U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
| | TRANSISTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
___________
Commission File Number: 000-27861
Centra Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3268918
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
430 Bedford Street, Lexington, MA 02420
(Address of Principal Executive Offices)
(781) 861-7000
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the Registrant's common stock as of November
9, 2001 was 25,272,289.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and
September 30, 2001 (unaudited).................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 2001 (unaudited).............. 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 2001 (unaudited).............. 5
Notes to Consolidated Financial Statements (unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 20
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signatures............................................................. 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRA SOFTWARE, INC.
Consolidated Balance Sheets
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2000 2001
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 42,015 $ 36,632
Short-term investments....................................................... 23,172 10,500
Restricted cash.............................................................. 100 100
Accounts receivable, net of reserves of approximately $577 and $576 at
December 31, 2000 and September 30, 2001, respectively...................... 4,170 9,891
Prepaid expenses and other current assets.................................... 1,766 1,500
-------- --------
Total current assets..................................................... 71,223 58,623
-------- --------
Property and Equipment, at cost:
Computers and equipment...................................................... 5,103 7,383
Furniture and fixtures....................................................... 657 945
Leasehold improvements....................................................... 229 527
-------- --------
5,989 8,855
Less: Accumulated depreciation and amortization.............................. 2,610 4,272
-------- --------
3,379 4,583
-------- --------
Goodwill and other intangible assets, net.................................... -- 7,449
Restricted Cash.............................................................. 400 547
Other Assets................................................................. 62 92
-------- --------
$ 75,064 $ 71,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of term loan.............................................. $ 482 $ 1,626
Accounts payable............................................................. 1,184 1,348
Accrued expenses............................................................. 4,612 6,050
Deferred revenue............................................................. 5,018 6,227
-------- --------
Total current liabilities................................................ 11,296 15,251
-------- --------
Term loan, net of current maturities........................................... 1,894 3,012
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value-
Authorized-10,000,000 shares as of December 31, 2000 and September 30, 2001,
Issued and outstanding-No shares at December 31, 2000 and September 30, 2001 -- --
Common stock, $0.001 par value-
Authorized-100,000,000 shares as of December 31, 2000 and September 30, 2001
Issued-24,977,656 shares and 25,710,283 shares at December 31, 2000 and
September 30, 2001, respectively............................................ 25 26
Additional paid-in capital................................................... 105,192 109,741
Accumulated deficit.......................................................... (41,043) (55,111)
Deferred compensation........................................................ (2,260) (1,548)
Cumulative foreign currency translation adjustment........................... -- (37)
Treasury stock (661,606 shares of common stock at December 31, 2000 and
September 30, 2001)......................................................... (40) (40)
-------- --------
Total stockholders' equity............................................... 61,874 53,031
-------- --------
$ 75,064 $ 71,294
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 2001 2000 2001
------- ------- -------- --------
Revenues:
License................................................ $ 5,187 $ 6,467 $ 12,391 $ 21,187
Services............................................... 1,148 2,769 2,752 6,881
------- ------- -------- --------
Total revenues..................................... 6,335 9,236 15,143 28,068
------- ------- -------- --------
Cost of Revenues:
License................................................ 154 100 216 383
Services(1)............................................ 829 1,719 2,219 4,946
------- ------- -------- --------
Total cost of revenues............................. 983 1,819 2,435 5,329
------- ------- -------- --------
Gross profit....................................... 5,352 7,417 12,708 22,739
------- ------- -------- --------
Operating Expenses:
Sales and marketing(1)................................. 6,243 5,873 15,487 18,910
Product development(1)................................. 2,229 3,418 6,373 9,481
General and administrative(1).......................... 1,216 1,831 3,313 5,664
Compensation charge for issuance of stock options (1).. 228 223 702 670
Amortization of goodwill and other intangible assets... -- 494 -- 823
Acquired in-process research and development........... -- -- -- 2,200
------- ------- -------- --------
Total operating expenses........................... 9,916 11,839 25,875 37,748
------- ------- -------- --------
Operating loss......................................... (4,564) (4,422) (13,167) (15,009)
Other income............................................. 1,079 529 2,798 1,976
Other expense, net....................................... (14) (106) (54) (263)
Loss on sale of short-term investments................... -- -- -- (772)
------- ------- -------- --------
Net loss............................................... (3,499) (3,999) (10,423) (14,068)
Accretion of discount on preferred stock................. -- -- 649 --
------- ------- -------- --------
Net loss attributable to common stockholders............. $(3,499) $(3,999) $(11,072) $(14,068)
======= ======= ======== ========
Basic and diluted net loss per share..................... $(.15) $(.16) $(.52) $(.58)
======= ======= ======== ========
Pro forma basic and diluted net loss per share........... $(.49)
========
Weighted average shares outstanding:
Basic and diluted...................................... 23,271 24,673 21,265 24,321
======= ======= ======== ========
Pro forma basic and diluted............................ 22,368
========
___________
(1) The following summarizes the departmental allocation of the compensation
charge for issuance of stock options:
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
-------------- --------------
2000 2001 2000 2001
----- ----- ----- -----
Cost of services revenues................................. $ 7 $ 6 $ 18 $ 18
Sales and marketing.................................... 102 98 303 294
Product development....................................... 41 41 120 123
General and administrative................................ 78 78 261 235
----- ----- ----- ----
Total compensation charge for issuance of stock options $ 228 $ 223 $ 702 $670
===== ===== ===== ====
The accompanying notes are an integral part of these consolidated financial
statements.
