Edgar Filing: CENTRA SOFTWARE INC

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 MARCH 31, 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 May 14,
2001 was 24,895,624.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2000 and
March 31, 2001 (unaudited)........................................ 3

Consolidated Statements of Income for the three months ended
March 31, 2000 and 2001 (unaudited)............................... 4

Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 2001 (unaudited).................. 5

Notes to Consolidated Financial Statements ....................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 10

Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 17

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.......................... 17

Item 6. Exhibits and Reports on Form 8-K.................................. 18

Signatures................................................................ 19

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, March 31,
------------------ ------------------
2000 2001
------------------ ------------------

ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 42,015 $ 48,631
Short-term investments........................................................... 23,172 11,073
Restricted cash.................................................................. 100 100
Accounts receivable, net of reserves of approximately $577 and $659 at
December 31, 2000 and March 31, 2001, respectively.............................. 4,170 6,466

Prepaid expenses and other current assets........................................ 1,766 1,399
------------------- -------------------
Total current assets......................................................... 71,223 67,669
------------------- -------------------
Property and Equipment, at cost:
Computers and equipment.......................................................... 5,103 5,748
Furniture and fixtures........................................................... 657 714
Leasehold improvements........................................................... 229 393
------------------- -------------------
5,989 6,855
Less: Accumulated depreciation and amortization.................................. 2,610 3,112
------------------- -------------------
3,379 3,743
------------------- -------------------
Restricted Cash.................................................................. 400 400
Other Assets..................................................................... 62 83
------------------- -------------------
$ 75,064 $ 71,895
=================== ===================

LIABILITIES, AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current maturities of term loan.................................................. $ 482 $ 582
Accounts payable................................................................. 1,184 2,212
Accrued expenses................................................................. 4,612 3,943
Deferred revenue................................................................. 5,018 5,104
------------------- -------------------
Total current liabilities.................................................... 11,296 11,841
------------------- -------------------
Term loan, net of current maturities............................................... 1,894 1,708
------------------- -------------------
Stockholders' equity:
Preferred stock, $.001 par value-
Authorized-10,000,000 shares as of December 31, 2000 and March 31, 2001,
Issued and outstanding-No shares at December 31, 2000 and March 31, 2001 -- --
Common stock, $0.001 par value-
Authorized-100,000,000 shares as of December 31, 2000 and March 31, 2001
Issued-24,977,656 shares and 25,019,507 shares at December 31, 2000 and
March 31, 2001, respectively..................................................... 25 25
Additional paid-in capital....................................................... 105,192 105,224
Accumulated deficit.............................................................. (41,043) (44,841)
Deferred compensation............................................................ (2,260) (2,037)
Cumulative translation adjustment................................................ -- 15
Treasury stock (661,606 shares of common stock at December 31, 2000 and March
31, 2001)....................................................................... (40) (40)
------------------- -------------------
Total stockholders' equity................................................... 61,874 58,346
------------------- -------------------
$ 75,064 $ 71,895
=================== ===================

The accompanying notes are an integral
part of these consolidated financial statements.

3
s

CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------

Revenues:
License............................................................................. $ 3,150 $ 7,219
Services............................................................................ 643 1,853
------------ ------------
Total revenues........................................................... 3,793 9,072
------------ ------------
Cost of Revenues:
License............................................................................. 31 147
Services(1)......................................................................... 649 1,565
------------ ------------
Total cost of revenues................................................... 680 1,712
------------ ------------
Gross profit............................................................. 3,113 7,360
------------ ------------
Operating Expenses:
Sales and marketing(1).............................................................. 4,152 6,336
Product development(1).............................................................. 1,806 2,635
General and administrative(1)....................................................... 953 1,917
Compensation charge for issuance of stock options(1)................................ 234 223
------------ ------------
Total operating expenses................................................. 7,145 11,111
------------ ------------
Operating loss...................................................................... (4,032) (3,751)
Interest Income....................................................................... 617 782
Other Expense, net.................................................................... (29) (57)
Loss on Sale of short-term investments................................................ -- (772)
------------ ------------
Net Loss............................................................................ (3,444) (3,798)
Accretion of discount on preferred stock.............................................. 649 --
------------ ------------
Net loss attributable to common stockholders.......................................... $(4,093) $(3,798)
============ ============
Basic and diluted net loss per share.................................................. $ (.23) $ (.16)
============ ============
Pro forma basic and diluted net loss per share........................................ $ (.19)
============
Weighted average shares outstanding:
Basic and diluted................................................................... 17,749 23,771
============ ============
Pro forma basic and diluted......................................................... 21,057
============

