170
Prepaid expenses and other current assets................. 510 1,766
-------- -------
Total current assets..................................... 11,055 71,223
-------- -------
Property and Equipment, at cost:
Computers and equipment................................... 2,343 5,103
Furniture and fixtures.................................... 312 657
Leasehold improvements.................................... 93 229
-------- -------
2,748 5,989
Less: Accumulated depreciation and amortization........... 1,271 2,610
-------- -------
1,477 3,379
Restricted Cash........................................... -- 400
Other Assets.............................................. 764 62
-------- -------
$13,296 $75,064
======== =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long term debt...................... $ 339 $ 482
Accounts payable.......................................... 562 1,184
Accrued expenses.......................................... 2,780 4,612
Deferred revenue.......................................... 1,546 5,018
-------- -------
Total current liabilities................................ 5,227 11,296
-------- -------
Long term debt, net of current maturities................... 376 1,894
-------- -------
Commitments (Note 4)
Redeemable convertible preferred stock, $0.001 par value--
Authorized--9,164,490 and 0 shares as of December 31, 1999
and 2000, respectively
Issued and outstanding--9,164,490 and 0 shares as of
December 31, 1999 and 2000, respectively, at carrying
value.................................................... 32,480 --
-------- -------
Stockholders' equity (deficit):
Preferred stock, $.001 par value--
Authorized--0 shares at December 31, 1999; 10,000,000
shares at December 31, 2000
Issued and outstanding--0 shares at December 31, 1999 and
2000..................................................... -- --
Common stock, $0.001 par value
Authorized--25,000,000 as of December 31, 1999; and
100,000,000 shares as of December 31,2000
Issued--5,164,923 shares at December 31, 1999 and
24,977,656 shares at December 31, 2000................... 5 25
Additional paid-in capital................................ 3,770 105,192
Accumulated deficit....................................... (26,536) (41,043)
Deferred compensation..................................... (1,986) (2,260)
Treasury stock (661,606 shares of common stock at December
31, 1999 and 2000, respectively)......................... (40) (40)
-------- -------
Total stockholders' equity (deficit)..................... (24,787) 61,874
-------- -------
$ 13,296 $75,064
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Years Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------
Revenues:
License......................................... $ 3,356 $ 7,017 $ 18,697
Services........................................ 870 1,578 4,276
------- ------- --------
Total revenues................................ 4,226 8,595 22,973
------- ------- --------
Cost of Revenues:
License......................................... 185 173 314
Services(1)..................................... 919 1,543 3,381
------- ------- --------
Total cost of revenues........................ 1,104 1,716 3,695
------- ------- --------
Gross profit.................................. 3,122 6,879 19,278
------- ------- --------
Operating Expenses:
Sales and marketing(1).......................... 5,066 8,040 22,563
Product development(1).......................... 3,078 4,594 8,481
General and administrative(1)................... 1,442 2,440 4,977
Compensation charge for issuance of stock
options(1)..................................... -- 736 925
------- ------- --------
Total operating expenses...................... 9,586 15,810 36,946
------- ------- --------
Operating loss.................................. (6,464) (8,931) (17,668)
Interest income................................... 244 375 3,852
Interest expense.................................. (33) (67) (42)
======= ======= ========
Net loss........................................ (6,253) (8,623) (13,858)
Accretion of discount on preferred stock.......... 506 507 649
======= ======= ========
Net loss attributable to common stockholders...... $(6,759) $(9,130) $(14,507)
======= ======= ========
Basic and diluted net loss per share.............. $ (1.16) $ (1.39) $ (.67)
======= ======= ========
Pro forma basic and diluted net loss per share
(Note 1(l))...................................... $ (.64) $ (.64)
======= ========
Weighted average shares outstanding:
Basic and diluted............................... 5,845 6,588 21,781
======= ======= ========
Pro forma basic and diluted (Note 1(l))......... 15,281 22,608
======= ========
--------
(1) The following summarizes the departmental allocation of the compensation
charge for issuance of stock options:
1999 2000
---- ----
Cost of service revenues.......................................... $-- $ 24
Sales and marketing............................................... 176 401
Product development............................................... 75 161
General and administrative........................................ 485 339
---- ----
Total compensation charge for issuance of stock options........... $736 $925
==== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE THREE YEARS ENDED DECEMBER
31, 2000
(In Thousands, Except Share and Per Share Data)
Stockholders' Equity (Deficit)
Redeemable -----------------------------------------------------------------------------------
Convertible Treasury
Preferred Stock Common Stock Stock
-------------------- -------------------- Additional Stock -------------
Carrying $0.001 Paid-in Accumulated Deferred Subscription
Shares Value Shares Par Value Capital Deficit Compensation Receivable Shares Cost
---------- -------- ---------- --------- ---------- ----------- ------------ ------------ ------- -----
Balance,
December 31,
1997............ 6,469,490 $ 17,992 3,534,375 $ 3 $ 636 $(10,595) $ -- $ (8) 447,089 $ (13)
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ -- 506 -- -- -- (506) -- -- -- --
Sale of common
stock........... -- -- 208,314 -- 57 -- -- 8 -- --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- 8,250 (1)
Net loss........ -- -- -- -- -- (6,253) -- -- -- --
---------- -------- ---------- ---- -------- -------- ------- ----- ------- -----
Balance,
December 31,
1998............ 6,469,490 18,498 3,742,689 3 693 (17,354) -- -- 455,339 (14)
Sales of series
E redeemable
convertible
preferred stock,