4
CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 2001
-------- --------
Cash Flows from Operating Activities:
Net loss........................................................................... $(10,423) $(14,068)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 895 2,483
Provision for doubtful accounts................................................. 280 163
Compensation charge for issuance of stock options............................... 702 670
Acquired in-process research and development.................................... -- 2,200
Loss on sale of short-term investments.......................................... -- 772
Changes in assets and liabilities:
Restricted cash......................................................... (100) --
Accounts receivable..................................................... (1,373) (5,664)
Prepaid expenses and other current assets............................... (1,728) 262
Accounts payable........................................................ 565 (372)
Accrued expenses........................................................ 1,507 (62)
Deferred revenue........................................................ 2,227 990
-------- --------
Net cash used in operating activities................................. (7,448) (12,626)
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net......................................... (2,283) (2,751)
Maturities of short-term investments............................................ -- 11,899
Cash paid for acquisition of MindLever.com, net of cash acquired............... -- (3,025)
Increase in restricted cash..................................................... (400) (147)
Other assets.................................................................... 638 (26)
-------- --------
Net cash (used in) provided by investing activities................... (2,045) 5,950
-------- --------
Cash Flows from Financing Activities:
Net proceeds from initial public offering................................... 73,232 --
Proceeds from sale of common stock.......................................... 57 762
Payments of dividends to preferred shareholders............................. (6,480) --
Net borrowings on line of credit............................................ -- 2,500
Payments on MindLever.com debt.............................................. -- (1,758)
Payments on term loan....................................................... (231) (231)
Payments on capital lease obligations....................................... (23) (16)
-------- --------
Net cash provided by financing activities............................. 66,555 1,258
-------- --------
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents................ -- 35
-------- --------
Net increase (decrease) in cash and cash equivalents................................ 57,062 (5,383)
Cash and cash equivalents, beginning of period...................................... 7,878 42,015
-------- --------
Cash and cash equivalents, end of period............................................ $ 64,940 $ 36,632
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................................... $ 37 $ 158
======== ========
Supplemental Disclosure of Noncash Financing Activities:
Accretion of discount on Series A and Series B redeemable convertible
preferred stock............................................................ $ 649 $ --
======== ========
Conversion of redeemable convertible preferred stock into common stock in
connection with initial public offering of common stock........................... $ 33,130 $ --
======== ========
Purchase of Business:
Tangible net assets acquired, at fair value....................................... $ -- $ (3,281)
In-process research and development............................................... -- 2,200
Developed technology and know-how................................................. -- 2,100
Assembled workforce............................................................... -- 300
Goodwill.......................................................................... -- 5,873
Cash Paid......................................................................... -- (2,850)
Acquisition costs incurred -- (512)
-------- --------
Fair value of stock issued....................................................... $ -- $ 3,830
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CENTRA SOFTWARE, INC.
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. Centra is a provider of web-based
software infrastructure and services that support eLearning and real-time
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 and 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 policies, as described in this note and elsewhere in the
notes to consolidated financial statements.
(a) Basis of Presentation
The consolidated financial statements include the accounts of Centra and its
wholly-owned subsidiaries, Centra Software Europe Limited, which was
incorporated in the United Kingdom, Centra Software Southern Europe SAS, which
was incorporated in France on March 16, 2001, Centra Software Nordic ApS, which
was incorporated in Denmark on October 2, 2001 and Centra Software Securities
Corporation, a Massachusetts securities corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., a wholly-
owned subsidiary of the Company, the Company acquired MindLever, a provider of
management systems for learning content, by merging it with and into M-L
Acquisition Co. The Company acquired MindLever for approximately $2,850,000 in
cash, the issuance of 509,745 shares of common stock valued at approximately
$3,830,000 and acquisition costs in the approximate amount of $512,000, for a
total purchase price of approximately $7,192,000. The acquisition was accounted
for using the purchase method in accordance with APB No. 16. Accordingly, the
results of operations of MindLever have been included in the results of
operations of the Company from the date of acquisition.
The accompanying consolidated financial statements for the three and nine
months ended September 30, 2000 and 2001 are unaudited and have been prepared on
a basis consistent with the December 31, 2000 audited financial statements and
include normal recurring adjustments which are, in the opinion of management,
necessary for the fair statement of the results of these periods. These
consolidated statements should be read in conjunction with our consolidated
financial statements and notes thereto included in our Form 10-K for the fiscal
year ended December 31, 2000. The results of operations for the three and nine
months ended September 30, 2001 are not necessarily indicative of results to be
expected for the entire year or any other period.
(b) Use of Estimates
The preparation of financial statements in conformity with 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 support, bug fixes and rights to upgrades and enhancements on
a when-and-if available basis. Other 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, maintenance arrangement and other services arrangements.
These contracts may be elements in a multiple element arrangement. Revenue under
multiple element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 98-9, Software Revenue Recognition
with Respect to Certain Arrangements.
6
Centra uses the residual method when vendor-specific objective evidence of
fair value does not exist for one of the delivered elements in the arrangement.
Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. Centra has established sufficient vendor
specific objective evidence for 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.
Revenues from license fees are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collectability is probable. Advance payments are recorded as
deferred revenue until the products are shipped, services are delivered or
obligations are met. Centra's products do not require significant customization.
Billings to customers are generally due within 90 days of the invoice date. The
Company has offered extended payment terms greater than 90 days but less than 12
months to certain of its customers for which license revenue is recognized upon
shipment. These customers are well capitalized and typically have entered into
enterprise wide license arrangements with the Company. The Company believes that
it has sufficient history of collecting all amounts within the stated terms
under these types of arrangements to conclude the fee is fixed or determinable
at the time of license revenue recognition.
Revenues related to maintenance and hosting are recognized on a straight-line
basis over the period that the maintenance and hosting are provided. Revenues
related to ASP services are recognized on a straight-line basis over the period
that the ASP services are provided, or on an as-used basis if defined in the
contract. Revenues allocable to implementation, consulting and training services
are recognized as the services are performed, or upon completing project
milestones if defined in the agreement.