-------------
(1) The following summarizes the departmental allocation of the compensation
charge for issuance of stock options:

THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------

Cost of revenues...................................................................... $ 4 $ 6
Operating Expenses:
Sales and marketing ............................................................... 87 98
Research and development .......................................................... 38 41
General and administrative......................................................... 105 78
------------ -------------
Total compensation charge for issuance of stock options............................ $ 234 $ 223
============ ============

The accompanying notes are an integral
part of these consolidated financial statements.

CENTRA SOFTWARE, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
(in thousands)

THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------

Cash Flows from Operating Activities:
Net loss........................................................................... $(3,444) $(3,798)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 237 502
Provision for doubtful accounts................................................. 99 82
Compensation charge for issuance of stock options............................... 234 223
Loss on sale of short-term investments.......................................... -- 772
Changes in assets and liabilities:
Accounts receivable.......................................................... 455 (2,378)
Prepaid expenses and other current assets.................................... (510) 367
Other assets................................................................. 448 (21)
Accounts payable............................................................. 119 1,028
Accrued expenses............................................................. (406) (669)
Deferred revenue............................................................. 651 86
------------ ------------
Net cash used in operating activities................................. (2,117) (3,806)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment, net.......................................... (863) (866)
Maturities (purchases) of short-term investments................................. (516) 11,327
------------ ------------
Net cash (used in) provided by investing activities................... (1,379) 10,461
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from initial public offering........................................ 73,251 --
Proceeds from sale of common stock............................................... 5 32
Payments of dividends to preferred shareholders.................................. (6,480) --
Payments on term loan............................................................ (77) (78)
Payments on capital lease obligations............................................ (8) (8)
------------ ------------
Net cash provided by (used in) financing activities................... 66,691 (54)
------------ ------------
Net increase in cash and cash equivalents........................................... 63,195 6,601
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents -- 15
Cash and Cash Equivalents, beginning of period...................................... 7,878 42,015
------------ ------------
Cash and cash equivalents, end of period............................................ $71,073 $48,631
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................................... $ 18 $ 41
============ ============
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 $ --
============ ============

The accompanying notes are an integral
part of these consolidated financial statements.

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 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 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 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, Centra Software Southern Europe SAS, which
was incorporated in France on March 16, 2001 and Centra Software Securities
Corporation, a Massachusetts securities corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements for the three months ended
March 31, 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 months ended March
31, 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.

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 and maintenance arrangement and other 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 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, 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 consist of money market accounts and highly rated corporate bonds
and commercial paper.

December 31, March 31,
------------------ -----------------
2000 2001
------------------ -----------------

Cash and cash equivalents-
Cash................................... $ 1,059 $ 4,451
Money market accounts.................. 6,095 20,694
Commercial paper....................... 18,911 --
Municipal bonds........................ 15,450 23,486
Corporate notes and bonds.............. 500 --
------------------ -----------------
Total cash and cash equivalents...... $42,015 $48,631
================== =================

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 March 31, 2001, Centra's short-term investments consisted of the
following:

December 31, March 31,
------------------ -----------------
2000 2001
------------------ -----------------

Short-term Investments-
Commercial paper........................ $ 9,914 $ --
Corporate notes and bonds............... 9,244 --
Municipal bonds......................... 4,014 11,073
------------------ -------------------
Total cash and cash equivalents...... $23,172 $11,073
================== =================

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.

(e) Comprehensive Income (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 income (loss)
reported by the Company are net income and foreign currency translation
adjustments.

Three Months
Ended March 31,
-----------------
2000 2001
------- -------
Net loss..................................................$(4,093) $(3,798)
Foreign currency translation adjustments.................. -- 15
------- -------
Comprehensive loss........................................$(4,093) $(3,783)
======= =======

(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. Accordingly, the 3,824,236 shares to be 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 three months ended March 31, 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 3,665,000 and 571,000 at
March 31, 2000 and 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 three
months ended March 31, 2000.

(g) Pro Forma Net Loss Per Share

Pro forma net loss per share for the three months ended March 31, 2000 has
been computed as described above and also gives effect to the conversion of
9,923,000 shares 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.