net of issuance
costs of
$52,000......... 2,695,000 13,475 -- -- -- (52) -- -- -- --
Deferred
compensation
related to
grants of common
stock options... -- -- -- -- 2,722 -- (2,722) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 736 -- -- --
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ -- 507 -- -- -- (507) -- -- -- --
Sale of common
stock........... -- -- 1,422,234 2 355 -- -- -- -- --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- 206,267 (26)
Net loss........ -- -- -- -- -- (8,623) -- -- -- --
---------- -------- ---------- ---- -------- -------- ------- ----- ------- -----
Balance,
December 31,
1999............ 9,164,490 32,480 5,164,923 5 3,770 (26,536) (1,986) -- 661,606 (40)
Deferred
compensation
related to
grants of common
stock options... -- -- -- -- 1,199 -- (1,199) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 925 -- -- --
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ -- 649 -- -- -- (649) -- -- -- --
Accrual of
dividends paid
on series A and
B redeemable
convertible
preferred
stock........... -- (6,479) -- -- -- -- -- -- -- --
Conversion of
redeemable
convertible
preferred stock
into common
stock........... (9,164,490) (26,650) 13,746,735 14 26,636 -- -- -- -- --
Issuance of
common stock in
initial public
offering, net of
issuance costs
of $7,268....... -- -- 5,750,000 6 73,226 -- -- -- -- --
Proceeds from
other issuance
of common stock -- -- 315,998 -- 361 -- -- -- -- --
Net loss........ -- -- -- -- -- (13,858) -- -- -- --
---------- -------- ---------- ---- -------- -------- ------- ----- ------- -----
Balance,
December 31,
2000............ -- $ -- 24,977,656 $ 25 $105,192 $(41,043) $(2,260) $ -- 661,606 $ (40)
========== ======== ========== ==== ======== ======== ======= ===== ======= =====
Total
Stockholders'
Equity (Deficit)
----------------
Balance,
December 31,
1997............ $ (9,977)
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ (506)
Sale of common
stock........... 65
Repurchase of
common stock.... (1)
Net loss........ (6,253)
----------------
Balance,
December 31,
1998............ (16,672)
Sales of series
E redeemable
convertible
preferred stock,
net of issuance
costs of
$52,000......... (52)
Deferred
compensation
related to
grants of common
stock options... --
Amortization of
deferred
compensation.... 736
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ (507)
Sale of common
stock........... 357
Repurchase of
common stock.... (26)
Net loss........ (8,623)
----------------
Balance,
December 31,
1999............ (24,787)
Deferred
compensation
related to
grants of common
stock options... --
Amortization of
deferred
compensation.... 925
Accretion of
series A and B
redeemable
convertible
preferred stock
discount........ (649)
Accrual of
dividends paid
on series A and
B redeemable
convertible
preferred
stock........... --
Conversion of
redeemable
convertible
preferred stock
into common
stock........... 26,650
Issuance of
common stock in
initial public
offering, net of
issuance costs
of $7,268....... 73,232
Proceeds from
other issuance
of common stock 361
Net loss........ (13,858)
----------------
Balance,
December 31,
2000............ $ 61,874
================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------
Cash Flows from Operating Activities:
Net loss........................................ $(6,253) $(8,623) $(13,858)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 369 613 1,335
Compensation charge for issuance of stock
options...................................... -- 736 925
Changes in assets and liabilities:
Restricted cash............................. -- -- (100)
Accounts receivable......................... (1,619) (899) (1,503)
Prepaid expenses and other current assets... (113) (321) (1,256)
Accounts payable............................ (110) 145 623
Accrued expenses............................ 585 1,850 1,832
Deferred revenue............................ 660 821 3,472
------- ------- --------
Net cash used in operating activities..... (6,481) (5,678) (8,530)
------- ------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment.............. (472) (1,291) (3,238)
Purchase of short-term investments.............. -- -- (23,697)
Sale of short-term investments.................. 70 -- 525
Restricted cash................................. 211 -- (400)
Other assets.................................... 10 (746) 702
------- ------- --------
Net cash used in investing activities..... (181) (2,037) (26,108)
------- ------- --------
Cash Flows from Financing Activities:
Proceeds from initial public offering, net of
issuance costs................................. -- -- 73,232
Proceeds from sale of preferred stock........... -- 13,423 --
Proceeds from issuance of common stock.......... 65 357 361
Payments of dividends to preferred
shareholders................................... -- -- (6,479)
Purchase of treasury stock...................... (1) (26) --
Proceeds from term loans........................ 713 209 2,000
Payments on term loans.......................... (120) (323) (307)
Payments on capital lease obligations........... (25) (26) (32)
------- ------- --------
Net cash provided by financing
activities............................... 632 13,614 68,775
------- ------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents...................................... (6,030) 5,899 34,137
Cash and Cash Equivalents, beginning of period.... 8,009 1,979 7,878
------- ------- --------
Cash and Cash Equivalents, end of period.......... $ 1,979 $ 7,878 $ 42,015
======= ======= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest........ $ 37 $ 74 $ 60
======= ======= ========
Supplemental Disclosure of Noncash Financing
Activities:
Accretion of discount on series A and series B
redeemable convertible preferred stock......... $ 506 $ 507 $ 649
======= ======= ========
Conversion of redeemable convertible preferred
stock into 13,746,735 shares of common stock..... -- -- $ 26,650
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations and Significant Accounting Policies
Centra Software, Inc. (Centra or the Company) was incorporated as a Delaware
corporation on April 4, 1995. From incorporation in April 1995 through June
1997, Centra was in the development stage, engaged primarily in the development
of its initial products. In July 1997, Centra began commercial shipment of its
initial product. Centra is a provider of software and services that support
live eLearning and business collaboration.