(d) Cash Equivalents and Short-Term Investments
Centra considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Centra's cash
equivalents consist of money market accounts and highly rated commercial paper,
municipal bonds and corporate bonds and consist of the following at December 31,
2000 and September 30, 2001.
DECEMBER 31, SEPTEMBER 30,
2000 2001
------- -------
Cash and cash equivalents-
Cash............................................. $ 1,059 $ 2,479
Money market accounts............................ 6,095 20,171
Commercial paper................................. 18,911 --
Municipal bonds.................................. 15,450 13,982
Corporate notes and bonds........................ 500 --
----------- ------------
Total cash and cash equivalents................ $42,015 $36,632
=========== ============
Centra accounts for short-term investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, investments for
which Centra has the positive intent and the ability to hold to maturity are
reported at amortized cost, which approximates fair market value. At December
31, 2000 and September 30, 2001, Centra's short-term investments consisted of
the following:
DECEMBER 31, SEPTEMBER 30,
2000 2001
------- -------
Short-term Investments-
Commercial paper.................................. $ 9,914 $ --
Corporate notes and bonds......................... 9,244 --
Municipal bonds (average 329 remaining days
to maturity for the period ended September 30,
2001)............................................ 4,014 10,500
------- -------
Total short-term investments................... $23,172 $10,500
======= =======
In January 2001, we liquidated, prior to maturity, certain short-term
obligations of California based utilities when their ratings dropped to below
investment grade. This resulted in a realized loss of approximately $772,000.
7
(e) Comprehensive Loss
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive
Income which establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The only components of comprehensive loss reported by
the Company are net loss and foreign currency translation adjustments.
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 2001
---- ----
Net loss..................................... $(10,423) $(14,068)
Foreign currency translation adjustments..... -- (37)
-------- --------
Comprehensive loss........................... $(10,423) $(14,105)
======== ========
(f) Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earning Per Share (SFAS No. 128) for all periods presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin 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 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 preferred stock. Accordingly, the 3,824,236
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 for the nine months ended September 30, 2000. 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 of 917,000 and
1,865,000 for the three and nine months ended September 30, 2000 and 389,000 and
399,000 for the three and nine months ended September 30, 2001, respectively,
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 for the nine months ended September 30, 2000.
Options to purchase a total of 3,176,000 and 4,892,000 common shares have
not been included in the computation of diluted earnings per share above for the
three and nine months ended September 30, 2000 and 2001, respectively. Inclusion
of these shares would have an antidilutive effect, as Centra has recorded a loss
for all periods presented.
Common stock outstanding as of September 30, 2001 includes 54,438 shares
issued but held in escrow in connection with the Company's acquisition of
MindLever.com in April, 2001. These shares will be released from escrow on April
30, 2002 if and to the extent that they are not used to pay liabilities of the
former MindLever stockholders pursuant to the merger agreement. These shares
have not been included in the computation of diluted earnings per share above
for the three and nine months ended September 30, 2000 and 2001, respectively.
(h) Segment Information
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information (SFAS
No. 131). As of September 30, 2001, Centra operates solely in one segment, the
development and marketing of software products and related services. Centra's
revenues from customers outside of the United States were approximately
$1,103,000 and $2,200,000 for the three and nine months ended September 30, 2000
and $2,136,000 and $6,964,000 for the three and nine months ended September 30,
2001, respectively. No single country outside of the United States represented
greater than 10% of total consolidated revenues for the three and nine months
ended September 30, 2000 and 2001.
(i) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
8
This statement is effective for all business combinations initiated after
June 30, 2001.
In July 2001, the FASB issued SFAS no. 142, Goodwill and Other Intangible
Assets. This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill, as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized. Instead, these
assets will be reviewed for impairment on a periodic basis. This statement is
effective for the Company in the first quarter of its fiscal year ending
December 2002. Management is currently evaluating the impact that this statement
will have on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Asssets. This statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of and APB no. 30, Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This statement provides
guidance on recognizing and measuring impairment for long lived assets excluding
certain long-lived assets, such as goodwill, non-amortized intangible assets and
deferred tax assets. This statement is effective for the Company in the first
quarter of its fiscal year ending December 2002. Management is currently
evaluating the impact that this statement will have on the Company's financial
statements.
(j) MindLever.com Acquisition
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., a wholly-
owned subsidiary of the Company, the Company acquired MindLever, a provider of
management systems for learning content by merging it with and into M-L
Acquisition Co. The Company acquired MindLever for approximately $2,850,000 in
cash, the issuance of 509,745 shares of common stock in the amount of
approximately $3,830,000 and acquisition costs in the approximate amount of
$512,000 for a total purchase price of approximately $7,192,000. The acquisition
was accounted for using the purchase method in accordance with APB No. 16.
Accordingly, the results of operations of MindLever have been included in the
results of operations of the Company from the date of acquisition.
The following table summarizes the transaction (in thousands):
AMOUNT
--------------
(in thousands)
Aquisition of MindLever:
Tangible net assets acquired, at fair value $ (3,281)
In-process research and development 2,200
Developed technology and know-how 2,100
Assembled workforce 300
Goodwill 5,873
--------
$ 7,192
========
As part of the purchase price allocation, all intangible assets acquired from
MindLever were identified and valued. It was determined that technology assets
and assembled workforce had value. As a result of this identification and
valuation process, the Company allocated $2,200,000 of the purchase price to in-
process research and development projects. This allocation represents the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of the projects had not yet reached technical feasibility, and the research and
development in progress had no alternative future uses. Accordingly, these costs
were expensed as of the date of acquisition.