Options to purchase a total of 1,493,849 and 4,656,144 common shares have not
been included in the computation of dilutive earnings per share above for the
three months ended March 31, 2000 and 2001, respectively. Inclusion of these
shares would have an antidilutive effect, as Centra has recorded a loss for all
periods presented.

(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 March 31, 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 $467,000
and $1,974,000 for the three months ended March 31, 2000 and 2001, respectively.
No single country outside of the United States represented greater than 10% of
total consolidated revenues for the three months ended March 31, 2000 and 2001.

(i) 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 an impact on the accompanying financial statements.

(j) Subsequent Event

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 and the issuance of 509,745 shares of common stock for a total purchase
price of approximately $6,680,000, excluding acquisition costs. The acquisition
will be accounted for using the purchase method in accordance with APB No. 16.
Accordingly, the results of operations of MindLever will be included in the
results of operations of the Company from the date of acquisition.

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 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(TM), an enterprise Web application for highly interactive
eLearning and team collaboration;

. Centra Conference(TM), an enterprise Web application for live interactive
seminars and corporate briefings for large dispersed audiences;

. Centra eMeeting(TM), 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(TM) ASP, a network service for live, voice-enabled business
meetings and events.

Subsequent to March 31, 2001, we acquired MindLever.com, Inc. (Mindlever)
pursuant to an Agreement and Plan of Merger by and among the Company, MindLever
and M-L Acquisition Co., our wholly owned subsidiary. The acquisition will be
accounted for using the purchase method in accordance with APB No. 16.
Accordingly, the results of operations of MindLever will be included in our
results of operations from the date of acquisition.

Through March 31, 2001, our revenues were derived from licenses of our
software products, from related maintenance, and from the delivery of
implementation consulting, training, hosting and ASP services. We price 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 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 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 use 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. 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.

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.

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 were 12% and 22% of total
revenues or $467,000 and $1,974,000 for the three months period ended March 31,
2000 and 2001, respectively. During 1999 and 2000, we 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 four general categories: sales and
marketing, product development, general and administrative, and compensation
charge 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 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.

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 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 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 March 31, 2001, we had an accumulated deficit of $44.8 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 increase brand awareness. Accordingly, we
expect to experience additional losses in 2001.

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. 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.

RESULTS OF OPERATIONS

The following table sets forth operating data expressed as percentages of
total revenues for each period indicated.

Three Months Ended
----------------------------------------

March 31, March 31,
2000 2001
----------------- ------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License 83% 80%
Services 17 20
----------------- ------------------
Total revenues 100 100

Cost of Revenues:
License 1 2
Services 17 17
----------------- ------------------
Total cost of revenues 18 19
----------------- ------------------
Gross margin 82 81

Operating expenses:
Sales and marketing 109 70
Product development 48 29
General and administrative 25 21
Compensation charge for
issuance of stock options 6 2

----------------- ------------------
Total operating expenses 188 122
----------------- ------------------
Operating loss (106) (41)
Interest income, net 15 8
Loss on sale of investment -- (9)
Net loss (91)% (42)%
================= ==================

Comparison of three months ended March 31, 2000 and 2001

Revenues. Total revenues increased by $5.3 million, or 139%, to $9.1 million
for the three months ended March 31, 2001, from $3.8 million for the three
months ended March 31, 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 $4.0 million, or 125%, to $7.2 million for
the three months ended March 31, 2001, from $3.2 million for the three
months ended March 31, 2000. The increase was attributable to an increase
in the number and average transaction value of license transactions.

. Service revenues increased by $1.2 million, or 188%, to $1.9 million for
the three months ended March 31, 2001, from $643,000 for the three months
ended March 31, 2000. The increase was primarily related to an increase
in maintenance support contracts to new and existing customers and to a
lesser extent an increase in hosting and professional services revenue,
as well as the addition of ASP revenue.