Centra is subject to certain business risks that could affect future
operations and financial performance. These risks include, but are not limited
to, rapid technological changes, significant competition, dependence on key
individuals, quarterly performance fluctuations, ability to enhance existing
products and services, the potential need to obtain adequate financing to fund
operations beyond the next 12 months and for the development of new products.
The accompanying consolidated financial statements reflect the application
of certain accounting polices, 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, and Centra Software Securities Corporation,
a Massachusetts securities corporation. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
(c) Revenue Recognition
Centra derives substantially all of its revenues from the sale of software
licenses, post-contract support (maintenance), and other services. Maintenance
includes telephone technical support, bug fixes and rights to upgrades and
enhancements on a when-and-if available basis. Professional services include
training, basic implementation consulting to meet specific customer needs,
hosting and ASP services. Centra executes contracts that govern the terms and
conditions of each software license and maintenance arrangement and
professional service arrangement. 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, are
allocated to each element based on the residual method in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement of
Position 98-9, Software Revenue Recognition with Respect to Certain
Arrangements.
Centra uses the residual method when vendor-specific objective evidence of
fair value does not exist for one of the delivered elements in an 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 professional services, training and maintenance
and support 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 professional
services, training, and maintenance and support services.
F-7
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from license fees, not provided under ASP services, 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.
Revenues related to maintenance, hosting and ASP services are recognized on
a straight-line basis over the period that the maintenance, hosting and ASP
services are provided and revenues allocable to implementation, consulting and
training services are recognized as the services are performed.
(d) Cash Equivalents and Short-Term Investments
Centra considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Centra's cash
equivalents consisted of money market accounts and highly rated corporate bonds
and commercial paper.
December 31,
--------------
1999 2000
------ -------
Cash and cash equivalents--
Cash....................................................... $ -- $ 1,059
Money market accounts...................................... 352 6,095
Commercial paper........................................... 7,526 18,911
Municipal bonds............................................ -- 15,450
Corporate notes and bonds.................................. -- 500
------ -------
Total cash and cash equivalents.......................... $7,878 $42,015
====== =======
Centra accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, investments for
which Centra has the positive intent and the ability to hold to maturity are
reported at amortized cost, which approximates fair market value. At December
31, 1999 and 2000, Centra's short-term investments consisted of the following;
December 31,
------------
1999 2000
---- -------
Short-term Investments--
Commercial paper (average 48 remaining days to maturity).... $-- $ 9,914
Corporate notes and bonds (average 153 remaining days to
maturity).................................................. -- 9,244
Municipal bonds (average 243 remaining days to maturity).... -- 4,014
---- -------
Total short-term investments.............................. $-- $23,172
==== =======
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.
This loss event occurred during the Company's first quarter of 2001 and
therefore will be reflected in the results of that period.
F-8
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Depreciation and Amortization
Centra provides for depreciation and amortization of property and equipment
using the straight-line method by charges to operations in amounts to allocate
the cost of assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- -------------
Computers and equipment........................................ 2-3 years
Furniture and fixtures......................................... 3 years
Leasehold improvements......................................... Life of lease
(f) Long-Lived Assets
In accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and For Long-Lived Assets to Be Disposed Of, Centra reviews its long-
lived assets (which consists of property and equipment) for impairment as
events and circumstances indicate the carrying amount of an asset may not be
recoverable. Centra evaluates the realizability of its long-lived assets based
on profitability and cash flow expectations for the related asset. Management
believes that, as of each of the balance sheet dates presented, none of
Centra's long-lived assets were impaired.
(g) Product Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed, requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based upon Centra's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by Centra
between the establishment of technological feasibility and the point at which
the product is ready for general release have not been significant.
Accordingly, Centra has charged all such costs to product development expenses
in the accompanying consolidated statements of operations.
(h) Disclosure of Fair Value of Financial Instruments and Concentration of
Credit Risk
The estimated fair values of the Company's financial instruments, which
includes cash equivalents, short-term investments, restricted cash, accounts
receivable, and current maturities of long term debt approximate their carrying
values due to the short-term nature of these instruments.