In making its purchase price allocation, management considered the present
value in calculating income, an analysis of project accomplishments and
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The revenue
9
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting cash flows from such projects are
based on management's estimates of costs of sales, operating expenses, and
income taxes from such projects.
As a result of the identification and valuation of intangibles acquired, the
Company also allocated $2,100,000 and $300,000 to developed technology and know-
how and assembled workforce, respectively. Developed technology represents
technology and know-how related to MindLever's current learning content
management solution. Developed technology is being amortized over a period of
three years. Assembled workforce is the presence of a skilled workforce that is
knowledgeable about company procedures and possesses expertise in certain fields
that are important to continued profitability and growth of a company. Assembled
workforce is being amortized over a period of three years.
The excess of the purchase price over the fair value of the identifiable
intangible net assets of approximately $5,873,000 was allocated to goodwill.
Unidentifiable intangible assets are being amortized over a period of five
years.
Accumulated amortization of developed technology was $291,667 as of September
30, 2001. Accumulated amortization of assembled workforce was $41,667 as of
September 30, 2001. Accumulated amortization of goodwill was $489,299 as of
September 30, 2001.
Unaudited pro forma operating results for the Company, assuming the
acquisition of MindLever occurred at the beginning of each of the following
periods are as follows:
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
--------------- ----------------
2000 2001 2000 2001
----- ------ ----- -----
(in thousands) (in thousands)
Net sales $ 6,704 $ 9,236 $ 16,033 $ 28,459
Net loss (4,946) (3,999) (15,229) (15,195)
Net loss per share,
basic and diluted $ (.21) $ (.16) $ (.58)$ (.62)
For purposes of these pro forma operating results, the in-process research
and development was assumed to have been written off prior to the pro forma
periods, so that the operating results presented only include recurring costs.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "plans,"
"expects," and similar expressions identify such forward-looking statements. The
forward-looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward-looking statements.
Factors that might cause such a difference include, among other things, those
set forth under "Overview", "Liquidity and Capital Resources", and "Factors That
Could Affect Future Results" included in these sections and those appearing
elsewhere in this report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting forward-looking statements.
OVERVIEW
We design, develop, market and support software infrastructure and ASP
services for live eLearning and real-time business collaboration. Our enterprise
products provide a comprehensive range of knowledge delivery and services which
include features such as voice-over-the-Internet, software application sharing,
real-time data exchange, shared workspaces and standards compliant content
management and monitoring. Our products to date have been sold primarily to
Global 2000 businesses and have consisted of product offerings and network
service solutions for corporate eLearning and training, collaborative sales and
marketing, and one-to-one customer, partner and employee relationships.
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., a wholly-
owned subsidiary of the Company, the Company acquired MindLever, a provider of
management systems for learning content by merging it with and into M-L
Acquisition Co. The Company acquired MindLever for $2,850,000 in cash and
509,745 shares of common stock valued at approximately $3,830,000, plus
acquisition costs in the approximate amount of $512,000, for a total purchase
price of approximately $7,192,000. The acquisition was accounted for using the
purchase method in accordance with APB No. 16. Accordingly, the results of
operations of MindLever have been included in the results of operations of the
Company from the date of acquisition.
Through September 30, 2001, our revenues were derived from licenses of our
software products, from related maintenance, and from the delivery of
implementation consulting, training, hosting and ASP services. We price the
license of our enterprise application software on a rental or purchase basis
under a variety of licensing models, including perpetual named-user licenses,
perpetual concurrent-user licenses, time-limited licenses and revenue-sharing.
Customers who license our enterprise application software typically purchase
renewable maintenance contracts that provide telephone support, bug fixes and
rights to upgrades and enhancements on a when and if basis over a stated term,
usually a twelve-month period. Maintenance is priced as a percentage of our
license fees. We also offer implementation consulting, training
11
and education services to our customers, primarily on a time-and-materials
basis. In addition, we offer hosting services for customers on a temporary basis
under hosting agreements, with terms typically ranging from six to twelve
months, to outsource the administration and infrastructure necessary to operate
our enterprise application software. The hosting fees include a set-up fee and
monthly service fee, in addition to license fees for the software. Finally, we
offer all of our license products as an ASP service, with terms typically
ranging from 3 to 12 months.
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, the Pacific Rim,
China, India, Brazil and South Africa. Revenues from international sales were
17% and 15% of total revenues or $1,103,000 and $2,200,000 for the three and
nine month periods ended September 30, 2000 and 23% and 25% of total revenues or
$2,136,000 and $6,964,000 for the three and nine month periods ended September
30, 2001, respectively. During 1999, 2000 and 2001 we have invested in the
infrastructure necessary to expand our global operations, including the
formation and staffing of our European subsidiaries. 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 six general categories: sales and
marketing, product development, general and administrative, compensation charge
for issuance of stock options, amortization of goodwill and other intangible
assets and acquired in-process research and development.
. 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,
12
purchase of third party source code, quality assurance, testing,
documentation and third party localization costs.
. General and administrative expenses consist primarily of salaries and
other related costs for executive, financial, administrative and
information technology personnel, as well as accounting, legal, investor
relations and other costs associated with being a public company.
. Compensation charge for issuance of stock options represents the
amortization, over the vesting period of the option, of the difference
between the exercise price of options granted to employees and the deemed
fair market value of the options for financial reporting purposes.
. Amortization of goodwill and other intangible assets represents the
amortization, over five and three year periods, of the excess of the
purchase price over the fair value of the identifiable intangible net
assets acquired and the valuation of the developed technology and know-how
and assembled workforce.
. Acquired in-process research and development represents the estimated fair
value based on risk-adjusted cash flows, related to incomplete research
and development projects. These costs were expensed as of the date of
acquisition.
