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 JUNE 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 August
10, 2001 was 25,135,413.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2001 (unaudited)......................................... 3

Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 2001(unaudited).................... 4

Consolidated Statements of Cash Flows for the six
months ended June 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 4. Submission of Matters to a Vote of Security Holders............. 21

Item 6. Exhibits and Reports on Form 8-K............................... 21

Signatures............................................................. 22

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, June 30,
-------------- ----------

2000 2001
-------- --------

Assets
Current Assets:
Cash and cash equivalents........................................................ $ 42,015 $ 47,227
Short-term investments........................................................... 23,172 5,000
Restricted cash.................................................................. 100 100
Accounts receivable, net of reserves of approximately $577 and $638 at
December 31, 2000 and June 30, 2001, respectively............................... 4,170 8,001

Prepaid expenses and other current assets........................................ 1,766 1,288
------------------- -------------------
Total current assets......................................................... 71,223 61,616
------------------- -------------------
Property and Equipment, at cost:
Computers and equipment.......................................................... 5,103 6,771
Furniture and fixtures........................................................... 657 935
Leasehold improvements........................................................... 229 489
------------------- -------------------
5,989 8,195
Less: Accumulated depreciation and amortization.................................. 2,610 3,654
------------------- -------------------
3,379 4,541
------------------- -------------------
Goodwill and other intangible assets, net........................................ -- 7,943
Restricted Cash.................................................................. 400 644
Other Assets..................................................................... 62 96
------------------- -------------------
$ 75,064 $ 74,840
=================== ===================

Liabilities and Stockholders' Equity

Current Liabilities:
Current maturities of term loan.................................................. $ 482 $ 1,138
Accounts payable................................................................. 1,184 1,623
Accrued expenses................................................................. 4,612 6,267
Deferred revenue................................................................. 5,018 6,309
------------------- -------------------
Total current liabilities.................................................... 11,296 15,337
------------------- -------------------
Term loan, net of current maturities............................................... 1,894 2,886
------------------- -------------------
Stockholders' equity:
Preferred stock, $0.001 par value-
Authorized-10,000,000 shares as of December 31, 2000 and June 30, 2001,
Issued and outstanding-No shares at December 31, 2000 and June 30, 2001 -- --
Common stock, $0.001 par value-
Authorized-100,000,000 shares as of December 31, 2000 and June 30, 2001
Issued-24,977,656 shares and 25,710,283 shares at December 31, 2000 and
June 30, 2001, respectively..................................................... 25 26
Additional paid-in capital....................................................... 105,192 109,550
Accumulated deficit.............................................................. (41,043) (51,112)
Deferred compensation............................................................ (2,260) (1,814)
Cumulative translation adjustment................................................ -- 7
Treasury stock (661,606 shares of common stock at December 31, 2000 and
June 30, 2001).................................................................. (40) (40)
------------------- -------------------
Total stockholders' equity................................................... 61,874 56,617
------------------- -------------------
$ 75,064 $ 74,840
=================== ===================