Financial instruments that potentially expose Centra to concentrations of
credit risk consist mainly of cash and cash equivalents, short-term investments
and accounts receivable. Centra maintains its cash and cash equivalents, short-
term investments and restricted cash principally in domestic financial
institutions and investments of high credit rating. Centra's accounts
receivable are derived primarily from sales of software products and services.
Centra performs credit evaluations of its customers and generally does not
require collateral. Except for the loss discussed in Note 1 (d), Centra does
not believe that significant credit risk, beyond amounts provided, exists at
December 31, 1999 and 2000.
During the year ended December 31, 1998, Centra had one customer who
accounted for 11% of revenues. No customer accounted for greater than 10% of
revenues for the years ended December 31, 1999 and 2000. As of December 31,
1999, Centra had three customers who accounted for 16%, 12% and 10% of accounts
receivable, respectively. As of December 31, 2000, Centra had one customer who
accounted for 10% of accounts receivable.
F-9
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(i) Foreign Currency Translation
The financial statements of Centra's non-U.S. subsidiary are translated in
accordance with SFAS No. 52, Foreign Currency Translation. The functional
currency of Centra's foreign subsidiary is the U.S. dollar, accordingly, all
assets and liabilities of the foreign subsidiary are translated using the
exchange rate at the balance sheet date except for property and equipment and
stockholders' equity, which are translated at historical rates. Revenues and
expenses are translated at average rates during the period, except for
depreciation and amortization, which are translated at historical rates.
Transaction and translation gains and losses are included in the accompanying
consolidated statements of operations for the years ended December 31, 1999 and
2000 and were not material to the financial statements taken as a whole.
(j) Comprehensive Income (Loss)
Under SFAS No. 130, Reporting Comprehensive Income, the Company is required
to disclose all components of comprehensive income (loss) on an annual and
interim basis. 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 nonowner sources. Centra's comprehensive loss is equal to
net loss for all periods presented.
(k) Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earning per Share for all periods presented. Pursuant to Securities
and Exchange Commission Staff (SEC) Accounting Bulletin (SAB) No. 98, common
stock and redeemable convertible preferred stock issued or granted for nominal
consideration prior to the date of Centra's initial public offering must be
included in the calculation of basic and diluted net loss per share as if they
had been outstanding for all periods presented. The common shares issued for
the series A and series B Redeemable Convertible Participating preferred stock
upon conversion, redemption or liquidation were for nominal consideration due
to the liquidation payment made to the holders of series A and series B.
Accordingly, the shares issued at the time the series A and series B preferred
stock converted to common stock have been included in the calculation of basic
and diluted net loss per share from date of issuance. In accordance with SFAS
No. 128, basic and diluted net loss per share has been computed by dividing the
weighted average number of shares of common stock outstanding during the
period, less shares subject to repurchase into the net loss attributable to
common stockholders, which includes both the accretion of the discount and the
liquidation premium on the series A and series B preferred stock.
(l) Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of redeemable convertible preferred stock not
included in the computation of basic and diluted net loss per share that
automatically converted upon the completion of Centra's initial public offering
(using the if-converted method) from the original date of issuance. Upon
consummation of the initial public offering in February 2000, all of the
outstanding redeemable convertible preferred stock converted into an aggregate
of 13,746,735 shares of common stock.
F-10
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Historical and pro forma basic and diluted net loss per share are as
follows:
Years Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------
(in thousands, except
per share data)
Historical:
Net loss attributable to common stockholders...... $(6,759) $(9,130) $(14,507)
======= ======= ========
Basic and diluted shares:
Weighted average shares of common and series A and
B preferred stock outstanding.................... 7,028 7,857 22,403
Less: weighted average shares subject to
repurchase....................................... (1,183) (1,269) (622)
------- ------- --------
Weighted average shares of common and series A and
B preferred stock outstanding used in computing
basic and diluted net loss per share............. 5,845 6,588 21,781
======= ======= ========
Basic and diluted net loss per share.............. $ (1.16) $ (1.39) $ (.67)
======= ======= ========
Pro Forma:
Net loss attributable to common stockholders...... $(9,130) $(14,507)
Less: Accretion of unamortized discount on series
A and B preferred stock.......................... 650 --
------- --------
Net loss.......................................... $(9,780) $(14,507)
======= ========
Weighted average shares of common and series A and
B preferred stock outstanding used in computing
basic and diluted net loss per share............. 6,588 21,781
Adjusted to reflect the assumed conversion of
series C, D and E preferred stock from the date
of issuance...................................... 8,693 827
------- --------
Weighted average shares used in computing pro
forma basic and diluted net loss per share....... 15,281 22,608
======= ========
Pro forma basic and diluted net loss per share.... $ (0.64) $ (0.64)
======= ========
Options to purchase a total of 1,092,920, 1,377,413 and 3,754,016 common
shares have not been included in the computation of diluted loss per share for
the years ended December 31, 1998, 1999 and 2000, respectively. These shares
are considered antidilutive, as Centra has recorded a loss for all periods
presented.