In the development of new products and enhancements of existing products, the
technological feasibility of the software is not established until substantially
all product development is complete. Historically, our software development
costs eligible for capitalization have been insignificant and all costs related
to internal product development have been expensed as incurred.
Our previously outstanding Series A and Series B preferred stock had
participation rights that allowed holders to receive a premium equal to 150% of
their original investment upon the redemption, liquidation or automatic
conversion of the preferred stock into common stock. For financial reporting
purposes, we discounted the value of Series A and Series B preferred stock by
the value of these 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 was also reflected in the accretion of discount
on preferred stock in our statement of operations. Upon the automatic conversion
of the series A and series B preferred stock into common stock in February 2000,
$649,000 in unamortized liquidation premium and participation discount on the
Series A and Series B preferred stock was accreted.
We have experienced substantial losses in each fiscal period since our
inception. As of September 30, 2001, we had an accumulated deficit of $55.1
million. These losses and our accumulated deficit have resulted from the
significant costs incurred in the development of our products and services and
in the preliminary establishment of our infrastructure which have been only
partially offset by our revenues to date. 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, establishing sales operations in the Pacific
Rim and from marketing programs to continue to increase brand awareness.
Accordingly, we expect to experience additional losses in 2001 and 2002.
Although we have experienced 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. Our
ability to close business in the third quarter of 2001 and consequently, our
revenue and earnings for the quarter was directly and indirectly impacted by the
terrorist attacks of September 11, 2001. Sales cycles lengthened as prospective
customers paused to evaluate the ramifications on their own business, and
reassess expenditures. 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.
13
RESULTS OF OPERATIONS
The following table sets forth operating data expressed as percentages of
total revenues for each period indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2000 2001 2000 2001
------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License 82 % 70 % 82 % 75 %
Services 18 30 18 25
------- -------- -------- --------
Total revenues 100 100 100 100
Cost of revenues:
License 2 1 1 1
Services 13 19 15 18
------- -------- -------- --------
Total cost of revenues 15 20 16 19
------- -------- -------- --------
Gross margin 85 80 84 81
Operating expenses:
Sales and marketing 99 64 102 67
Research and development 35 37 42 34
General and administrative 19 20 22 20
Compensation charge for issuance of stock options 4 2 5 2
Amortization of goodwill and other
intangible assets - 5 - 3
Acquired in-process research and development - - - 8
------- -------- -------- --------
Total operating expenses 157 128 171 134
------- -------- -------- --------
Operating loss (72) (48) (87) (53)
Other income, net 17 5 18 3
------- -------- -------- --------
Net loss (55)% (43)% (69)% (50)%
======= ======== ======== ========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
Revenues. Total revenues increased by $2.9 million, or 46%, to $9.2 million for
the three months ended September 30, 2001, from approximately $6.3 million for
the three months ended September 30, 2000. The increase was attributable to the
significant growth in our customer base resulting in substantial growth in
license and service revenues.
License revenues increased by $1.3 million, or 25%, to $6.5 million for the
three months ended September 30, 2001, from $5.2 million for the three months
ended September 30, 2000. The increase was attributable to an increase in the
number and average transaction value of customer license sales.
Service revenues increased by $1.6 million, or 133%, to $2.8 million for the
three months ended September 30, 2001, from $1.2 million for the three months
ended September 30, 2000. The increase was primarily related to an increase in
maintenance support contracts to new and existing customers, ASP revenue, and to
a lesser extent, an increase in professional and education services.
Cost of license revenues. Cost of license revenues decreased by $54,000, or
35%, to $100,000 for the three months ended September 30, 2001, from $154,000
for the three months ended September 30, 2000. The decrease was primarily
attributable to a one-time royalty incurred for upgrades to existing customers.
We anticipate that cost of license revenues will increase in the future both in
terms of absolute dollars as licensing revenues from our products increase and
as a percent of license revenues due to the licensing of additional technologies
from third parties. Cost of service revenues. Cost of service revenues increased
by $890,000, or 107%, to $1.7 million for the three months ended September 30,
2001, from
14
$829,000 for the three months ended September 30, 2000. The increase was due
primarily to an increase in the number of technical support, consulting and
education personnel providing services to our customers in the US and Europe, as
well as an increase in costs associated with providing our ASP Service. 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 and our ASP Service.
Sales and marketing expenses. Sales and marketing expenses decreased by
$370,000, or 6%, to $5.9 million for the three months ended September 30, 2001,
from $6.2 million for the three months ended September 30, 2000. The decrease
was primarily attributable to a decrease in marketing programs, including
advertising, trade shows, and promotional expenses, partially offset by an
increase in salaries associated with sales and marketing personnel. We expect
that sales and marketing expenses will increase in absolute dollars to support
increased sales efforts.
Product development expenses. Product development expenses increased by $1.2
million, or 55%, to $3.4 million for the three months ended September 30, 2001,
from $2.2 million for the three months ended September 30, 2000. The increase
primarily resulted from an increase in salaries associated with newly hired
product development personnel. We believe that continued investment in product
development is critical to achieving our strategic objectives and, as a result,
we expect product development expenses will continue to increase in absolute
dollars as additional product development personnel are added and additional
investments are made into third party source code.
General and administrative expenses. General and administrative expenses
increased by $615,000, or 51%, to $1.8 million for the three months ended
September 30, 2001, from $1.2 million for the three months ended September 30,
2000. The increase resulted primarily from costs associated with increased
headcount and related operational costs required to manage our growth. We expect
that general and administrative expenses will remain constant in absolute
dollars for the forseeable future.
Compensation charge for issuance of stock options. We incurred a charge of
$228,000 and $223,000 for the three months ended September 30, 2000 and 2001,
respectively, related to the issuance of stock options to employees and non-
employees during 1999 and 2000. These options vest over periods up to five
years, which will result in additional compensation expense of approximately
$1.5 million through September 2003.