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

CENTRA SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------

2000 2001 2000 2001
------- ------- ------- --------
Revenues:
License................................................. $ 4,054 $ 7,501 $ 7,204 $ 14,720
Services................................................ 961 2,259 1,604 4,112
--------------------------------------------------------------
Total revenues............................... 5,015 9,760 8,808 18,832
--------------------------------------------------------------
Cost of Revenues:
License................................................. 31 137 62 283
Services(1)............................................. 741 1,661 1,390 3,227
--------------------------------------------------------------
Total cost of revenues....................... 772 1,798 1,452 3,510
--------------------------------------------------------------
Gross profit................................. 4,243 7,962 7,356 15,322
--------------------------------------------------------------
Operating Expenses:
Sales and marketing(1).................................. 5,091 6,702 9,243 13,038
Product development(1).................................. 2,339 3,428 4,145 6,062
General and administrative(1)........................... 1,144 1,916 2,097 3,833
Compensation charge for issuance of stock options (1)... 240 223 474 447
Amortization of goodwill and other intangible assets.... -- 329 -- 329
Acquired in-process research and development............ -- 2,200 -- 2,200
--------------------------------------------------------------
Total operating expenses..................... 8,814 14,798 15,959 25,909
--------------------------------------------------------------
Operating loss.......................................... (4,571) (6,836) (8,603) (10,587)
Other income.............................................. 1,106 622 1,723 1,479
Other expense, net........................................ (15) (57) (44) (189)
Loss on sale of short-term investments.................... -- -- -- (772)
--------------------------------------------------------------
Net loss................................................ (3,480) (6,271) (6,924) (10,069)
Accretion of discount on preferred stock.................. -- -- 649 --
--------------------------------------------------------------
Net loss attributable to common stockholders.............. $(3,480) $(6,271) $(7,573) $(10,069)
==============================================================
Basic and diluted net loss per share...................... $(.15) $(.26) $(.37) $(.42)
==============================================================
Pro forma basic and diluted net loss per share............ $(.35)
==========
Weighted average shares outstanding:
Basic and diluted....................................... 23,132 24,317 20,248 23,994
==============================================================
Pro forma basic and diluted............................. 21,902
==========

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

Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------------------------------ -------------- --------------

2000 2001 2000 2001
------------------------------------------------------------ ---- ---- ---- ----
Cost of service revenues.................................. $ 7 $ 6 $ 11 $ 12
Sales and marketing....................................... 114 98 201 196
Product development....................................... 41 41 79 82
General and administrative................................ 78 78 183 157
----- ----- ----- ----
Total compensation charge for issuance of stock options $ 240 $ 223 $ 474 $447
===== ===== ===== ====

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

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

SIX MONTHS ENDED JUNE 30,
---------------------------

2000 2001
------- --------
Cash Flows from Operating Activities:
Net loss.................................................................... $(6,924) $(10,069)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 532 1,376
Provision for doubtful accounts................................................. 203 122
Compensation charge for issuance of stock options............................... 474 447
Acquired in-process research and development.................................... -- 2,200
Loss on sale of short-term investments.......................................... -- 772
Changes in assets and liabilities:
Accounts receivable..................................................... (753) (3,776)
Prepaid expenses and other current assets............................... (906) 470
Other assets............................................................ (49) (31)
Accounts payable........................................................ 340 (75)
Accrued expenses........................................................ 8 241
Deferred revenue........................................................ 1,833 1,083
----------------------------
Net cash used in operating activities................................. (5,242) (7,240)
----------------------------
Cash Flows from Investing Activities:
Purchase of property and equipment, net..................................... (1,598) (2,101)
Maturities of short-term investments........................................ -- 17,399
Cash paid for acquisition of MindLever.com, net of cash acquired............ -- (3,025)
Increase in restricted cash................................................. -- (244)
----------------------------
Net cash (used in) provided by investing activities.......................... (1,598) 12,029
----------------------------
Cash Flows from Financing Activities:
Net proceeds from initial public offering................................... 73,245 --
Proceeds from sale of common stock.......................................... 35 529
Payments of dividends to preferred shareholders............................. (6,480) --
Net borrowings on line of credit............................................ -- 1,808
Payments on MindLever.com Debt.............................................. -- (1,758)
Payments on term loan....................................................... (154) (153)
Payments on capital lease obligations....................................... (15) (15)
----------------------------
Net cash provided by financing activities.................................... 66,631 411

----------------------------
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents................ -- 12
Net increase in cash and cash equivalents........................................... 59,791 5,212
Cash and cash equivalents, beginning of period...................................... 7,878 42,015
----------------------------
Cash and cash equivalents, end of period............................................ $67,669 $ 47,227
============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................................... $ 37 $ 90
============================
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 and other intangibles -- 5,873
Cash Paid -- (2,850)
Acquisition costs incurred -- (512)
Fair value of stock issued $ -- $ 3,830
============================

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

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 eLearning and 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.

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 six
months ended June 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 six
months ended June 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.