(m) Segment Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. As of December 31, 2000, Centra operates
solely in one segment, the development and marketing of software products and
related services, and therefore there is no impact to Centra's financial
statements of adopting SFAS No. 131. Centra's revenues from customers outside
of the United States were approximately $585,000, $503,000 and $2,767,000 in
the years ended December 31, 1998, 1999 and 2000, respectively.
(n) Recent Accounting Pronouncements
In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133, which defers the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, issued in
June 1998, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging
F-11
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The adoption of this statement did not have a
material impact on the accompanying financial statements.
In March 2000, the FASB issued Interpretation Number 44, Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB No.
25. The interpretation clarifies the application of Accounting Principles Board
(APB) No. 25, Accounting for Stock-Issued to Employees, in certain situations,
as defined. The Interpretation was effective on July 1, 2000 but covers certain
events having occurred after December 15, 1998. The adoption of this
Interpretation did not have a material impact on the accompanying financial
statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition. On March 24, 2000,
the SEC deferred implementation of SAB 101 until the second calendar quarter of
2000, and on June 26, 2000, implementation was further deferred until the
fourth quarter of calendar 2000. The Company was required to comply with this
guidance no later than the fourth quarter of fiscal 2000. The adoption of this
guidance did not have a material impact on the accompanying financial
statements.
(o) Accrued Expenses
Accrued expenses at December 31, 1999 and 2000 consist of the following:
December 31,
---------------
1999 2000
------- -------
(in thousands)
Payroll and payroll-related costs........................... $ 1,200 $ 1,554
Accrued initial public offering costs....................... 489 --
Other accrued expenses...................................... 1,091 3,058
------- -------
$2,780 $ 4,612
======= =======
(2) Income Taxes
Centra provides for federal and state income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates. The components of Centra's
net deferred tax assets are approximately as follows at December 31, 1999 and
2000:
1999 2000
----------- ------------
Net operating loss carryforwards.................. $ 9,130,000 $ 11,793,000
Tax credit carryforwards.......................... 394,000 730,000
Other temporary differences....................... 459,000 2,472,000
----------- ------------
9,983,000 14,995,000
Valuation allowance............................... (9,983,000) (14,995,000)
----------- ------------
Net deferred tax asset............................ $ -- $ --
=========== ============
Centra has generated taxable losses from operations since inception and,
accordingly, has no taxable income available to offset the carryback of net
operating losses. Based upon the weight of all available
F-12
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
evidence, Centra has provided a full valuation allowance for its deferred tax
assets since, in the opinion of management, realization of these future
benefits is not sufficiently assured.
As of December 31, 2000, Centra had federal tax net operating loss
carryforwards and tax credit carryforwards available to offset future taxable
income, if any, of approximately $29,292,000 and $730,000, respectively. These
carryforwards expire through 2020 and are subject to review and possible
adjustment by the Internal Revenue Service.
The U.S. Internal Revenue Code of 1986, as amended (the Code), contains
provisions that may limit the net operating loss and tax credit carryforwards
available to be used in any given year upon the occurrence of certain events,
including changes in the ownership interests of significant stockholders. In
the event of a cumulative change in ownership in excess of 50% over a three-
year period, the amount of the net operating loss carryforwards and tax credit
carryforwards that Centra can utilize in any one year may be limited. In the
event of a change in ownership, as defined, the annual limitation on the use of
the existing net operating loss and tax credit carryforwards is equal to an
amount determined by multiplying the value of Centra at the time of the
ownership change by the U.S. applicable federal rate of interest, as determined
by the U.S. Internal Revenue Service. Centra has completed several financings
since its inception and has not determined if its net operating losses and tax
credit carryforwards have been limited by these financings.
A reconciliation of the federal statutory rate to Centra's effective tax
rate is as follows:
December 31,
---------------------
1998 1998 2000
----- ----- -----
Income tax provision at federal statutory rate..... (34.0)% (34.0)% (34.0)%
Increase in tax resulting from State tax provision,
net of federal benefit............................ (6.0) (6.0) (6.0)
Increase in valuation allowance.................... 40.0 40.0 40.0
----- ----- -----
Effective tax rate................................. 0 % 0 % 0 %
===== ===== =====
(3) Long-Term Debt
(a) Term Loan Facility and Capital Leases
On December 22, 2000, Centra amended its equipment line of credit agreement
to allow $2.0 million of additional borrowings, all of which was outstanding at
December 31, 2000. Interest is payable monthly based on the prime rate (9.5% at
December 31, 2000) plus .50%. Amounts outstanding shall be payable in 36 equal
monthly installments beginning on September 22, 2001. Additionally at December
31, 2000, Centra has outstanding borrowings under the original equipment line
of credit of $356,000, bearing interest at 9.5% per annum. All borrowings are
secured by substantially all of Centra's assets. This amended line of credit
requires Centra to maintain a minimum balance of cash, cash equivalents and
short term investments of $30 million.