Amortization of goodwill and other intangible assets. We recognized
amortization of goodwill and other intangible assets in the amount of $493,579
for the three months ended September 30, 2001, compared to no expense for the
three months ended September 30, 2000. In conjunction with our acquisition of
MindLever, we allocated approximately $5.9 million to goodwill, $2.1 million to
developed technology and know-how and $300,000 to assembled workforce.
Amortization of goodwill and other intangible assets represents the
amortization, over five and three year periods, of the excess of the purchase
price over the fair value of the identifiable intangible net assets acquired and
the valuation of developed technology and know-how and assembled workforce.
Amortization of goodwill was $293,579 for the three months ended September 30,
2001. Amortization of developed technology was $175,000 for the three months
ended September 30, 2001. Amortization of assembled workforce was $25,000 for
the three months ended September 30, 2001.
Other income, net. Other income, net of other expense, decreased by $642,000
to $423,000 for the three months ended September 30, 2001, from $1,065,000 for
the three months ended September 30, 2000. Other income consists primarily of
interest on cash and short-term investments. The decrease resulted from a lower
average cash balance and lower average interest rates on invested cash and
short-term investments for the three months ended September 30, 2001 compared to
the three months ended September 30, 2000.
Net loss. Net loss increased by $500,000, or 14%, to $4.0 million for the
three months ended September 30, 2001, from $3.5 million for the three months
ended September 30, 2000. The increase was due to increased operating expenses
and cost of revenues and a decrease in interest income, which were partially
offset by increased revenues.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
Revenues. Total revenues increased by $12.9 million, or 85%, to $28.1 million
for the nine months ended September 30, 2001, from $15.2 million for the nine
months ended September 30, 2000. The increase was attributable to the
15
significant growth in our customer base resulting in substantial growth in
license and service revenues.
License revenues increased by $8.8 million, or 71%, to $21.2 million for
the nine months ended September 30, 2001, from $12.4 million for the nine months
ended September 30, 2000. The increase was attributable to an increase in the
number and average transaction value of customer license sales.
Service revenues increased by $4.1 million, or 146%, to $6.9 million for
the nine months ended September 30, 2001, from $2.8 million for the nine months
ended September 30, 2000. The increase was primarily related to an increase in
maintenance support contracts to new and existing customers, ASP revenue, and to
a lesser extent, an increase in professional and education services.
Cost of license revenues. Cost of license revenues increased by $167,000, or
77%, to $383,000 for the nine months ended September 30, 2001, from $216,000 for
the nine months ended September 30, 2000. The increase was attributable to an
increase in royalty obligations to third parties resulting from increased
license revenues.
Cost of service revenues. Cost of service revenues increased by $2.7 million,
or 123%, to $4.9 million for the nine months ended September 30, 2001, from
$2.2 million for the nine months ended September 30, 2000. The increase was due
primarily to an increase in the number of technical support, consulting and
education personnel providing services to our customers in the US and Europe, as
well as an increase in costs associated with providing our ASP service.
Sales and marketing expenses. Sales and marketing expenses increased by
$3.4 million, or 22%, to $18.9 million for the nine months ended September 30,
2001, from $15.5 million for the nine months ended September 30, 2000. The
increase was primarily attributable to an increase in the number of direct sales
employees, partially offset by a decrease in marketing programs, including
advertising, trade shows, and promotional expenses. The decrease in sales and
marketing expenses as a percentage of total revenues was due to our revenues
increasing at a greater rate than our sales and marketing expenses.
Product development expenses. Product development expenses increased by
$3.1 million, or 48%, to $9.5 million for the nine months ended September 30,
2001, from $6.4 million for the nine months ended September 30, 2000. The
increase was primarily the result of salaries associated with newly hired
product development personnel. The decrease in product development expenses as a
percentage of total revenues was due to our revenues increasing at a greater
rate than our product development expenses.
General and administrative expenses. General and administrative expenses
increased by $2.4 million, or 73%, to $5.7 million for the nine months ended
September 30, 2001, from $3.3 million for the nine months ended September 30,
2000. The increase was due primarily from costs associated with increased
headcount and related operational costs required to manage our growth. The
decrease in general and administrative expenses as a percentage of total
revenues was due to our revenues increasing at a greater rate than our general
and administrative expenses.
Compensation charge for issuance of stock options. We incurred a charge of
$702,000 and $670,000 for the nine months ended September 30, 2000 and 2001,
respectively, related to the issuance of stock options to employees and non-
employees during 1999 and 2000. These options vest over periods up to five
years, which will result in additional compensation expense of approximately
$1.5 million through September 2003.
Amortization of goodwill and other intangible assets. We recognized
amortization of goodwill and other intangible assets in the amount of $822,633
for the nine months ended September 30, 2001, compared to no expense for the
nine months ended September 30, 2000. In conjunction with our acquisition of
MindLever, we allocated approximately $5.9 million to goodwill, $2.1 million to
developed technology and know-how and $300,000 to assembled workforce.
Amortization of goodwill and other intangible assets represents the
amortization, over five and three year periods, respectively, of the excess of
the purchase price over the fair value of the identifiable intangible net assets
acquired and the valuation of the developed technology and know-how and
assembled workforce. Amortization of goodwill was $489,299 for the nine months
ended September 30, 2001. Amortization of developed technology was $291,667 for
the nine months ended September 30, 2001. Amortization of assembled workforce
was $41,667 for the nine months ended September 30, 2001.
Acquired in-process research and development. In conjunction with our
acquisition of MindLever, the Company allocated $2,200,000 of the purchase price
to in-process research and development projects. At the date of acquisition, the
development of the projects had not yet reached technical feasibility, and the
research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the date of acquisition.