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, is allocated to each element based on the
residual method in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position 98-9, Software Revenue Recognition
with Respect to Certain Arrangements.

Centra uses the residual method when vendor-specific objective evidence of
fair value does not exist for one of the delivered elements in the arrangement.
Under the residual method, the fair value of the undelivered elements is
deferred and subsequently recognized. Centra has established sufficient vendor
specific objective evidence for 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. 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 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 recognition.

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 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.

December 31, June 30,
-------------- ------------
2000 2001
-------------- ------------
Cash and cash equivalents-
Cash....................................... $ 1,059 $ 5,262
Money market accounts...................... 6,095 31,010
Commercial paper........................... 18,911 --
Municipal bonds............................ 15,450 10,955
Corporate notes and bonds.................. 500 --
-------------- ------------
Total cash and cash equivalents.......... $42,015 $47,227
============== ============

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 June 30, 2001, Centra's short-term investments consisted of the
following:

December 31, June 30,
------------- -------------
2000 2001
------------- -------------
Short-term Investments-
Commercial paper............................ $ 9,914 $ --
Corporate notes and bonds................... 9,244 --
Municipal bonds (average 289 remaining
days to maturity)......................... 4,014 5,000
------------- -------------
$23,172 $5,000
Total 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.

(e) Comprehensive Loss

The Company applies the provisions of SFAS No. 130, Reporting Comprehensive
Income which establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The only components of comprehensive loss reported by
the Company are net loss and foreign currency translation adjustments.

Six Months
Ended June 30,
-----------------
2000 2001
---- ----

Net loss............................................. $(7,573) $(10,069)
Foreign currency translation adjustments............. -- 7
------- --------
Comprehensive loss....................................$(7,573) $(10,062)
======= ========
(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 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 six months ended June 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 1,012,000 and 1,696,000 and 484,000
and 584,000 for the three and six months ended June 30, 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 six months ended June 30, 2000.

Options to purchase a total of 3,178,000 and 5,002,000 common shares have
not been included in the computation of dilutive earnings per share above for
the three and six months ended June 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 June 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.

(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 June 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 $155,000
and $2,855,000 and $638,000 and $4,829,000 for the three and six months ended
June 30, 2000 and 2001, respectively. No single country outside of the United
States represented greater than 10% of total consolidated revenues for the three
and six months ended June 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.
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 it's fiscal year
ending December 2002. Management is currently evaluating the impact that this
statement will have on the Company's financial statements.

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) 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 $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)
Acquisition 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
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 patented and unpatented 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 $116,667 as of June 30,
2001. Accumulated amortization of assembled workforce was $16,667 as of June 30,
2001. Accumulated amortization of goodwill was $195,720 as of June 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2000 2001 2000 2001
------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)

Net sales $5,319 $9,845 $ 9,329 $19,223
Net loss (5,069) (4,601) (10,283) (11,198)
Net loss per share-basic and diluted $ (.21) $ (.19) $ (.50) $ (.46)

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.

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.

. Centra Knowledge Products(TM), an enterprise web application for managing
the process of developing, managing, delivering and tracking personalized
views of self paced content.

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 June 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 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. 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 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 recognition.

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. 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.

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 South Africa. Revenues from international sales were 8%, 29%, 10% and
26% of total revenues or $155,000, $638,000, $2,855,000 and $4,829,000 for the
three and six month periods ended June 30, 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 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, 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 June 30, 2001, we had an accumulated deficit of $51.1 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.