In addition to the above equipment line of credit/term loan facility, Centra
also has two capital leases. These leases bear interest at rate of 10.5% per
annum and are payable through June 2002. As of December 31, 1999 and 2000,
obligations under these capital leases amounted to $28,000 and $20,000,
respectively.
F-13
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Maturities of Long-Term Debt
Future principal maturities of Centra's long-term obligations as of December
31, 2000 are as follows:
(In
Year thousands)
---- ---------
2001........................................................... $ 482
2002........................................................... 727
2003........................................................... 667
2004........................................................... 500
------
$2,376
======
(4) Commitments
Centra conducts its operations in leased facilities and is obligated to pay
monthly rent through December 2005. As of December 31, 2000, the minimum future
rental payments under the operating lease agreements are approximately as
follows:
(in
Year ending December 31, thousands)
------------------------ ---------
2001......................................................... $1,728
2002......................................................... 1,598
2003......................................................... 1,593
2004......................................................... 1,443
2005......................................................... 797
------
$7,159
======
Rent expense charged to operations was approximately $362,000, $570,000 and
$1,286,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
(5) Redeemable Convertible Preferred Stock
Centra had 9,164,490 authorized shares of preferred stock, of which
1,133,000, 1,416,490, 1,670,000, 2,250,000 and 2,695,000 were designated as
series A redeemable convertible participating preferred stock (series A
preferred stock), series B redeemable convertible participating preferred stock
(series B preferred stock), series C redeemable convertible preferred stock
(series C preferred stock), series D redeemable convertible preferred stock
(series D preferred stock) and series E redeemable convertible preferred stock
(series E preferred stock), respectively. During 1995, Centra sold 1,133,000
shares of series A preferred stock for $1.00 per share for gross proceeds of
$1,133,000. During 1996, Centra sold 1,416,490 shares of series B preferred
stock at $2.25 per share for gross proceeds of $3,187,000. During 1997, Centra
sold 1,670,000 shares of series C preferred stock for $2.50 per share for gross
proceeds of $4,175,000 and 2,250,000 shares of series D preferred stock for
$4.00 per share for gross proceeds of $9,000,000. During 1999, Centra sold
2,695,000 shares of series E preferred stock for $5.00 per share for gross
proceeds of $13,475,000.
Series A and series B preferred stockholders had rights that allowed them to
receive a cash payment equal to 150% of their original investment upon
redemption, liquidation and automatic conversion plus the common shares into
which the series A and the series B preferred stock converts. A cash payment of
approximately $6,479,000 was made to the Series A and Series B preferred
stockholders in satisfaction of this right, upon the completion of the
Company's initial public offering. Centra attributed $113,000 and $354,000 of
value to these rights of the series A and series B preferred stock,
respectively, by decreasing the carrying value of preferred stock and
increasing additional paid-in capital in equal amounts at the date of issuance.
Centra increased ratably over the redemption period the carrying value of
series A and series B preferred stock by accreting the discount
F-14
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and the liquidation premium, representing the cash payment in excess of the
original investment. For the years ended December 31, 1998, 1999 and 2000
Centra recorded $506,000, $507,000 and $649,000, respectively of accretion.
Each outstanding share of series A, series B, series C, series D and series
E preferred stock was convertible into common stock at the rate of 1.5 shares
of common stock for each share of preferred stock, adjusted for certain
dilutive events. Conversion was automatic and occured immediately prior to the
closing of Centra's initial public offering of common stock resulting in a
total of 13,746,735 common shares.
(6) Stockholders' Equity (Deficit)
(a) Authorized Capital Stock
Upon the closing of Centra's proposed initial public offering, its
certificate of incorporation was amended and restated to change its authorized
capital stock to 100,000,000 shares of $0.001 par value common stock and
10,000,000 shares of $0.001 par value preferred stock.
(b) Stock Option and Stock Purchase Plans
1995 Stock Plan
In 1995, Centra adopted the 1995 Stock Plan (the 1995 Plan), which provides
for the granting of incentive stock options to employees of Centra and
nonqualified stock options to any directors, officers, employees or consultants
of Centra. Options to purchase 3,852,000 shares of common stock may be issued
pursuant to the 1995 Plan, plus an additional 385,500 shares, as defined under
the 1995 Plan. Option and stock pricing is determined by Centra's Board of
Directors and all options to date have been granted at the fair market value
determined by the Board of Directors. Options and stock granted under the 1995
Plan vest as follows: 25% on the one-year anniversary date and then 6.25% on
each subsequent quarter over the next three years, and expire no later than 10
years from the date of grant. There are no shares available for grant under the
1995 Stock Plan.
Centra allowed for the immediate exercise of certain stock options granted
under the 1995 Plan. The shares received upon exercise are subject to
repurchase by Centra at the original option exercise price of $0.001 to $0.33
per share, subject to vesting at the same rates as provided in the original
option agreements. A total of 2,464,907 shares have been issued upon the
immediate exercise of certain stock options granted under the 1995 Plan, of
which 621,924 shares are subject to repurchase rights. During the years ended
December 31, 1998 and 1999, Centra exercised its rights under the stock
repurchase agreements and repurchased 8,250 and 206,249 shares, respectively.