16
Other income, net. Other income, net of other expense, decreased by
$1.0 million to $1.7 million for the nine months ended September 30, 2001, from
$2.7 million for the nine months ended September 30, 2000. The decreases
resulted from a lower average cash balance and lower average interest rates on
invested cash and short-term investments for the nine months ended September 30,
2001 compared to the nine months ended September 30, 2000.
Loss on sale of short-term investments. In January, 2001, we liquidated, prior
to maturity, certain short-term obligations of California based utilities when
their ratings dropped to below investment grade which resulted in a realized
loss of approximately $772,000.
Net loss. Net loss increased by $3.7 million, or 36%, to $14.1 million for the
nine months ended September 30, 2001, from $10.4 million for the nine months
ended September 30, 2000. The increase was due to increased operating expenses,
cost of revenues and a decrease in net interest income, partially offset by
increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had cash and cash equivalents of $36.6 million
and short-term investments of $10.5 million, a decrease of $5.4 million of cash
and cash equivalents from $42.0 million at December 31, 2000 and a decrease of
$12.7 million of short-term investments from $23.2 million as of December 31,
2000. The net combined decrease of $18.1 million for cash and cash equivalents
and short-term investments resulted primarily from cash used to fund operations
and for the acquisition of MindLever. Our working capital as of September 30,
2001 was $43.4 million, compared to $59.9 million as of December 31, 2000.
Net cash used in operating activities was $12.6 million for the nine months
ended September 30, 2001, primarily the result of operating losses, offset by
non-cash expenses, amortization of goodwill and other intangibles and expensing
of acquired in-process research and development. Also contributing to the net
cash used in operating activities was an increase in accounts receivable of
approximately $5.7 million from December 31, 2000, partially offset by an
increase in deferred revenue of $1.0 million. Operating activities for the nine
months ended September 30, 2000 resulted in net cash outflows of $7.4 million,
primarily the result of operating losses, offset by non-cash expenses, as well
as an increase in prepaid expenses and accounts receivable, partially offset by
an increase in deferred revenue, accrued expenses and accounts payable and a
decrease in other assets.
Net cash provided by investing activities was $6.0 million for the nine months
ended September 30, 2001, resulting from the conversion or maturity of short-
term investments, reduced by cash used in the acquisition of MindLever and for
purchases of property and equipment to support expanding operations. Net cash
used in investing activities was $2.0 million for the nine months ended
September 30, 2000 due to purchases of property and equipment and an increase in
restricted cash.
Net cash provided by financing activities was $1.3 million for the nine months
ended September 30, 2001, resulting from drawings of $2.5 million made under our
$4.5 million equipment line of credit and the receipt of proceeds from the
employee stock purchase plan and the exercise of stock options, partially offset
by payments on MindLever debt assumed and payments made under a term loan and
capital leases. Net cash provided by financing activities was $66.6 million for
the nine months ended September 30, 2000 primarily the result of $73.3 million
in net proceeds received from our initial public offering, net of offering costs
and payments to preferred shareholders.
On May 4, 2001, we amended our equipment line of credit agreement to allow for
$2.5 million in additional borrowings (for a total allowed of $4.5 million), all
of which was outstanding at September 30, 2001. Interest on the borrowings is
payable at the prime rate (6.0% at September 30, 2001) plus .5%. Amounts
outstanding are payable in 36 equal monthly installments beginning on October 1,
2001. Additionally, at September 30, 2001, we had outstanding borrowings under
previous equipment lines of credit of $126,000, bearing interest at the rate of
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 $2.3 million and $2.8 million for the nine month
periods ended September 30, 2000 and 2001, respectively. Our capital
expenditures consisted of operating assets to manage our operations, including
computer hardware and software, office furniture and equipment and leasehold
improvements. Purchases of computer equipment represent the largest component of
our capital expenditures. We expect capital expenditures to continue for the
foreseeable future as we increase our number of employees, increase the size of
17
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.
On April 30, 2001, pursuant to an Agreement and Plan of Merger by and among
the Company, MindLever.com, Inc. (MindLever) and M-L Acquisition Co., a wholly-
owned subsidiary of the Company, the Company acquired MindLever, a provider of
management systems for learning content by merging it with and into M-L
Acquisition Co. The Company acquired MindLever for $2,850,000 in cash, the
issuance of 509,745 shares of common stock in the amount of approximately
$3,830,000 and acquisition costs in the approximate amount of $512,000 for a
total purchase price of approximately $7,192,000. The acquisition was accounted
for using the purchase method in accordance with APB No. 16. Accordingly, the
results of operations of MindLever have been included in the results of
operations of the Company from the date of acquisition.
Days sales outstanding for the three months ended September 30, 2001 were
96 days, an increase of 22 days from the prior quarter. This increase reflects
the delay of payments from customers that were due before the end of the
quarter. Overdue payments equating to 14 days of days sales outstanding were
received within the first two weeks following the end of the quarter. To a
lesser extent, days sales outstanding increased resulting from the effect of
offering extended payment terms greater than 90 days but less than 12 months to
a customer during the prior quarter for which license revenue was recognized
upon shipment. This customer is well capitalized and has entered into an
enterprise wide license arrangement with the Company.
We expect to continue to experience increases in our 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 require 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 the 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
This statement is effective for all business combinations initiated after June
30, 2001.