Cost of license revenues. Cost of license revenues increased by $116,000, or
374%, to $147,000 for the three months ended March 31, 2001, from $31,000 for
the three months ended March 31, 2000. The increase was attributable to an
increase in royalty obligations to third parties primarily as a result of a new
agreement for licensing additional technologies from a third party. Cost of
license revenues was 1% of license revenues for the three months ended March 31,
2000 and 2% of license revenues for the three months ended March 31, 2001. We
anticipate that the 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 $916,000, or
141%, to $1.6 million for the three months ended March 31, 2001, from $649,000
for the three months ended March 31, 2000. The increase was due primarily to an
increase in the costs related to infrastructure for the ASP service and to a
lesser extent the number of technical support, consulting and education
personnel providing services to our customers and the addition of service
expenses for Europe. Cost of service revenues was 101% and 84% of service
revenues for the three months ended March 31, 2000 and 2001, respectively. The
decrease as a percentage of service revenues was due primarily to the growth of
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 $2.2
million, or 53%, to $6.3 million for the three months ended March 31, 2001, from
$4.1 million for the three months ended March 31, 2000. The increase was
primarily attributable to an increase in marketing programs, including
advertising, trade shows, and promotional expenses. 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 period.
Sales and marketing expenses were 109% and 70% of total revenues for the three
months ended March 31, 2000 and 2001, respectively. The decrease as a percentage
of total revenues was due to revenues increasing at a greater rate than sales
and marketing expenses. 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
$829,000, or 46%, to $2.6 million for the three months ended March 31, 2001,
from $1.8 million for the three months ended March 31, 2000. The increase
primarily resulted from salaries associated with newly hired product development
personnel. Product development expenses were 48% and 29% of total revenues for
the three months ended March 31, 2000 and 2001, respectively. The decrease as a
percentage of total revenues was due to revenues increasing at a greater rate
than product development expenses. We believe that continued investment in
product development is critical to attaining our strategic objectives, and, as a
result, we expect product development expenses will continue to increase in
absolute dollars as additional product development personnel are added.

General and administrative expenses. General and administrative expenses
increased by $964,000, or 101%, to $1.9 million for the three months ended March
31, 2001, from $953,000 for the three months ended March 31, 2000. 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 25% and 21% of total
revenues for the three months ended March 31, 2000 and 2001, respectively. The
decrease as a percentage of total revenues was due to our revenues increasing at
a greater rate than our general and administrative expenses. We expect that
general and administrative expenses will continue to increase in absolute
dollars, as we continue to add personnel to support our expanding operations,
incur additional costs related to the growth of our business, and continue to
incur costs associated with being a public company.

Compensation charge for issuance of stock options. We incurred a charge of
$234,000 and $223,000 for the three months ended March 31, 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 four
years, which will result in additional compensation expense of approximately
$2.0 million for periods ending subsequent to March 31, 2001.

Interest income, net. Interest income, net, increased by $129,000 to $725,000
for the three months ended March 31, 2001, from $596,000 for the three months
ended March 31, 2000. The increase resulted from a higher average cash balance
for the three months ended March 31, 2001 compared to the three months ended
March 31, 2000 reflecting the receipt of proceeds for two months from our
initial public offering in February 2000 versus 3 months for March 31, 2001.

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 decreased by $295,000, or 7%, to $3.8 million for the three
months ended March 31, 2001, from $4.1 million for the three months ended March
31, 2000. The decrease was due to increased revenues, partially offset by
increased operating expenses and the loss on sale of short-term investments.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2001, we had cash and cash equivalents of $48.6 million and
short-term investments of $11.1 million, an increase of $6.6 million of cash and
cash equivalents from $42.0 million at December 31, 2000 and a decrease of $12.1
million of short-term investments compared with short-term investments of $23.2
million as of December 31, 2000. The net decrease in the combined cash and cash
equivalents and short-term investments resulted primarily from cash used to fund
operations. Our working capital as of March 31, 2001 was $55.8 million, compared
to $59.9 million as of December 31, 2000.

Net cash used in operating activities was $3.8 million for the three months
ended March 31, 2001, primarily due to operating losses, reduced by non cash
expenses, including a loss on the sale of certain short-term obligations of
California based utilities, as well as an increase in accounts receivable and a
decrease in accrued expenses, partially offset by increases in accounts payable
and a decrease in prepaid expenses and deferred revenue. Our operating
activities for the three months ended March 31, 2000 resulted in net cash
outflows of $2.1 million primarily the result of operating losses, reduced by
non cash expenses, as well as an increase in prepaid expenses and a decrease in
accrued expenses, partially offset by a decrease in accounts receivable and
other assets and an increase in deferred revenue.