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 Six Months Ended
----------------------------------------------------

June 30, June 30, June 30, June 30,
2000 2001 2000 2001
---------- --------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License 81% 77% 82% 78%
Services 19 23 18 22
---------- --------- -------- --------
Total revenues 100 100 100 100

Cost of revenues:
License 1 1 1 2
Services 14 17 15 17
---------- --------- -------- --------
Total cost of revenues 15 18 16 19
---------- --------- -------- --------
Gross margin 85 82 84 81

Operating expenses:
Sales and marketing 101 69 105 69
Research and development 47 35 47 32
General and administrative 23 20 24 20
Compensation charge for issuance of stock options 5 2 6 2
Amortization of goodwill and other intangible assets - 3 - 2
Acquired in-process research and development - 23 - 12
---------- --------- -------- --------
Total operating expenses 176 152 182 137
---------- --------- -------- --------

Operating loss (91) (70) (98) (56)
Other income, net 22 6 19 3
---------- --------- -------- --------
Net loss (69) % (64) % (79) % (53) %
========== ========= ======== ========

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 2001

Revenues. Total revenues increased by $4.8 million, or 96%, to $9.8 million for
the three months ended June 30, 2001, from approximately $5.0 million for the
three months ended June 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 $3.4 million, or 83%, to $7.5 million for the
three months ended June 30, 2001, from $4.1 million for the three months ended
June 30, 2000. The increase was attributable to an increase in the number of
customer license sales.

Service revenues increased by $1.3 million, or 130%, to $2.3 million for
the three months ended June 30, 2001, from $1.0 million for the three months
ended June 30, 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 professional, ASP and hosting services.

Cost of license revenues. Cost of license revenues increased by $106,000, or
342%, to $137,000 for the three months ended June 30, 2001, from $31,000 for the
three months ended June 30, 2000. The increase was attributable to an increase
in royalty obligations to third parties. 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 $920,000, or
124%, to $1.7 million for the three months ended June 30, 2001, from $741,000
for the three

months ended June 30, 2000. The increase was due primarily to an increase in ASP
Service costs as well as an increase in the number of technical support,
consulting and education personnel providing services to our customers in the US
and Europe. 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 $1.6
million, or 31%, to $6.7 million for the three months ended June 30, 2001, from
$5.1 million for the three months ended June 30, 2000. The increase was
primarily attributable to an increase in the number of direct sales and
marketing employees. To a lesser extent, the increase was related to an increase
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. We expect that sales and marketing expenses will continue to
increase in absolute dollars to support marketing programs for new product
launches, continued international expansion and increased sales efforts.

Product development expenses. Product development expenses increased by $1.1
million, or 48%, to $3.4 million for the three months ended June 30, 2001, from
$2.3 million for the three months ended June 30, 2000. The increase primarily
resulted from 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. We believe that continued investment in product
development is critical to attaining our strategic objectives and, as a result,
we expect product development expenses will continue to increase in absolute
dollars as additional product development personnel are added and additional
investments are made into third party source code.

General and administrative expenses. General and administrative expenses
increased by $772,000, or 70%, to $1.9 million for the three months ended June
30, 2001, from $1.1 million for the three months ended June 30, 2000. The
increase resulted 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. We expect that general and administrative expenses will continue to
increase in absolute dollars, as we continue to add administrative personnel to
support our expanding operations and incur additional costs related to the
growth of our business.

Compensation charge for issuance of stock options. We incurred a charge of
$240,000 and $223,000 for the three months ended June 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
$1.8 million through September, 2003.

Amortization of goodwill and other intangible assets. 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 $195,720 for the three months ended June
30, 2001. Amortization of developed technology was $116,667 for the three months
ended June 30, 2001. Amortization of assembled workforce was $16,667 for the
three months ended June 30, 2001.

Acquired in-process research and development. In conjunction with our
acquisition of MindLever, we 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.

Other income, net. Other income, net of other expense, decreased by $526,000 to
$565,000 for the three months ended June 30, 2001, from $1,091,000 for the three
months ended June 30, 2000. The decrease primarily resulted from a lower average
cash balance and lower average interest rates on cash invested and short-term
investments for the three months ended June 30, 2001 compared to the three
months ended June 30, 2000.

Net loss. Net loss increased by $2.8 million, or 80%, to $6.3 million for the
three months ended June 30, 2001, from $3.5 million for the three months ended
June 30, 2000. The increase was primarily due to increased operating expenses,
which were partially offset by increased revenues.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 2001

Revenues. Total revenues increased by $10.0 million, or 114%, to $18.8
million for the six months ended June 30, 2001, from $8.8 million for the six
months ended June 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 $7.5 million, or 104%, to $14.7 million for
the six months ended June 30, 2001, from $7.2 million for the six months ended
June 30, 2000. The increase was attributable to an increase in the number and
average transaction value of customer license sales.