In July 2001, the FASB issued SFAS no. 142, Goodwill and Other Intangible
Assets. This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement goodwill, as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized, instead these
assets will be reviewed for impairment on a periodic basis. This statement is
effective for the Company in the first quarter of its fiscal year ending
December 2002. Management is currently evaluating the impact that this statement
will have on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Asssets. This statement supersedes SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of and APB no. 30, Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. This statement provides guidance
on recognizing and measuring impairment for long lived assets excluding certain
long-lived assets, such as goodwill, non-amortized intangible assets and
deferred tax assets. This statement is effective for the Company in the first
quarter of its fiscal year ending December 2002. Management is currently
evaluating the impact that this statement will have on the Company's financial
statements.
FACTORS THAT COULD EFFECT FUTURE RESULTS
As defined under the safe harbor provisions of The Private Securities
Litigation Reform Act of 1995, some of the matters discussed in this filing
contain "forward-looking statements" regarding future events that are subject to
risks and uncertainties. The following factors, among others, could cause actual
18
results to differ materially from those described by such statements. These
factors include, but are not limited to: further market acceptance of our
ASP network service and our Centra eMeeting and knowledge center products,
quarterly fluctuations in operating results attributable to the timing and
amount of orders for our products and services, failure to manage rapid growth,
failure to enhance our existing products and services and to develop and
introduce new products and services and other risk factors contained in the
section titled "Factors That Could Affect Future Growth" beginning on page 20 of
our annual report on Form 10-K for the period ended December 31, 2000. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed and the trading price of our common stock
could decline.
In the future, we may acquire additional businesses or product lines. The
recently completed acquisition, or any future acquisition, may not produce the
revenue, earnings or business synergies that we anticipated, and an acquired
product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired companies
into our business may also result in unforeseen difficulties. Unforeseen
operating difficulties may absorb significant management attention, which we
might otherwise devote to our existing business. Also, the process may require
significant financial resources that we might otherwise allocate to other
activities, including the ongoing development or expansion of our existing
operations.
If we pursue a future acquisition, our management could spend a significant
amount of time and effort identifying and completing the acquisition. If we make
a future acquisition, we could issue equity securities which would dilute
current stockholders' percentage ownership, incur substantial debt, assume
contingent liabilities, incur a one-time charge or be required to amortize
intangibles.
Terrorist attacks in the U.S. in September of 2001 have disrupted commerce
throughout the U.S. and other parts of the world. The continued threat of
terrorism and the potential for miliary action and heightened security measures
in response to such threat may cause significant disruption to commence
throughout the world. To the extent that such disruptions result in delays or
cancellations of customer orders, a general decrease in corporate spending on
information technology, or our inability to effectively market and sell our
services and software, our business and results of operations could be
materially and adversely affected. We believe, our revenues for the month of
September were negatively impacted as a result of the events on September 11. We
are unable to predict whether the threat of terrorism or the responses to it
will result in any long term commercial disruptions or if such activities or
responses will have a long term material adverse effect on our business, results
of operations or financial condition.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We develop products in the United States and sell them worldwide. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Since a
significant portion of our international sales are currently priced in U.S.
dollars and translated to local currency amounts, a strengthening of the dollar
could make our products less competitive in foreign markets. Interest income and
expense are sensitive to changes in the general level of U.S. interest rates,
particularly since our investments are in short-term instruments and our long-
term debt and available line of credit require interest payments calculated at
fixed and variable rates. Based on the nature and current levels of our
investments and debt, however, we have concluded that there is no material
market risk exposure.
In January 2001, we liquidated, prior to maturity, certain short-term
obligations of California based utilities when their ratings dropped to below
investment grade which resulted in a realized loss of approximately $772,000.
Our general investing policy is to limit the risk of principal loss and 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.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(c) In the three months ended September 30, 2001, we granted options to
purchase 63,750 shares of our common stock and we issued 110,893
shares of our common stock upon the exercise of employee stock
options.
(d) Use of Proceeds from Sales of Registered Securities
On February 8, 2000 we closed the initial public offering of our
common stock. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement")
(Registration No. 333-89817) that was declared effective by the
Securities and Exchange Commission on February 3, 2000. The 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 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 September 30, 2001, we used approximately $6.5 million
for payments of dividends to preferred shareholders, $19.0 million to
fund operations, $1.3 million for capital expenditures, $1.8 million
for payment of MindLever debt, $3.0 million for the MindLever
acquisition and $558,000 to pay amounts outstanding under our loans.
As of September 30, 2001, we had approximately $40.7 million of net
proceeds remaining, and pending use of these proceeds, we intend to
invest such proceeds primarily in highly liquid money market accounts
and government backed securities.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation (filed as
exhibit 3.2 to the Company's Registration Statement, on From
S-1, File No. 333-89817 and incorporated herein by reference.)
3.2 Amended and Restated By-Laws (filed as exhibit 3.4 to the
Company's Registration Statement, on Form S-1, File No. 333-
89817 and incorporated herein by reference.)
(b) Reports on Form 8-K
On May 14, 2001 we filed a Current Report on Form 8-K relating to
the acquisition of MindLever.com, Inc.
On July 11, 2001 we filed an amendment on Form 8-K/A, including
consolidated financial statements of MindLever.com as of and for
the three months ended March 31, 2000 and 2001 and unaudited pro
forma combined condensed financial statements of Centra Software,
Inc. as of March 31, 2000 and 2001.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of November 14, 2001.
Centra Software, Inc.
By: Stephen A. Johnson
-----------------------------
Stephen A. Johnson
Chief Financial Officer,
Treasurer, and Secretary (duly
authorized officer and principal
financial and accounting officer)
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EXHIBIT INDEX
(a) Exhibits
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.2 to the Company's Registration Statement, on Form S-1,
file No. 333-89817 and incorporated herein by reference.)
3.2 Amended and Restated by-laws (filed as Exhibit 3.4 to the
Company's Registration Statement, on Form S-1, file No. 333-89817
and incorporated herein by reference.)
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