Net cash from investing activities increased by $10.5 million for the three
months ended March 31, 2001, resulting from purchases of short-term debt
instruments and on purchases of property and equipment to support expanding
operations. Net cash used in investing activities was $1.4 million for the three
months ended March 31, 2000 due to a net decrease in short-term investments and
purchases of property and equipment.

Net cash used in financing activities was $54,000 for the three months ended
March 31, 2001, resulting from payments on a term loan and capital leases
partially offset by proceeds from the exercise of stock options. Net cash
provided by financing activities was $66.7 million for the three months ended
March 31, 2000. The primary source of cash from financing activities for the
three months ended March 31, 2000 was the net proceeds of $73.3 million received
from our initial public offering, net of offering costs and payments to
preferred shareholders.

As of March 31, 2001, under an equipment line of credit, we had outstanding
loans of $2.0 million, which bear interest at the prime rate (8.0% at March 31,
2001) plus .5%. Principal payments are due in 36 equal monthly installments
beginning on September 22, 2001. Additionally, at March 31, 2001, under an
equipment term loan, we had outstanding loans of $279,000, which bear interest
at the rate of 9.5% per year. Principal payments are due in 36 equal monthly
installments through September 30, 2002. All borrowings are secured by
substantially all of our assets. These loans require us to maintain a minimum
balance of cash, cash equivalents and short-term investments of $30 million.

Capital expenditures totaled $866,000 and $863,000 for the three month periods
ended March 31, 2001 and 2000, 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 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.

Subsequent to March 31, 2001, we acquired MindLever.com Inc. (MindLever)
pursuant to an Agreement and Plan of Merger by and among the Company, MindLever
and M-L Acquisition Co., our wholly owned subsidiary. In connection with this
transaction, we expect to use approximately $6 million in cash for deal
consideration, liabilities assumed and costs incurred to combine the entities.

We expect to continue to experience significant growth 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

FACTORS THAT COULD EFFECT FUTURE RESULTS

As defined under Safe Harbor provisions of The Private Securities Litigation
Reform Act of 1995, some of the matters discussed in this filing contain
"forward-looking statements" regarding future events that are subject to risks
and uncertainties. The following factors, among others, could cause actual
results to differ materially from those described by such statements. These
factors include, but are not limited to: market acceptance of the CentraNow ASP
network service and Centra eMeeting product, 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.

On April 30, 2001, we acquired MindLever.com, Inc. There can be no assurance
that the integration of all of the acquired technologies will be successful or
will not result in unforeseen difficulties that may absorb significant
management attention.

In the future, we may acquire additional businesses or product lines. The
recently completed acquisition, or any future acquisition, may not produce the
revenue, earnings or business synergies that we anticipated, and an acquired
product, service or technology might not perform as expected. Prior to
completing an acquisition, however, it is difficult to determine if such
benefits can actually be realized. The process of integrating acquired companies
into our business may also result in unforeseen difficulties. Unforeseen
operating difficulties may absorb significant management attention, which we
might otherwise devote to our existing business. Also, the process may require
significant financial resources that we might otherwise allocate to other
activities, including the ongoing development or expansion of our existing
operations.

If we pursue a future acquisition, our management could spend a significant
amount of time and effort identifying and completing the acquisition. If we make
a future acquisition, we could issue equity securities which would dilute
current stockholders' percentage ownership, incur substantial debt, assume
contingent liabilities, incur a one-time charge or be required to amortize
goodwill.

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
the majority of our sales are currently priced in U.S. dollars and translated to
local currency amounts, a strengthening of the dollar could make our products
less competitive in foreign markets. Interest income and expense are sensitive
to changes in the general level of 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
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 March 31, 2001, we granted options to
purchase 990,450 shares of our common stock and we issued 41,851
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 $73.3 million. From the effective
date through March 31, 2001, we used approximately $6.5 million for
payments of dividends to preferred shareholders, $8.9 million to fund
operations, $3.9 million for capital expenditures and $389,000 to pay
amounts outstanding under our term loan. As of March 31, 2001, we had
approximately $53.5 million of net proceeds remaining, and pending use
of these proceeds, we intend to invest such proceeds primarily in
highly liquid money market accounts and government backed securities.

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

None.

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 May 15, 2001.

Centra Software, Inc.

By: /s/ Stephen A. Johnson
-----------------------------
Stephen A. Johnson
Chief Financial Officer,
Treasurer, and Secretary (duly
authorized officer and principal
financial and accounting officer)

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 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.)