These shares were repurchased at original issuance price.
1999 Stock Incentive Plan
In November 1999, Centra adopted the 1999 Stock Incentive Plan (the 1999
Plan). A total of 3,500,000 shares of common stock have been reserved for
issuance under the 1999 Plan. The 1999 Plan authorizes the grant of incentive
options and nonqualified options. The 1999 Plan also provides for awards of
stock appreciation rights, performance shares, restricted stock and other
stock-based awards.
Incentive options may be granted under the 1999 Plan to employees and
affiliates within the meaning of the Internal Revenue Code, including officers
and directors as well as officers and directors of affiliates who are also
employees. The exercise price of incentive options granted under the 1999 Plan
must be at least equal to the fair market value of our common stock on the date
of grant. The exercise price of incentive options granted to an optionee who
owns stock possessing more than 10% of the voting power of the outstanding
capital stock must be at least equal to 110% of the fair market value of the
common stock on the date of grant
F-15
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of the 1999 Plan, Centra may grant nonqualified options to
employees, directors and non employees. There are no limits on the exercise
price of nonqualified options granted under the 1999 Plan.
The 1999 Plan is administered by the compensation committee of the board of
directors. The compensation committee selects the individuals to whom options
will be granted and determines the option exercise price and other terms of
each award, subject to the provisions of the 1999 Plan.
1999 Director Option Plan
In November 1999, Centra adopted the 1999 Director Option Plan (Director
Plan). The Director Plan provides for the grant of stock options to those
directors who are not full-time employees of Centra or one of its subsidiaries.
Only non-statutory options may be granted under the Director Plan. The maximum
number of shares of common stock as to which options may be granted under the
Plan is 200,000. As of December 31, 2000, no options had been granted under the
Director Plan.
The Director Plan is administered by the board of directors. The option
exercise price for each option granted under the Director Plan is the fair
market value of the common stock as of the date of grant. Payment of the option
exercise price is to be made in cash for the full exercise price of the
options. The options terminate on the earlier of 10 years after the date of
grant or 60 days after the optionee ceases to serve as a director, except in
the event of death or disability.
Options to purchase 1,002,825 shares of common stock were available for
grant at December 31, 2000 under the 1999 Stock Incentive Plan and the 1999
Director Option Plan.
The following is a summary of common stock option and restricted stock
activity under the 1995 and 1999 Plans:
Weighted
Number of Exercise Average
Shares Price Exercise Price
---------- ------------ --------------
Outstanding, December 31, 1997........ 641,513 $ 0.07--0.17 $0.16
Granted............................... 840,450 0.27 0.27
Exercised............................. (208,314) 0.07--0.27 0.26
Canceled.............................. (180,729) 0.07--0.27 0.17
---------- ------------ -----
Outstanding, December 31, 1998........ 1,092,920 0.07--0.27 0.21
Granted............................... 1,816,675 0.27--8.00 1.22
Exercised............................. (1,422,234) 0.17--0.33 0.25
Canceled.............................. (109,948) 0.17--5.00 0.38
---------- ------------ -----
Outstanding, December 31, 1999........ 1,377,413 0.07--8.00 1.48
Granted............................... 2,750,675 0.27--11.00 6.13
Exercised............................. (259,571) 0.17--5.00 0.27
Canceled.............................. (114,501) 0.27--10.88 5.56
---------- ------------ -----
Outstanding, December 31, 2000........ 3,754,016 $0.07--11.00 $4.84
========== ============ =====
Exercisable common stock options,
December 31, 2000.................... 390,936 $ 0.07--8.00 $1.78
========== ============ =====
Exercisable common stock options,
December 31, 1999.................... 67,687 $ 0.07--5.00 $0.46
========== ============ =====
Exercisable common stock options,
December 31, 1998.................... 291,246 $ 0.07--0.27 $0.17
========== ============ =====
F-16
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The range of exercise prices for common stock options outstanding and
options exercisable at December 31, 2000 is as follows:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$ 0.07--0.17 106,069 6.3 years $0.17 73,292 $0.17
0.27--0.33 660,355 7.9 years 0.28 212,735 0.27
0.67 32,006 8.6 years 0.67 6,775 0.67
3.13--5.63 834,774 9.7 years 3.72 54,822 5.00
6.25--11.00 2,120,812 9.4 years 6.99 43,312 8.00
------------ --------- --------- ----- ------- -----
$0.07--11.00 3,754,016 8.3 years $4.84 390,936 $1.78
============ ========= ========= ===== ======= =====
In connection with stock options grants to employees and non employees
during the year ended December 31, 1999 and 2000, Centra recorded deferred
compensation of $2,722,000 and $1,199,000, respectively, which represents the
aggregate difference between the option exercise price and the deemed fair
market value of the common stock determined for financial reporting purposes
for grants to employees and the fair market value of the options for the non-
employees. The deferred compensation will be recognized as an expense over the
vesting period of the underlying stock options. Centra recorded compensation
expense of $736,000 and $925,000, during the year ended December 31, 1999 and
2000, respectively, related to these options
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock options
to be included in the statements of operations or disclosed in the notes to the
financial statements. Centra has determined that it will continue to account
for stock-based compensation for employees and directors under APB Opinion No.
25 and elect the disclosure-only alternative under SFAS No. 123. Centra records
the fair market value of stock options granted to non employees in the
consolidated statement of operations. The Company has computed the pro forma
disclosures required under SFAS No. 123 for stock options granted to employees
and directors using the Black-Scholes option pricing model. The assumptions
used are as follows:
Year Ended December 31,
----------------------------------
1998 1999 2000
---------- ---------- ------------
Risk-free interest rate...................... 4.5%--6.7% 4.8%--6.1% 5.84%--6.72%
Expected dividend yield......................
Expected lives............................... 7.5 years 7.5 years 7.5 years
Expected volatility.......................... 100% 85% 100%
The expected volatility factor was based on actual volatility factors for
comparable public software companies. The weighted average fair value of grants
at fair market value during the years ended December 31, 1998, 1999 and 2000
was $0.27, $6.48 and $5.33 per share, respectively. The weighted average
exercise price of grants at fair market value during the years ended December
31, 1998, 1999 and 2000 was $0.27, $8.00 and $6.18, respectively. During 1999,
Centra granted certain options with an exercise price below the deemed fair
market value of the common stock. The weighted average exercise price and
weighted average fair value of these options was $1.56 and $3.17, respectively.
F-17
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma effects of applying SFAS No. 123 are as follows for the years
ended December 31, 1998, 1999 and 2000:
Year Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------
(in thousands, except
per share data)
Net loss attributable to common stockholders
As reported...................................... $(6,759) $(9,130) $(14,507)
Pro forma........................................ $(6,823) $(9,815) $(16,729)
Basic and diluted loss per share--
As reported...................................... $ (1.16) $ (1.39) $ (.67)
Pro forma........................................ $ (1.17) $ (1.49) $ (.77)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because Centra's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
1999 Employee Stock Purchase Plan
In November 1999, Centra adopted the 1999 Employee Stock Purchase Plan (the
Stock Purchase Plan). The Stock Purchase Plan initially authorized the issuance
of up to a total of 1,500,000 shares of Centra's common stock to participating
employees. As of December 31 of each year, Centra will increase the number of
shares reserved for issuance under the Stock Purchase Plan automatically by 2%
of the total number of shares of our common stock then outstanding or, if less,
300,000 shares.
Under the terms of the Stock Purchase Plan, the option exercise price is an
amount equal to 85% of the fair market value of one share of common stock on
either the first or last day of the offering period, whichever is lower. In the
event of a change in control of Centra, the Stock Purchase Plan will terminate
and shares will be purchased with the payroll deductions accumulated to date by
participating employees.
The Stock Purchase Plan is administered by the compensation committee of the
board of directors. Employees purchased 56,427 shares of the Company's common
stock in the plan during the fiscal year ended December 31, 2000.
(7) Employee Benefit Plan
Centra has adopted an employee benefit plan (the 401(k) Plan) under Section
401(k) of the Internal Revenue Code. The 401(k) Plan allows employees to make
pretax contributions up to the maximum allowable amount set by the Internal
Revenue Service. Under the 401(k) Plan, Centra may match a portion of the
employee contribution up to a defined maximum and provide profit sharing to
employees at its discretion. Centra made no contributions to the 401(k) Plan
for the years ended December 31, 1998, 1999 and 2000.
(8) Valuation and Qualifying Accounts
A summary of the allowance for doubtful accounts:
F-18
CENTRA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Balance
Beginning Charged to Balance
of Year Expense Write-offs End of Year
--------- ---------- ---------- -----------
(in thousands)
Years Ended
Allowance for Doubtful Accounts:
December 31, 1998.................. $ 50 $ 99 $(49) $100
December 31, 1999.................. 100 190 (96) 194
December 31, 2000.................. 194 410 (28) 577
(9) Quarterly Statement of Operations Information (unaudited)
The following table presents a summary of quarterly results of operations
for 1999 and 2000:
Quarter Ended,
--------------------------------------------------------------------------
June Dec. June Dec.
Mar. 31, 30, Sept. 30, 31, Mar. 31, 30, Sept. 30, 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- ------- --------- ------- -------- ------- --------- -------
(in thousands, except per share data)
Total revenues.......... $ 1,026 $ 1,840 $ 2,716 $ 3,013 $ 3,793 $ 5,015 $ 6,335 $ 7,830
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 663 1,465 2,258 2,493 3,113 4,243 5,352 6,570
------- ------- ------- ------- ------- ------- ------- -------
Net loss attributable to
common stockholders.... (2,375) (2,079) (1,465) (3,211) (4,093) (3,480) (3,499) (3,435)
------- ------- ------- ------- ------- ------- ------- -------
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (.38) $ (.32) $ (.22) $ (.46) $ (.23) $ (.15) $ (.15) $ (.15)
======= ======= ======= ======= ======= ======= ======= =======
F-19