Service revenues increased by $2.5 million, or 156%, to $4.1 million for
the six months ended June 30, 2001, from $1.6 million for the six months ended
June 30, 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 revenues from professional, ASP and hosting services.

Cost of license revenues. Cost of license revenues increased by $221,000, or
356%, to $283,000 for the six months ended June 30, 2001, from $62,000 for the
six months ended June 30, 2000. The increase was attributable to an increase in
royalty obligations to third parties.

Cost of service revenues. Cost of service revenues increased by $1.8 million,
or 129%, to $3.2 million for the six months ended June 30, 2001, from $1.4
million for the six months ended June 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 ASP Service costs.

Sales and marketing expenses. Sales and marketing expenses increased by $3.8
million, or 41%, to $13.0 million for the six months ended June 30, 2001, from
$9.2 million for the six months ended June 30, 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 and marketing employees. 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 $2.0
million, or 49%, to $6.1 million for the six months ended June 30, 2001, from
$4.1 million for the six months ended June 30, 2000. The increase primarily
resulted from 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 $1.7 million, or 81%, to $3.8 million for the six months ended June
30, 2001, from $2.1 million for the six months ended June 30, 2000. The increase
resulted 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
$474,000 and $447,000 for the six months ended June 30, 2000 and 2001,
respectively, related to the issuance of stock options to employees and non-
employees during 1999 and 2000.

Amortization of goodwill and other intangible assets. 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 the developed technology and know-how and
assembled workforce. Amortization of goodwill was $195,720 for the six months
ended June 30, 2001. Amortization of developed technology was $116,667 for the
six months ended June 30, 2001. Amortization of assembled workforce was $16,667
for the six months ended June 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.

Other income, net. Other income, net of other expense, decreased by $397,000 to
$1.3 million for the six months ended June 30, 2001, from $1.7 million for the
six months ended June 30, 2000. The decrease primarily resulted from a lower
average cash balance and a lower average interest rate on cash invested and
short-term investments for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000 due to the expenditure of a portion of the
proceeds from our initial public offering in February 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 $2.5 million, or 33%, to $10.1 million for the
six months ended June 30, 2001, from $7.6 million for the six months ended
June 30, 2000. The increase was due to increased operating expenses, partially
offset by increased revenues.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2001, we had cash and cash equivalents of $47.2 million and
short-term investments of $5.0 million, an increase of $5.2 million of cash and
cash equivalents from $42.0 million at December 31, 2000 and a decrease of $18.2
million of short-term investments compared with short-term investments of $23.2
million as of December 31, 2000. The net decrease of $13.0 million in the
combined 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 June 30, 2001 was $46.3 million, compared to $59.9 million
as of December 31, 2000.

Net cash used in operating activities was $7.2 million for the six months
ended June 30, 2001, primarily the result of operating losses, reduced by non
cash expenses, including a loss on the sale of certain short-term obligations of
California based utilities, 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, partially offset by increases in deferred revenue and accrued
expenses and a decrease in prepaid expenses. Operating activities for the six
months ended June 30, 2000 resulted in net cash outflows of $5.2 million,
primarily the result of operating losses, reduced by non cash expenses, as well
as an increase in prepaid expenses and accounts receivable, partially offset by
an increase in deferred revenue and accounts payable.

Net cash provided by investing activities was $12.0 million for the six months
ended June 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 $1.6 million for the six months ended June 30,
2000 due to purchases of property and equipment.

Net cash provided by financing activities was $411,000 for the six months
ended June 30, 2001, resulting from drawings made under our equipment line of
credit for $1.8 million 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 six months
ended June 30, 2000. The primary source of cash from financing activities for
the six months ended June 30, 2000 was the net proceeds of $73.2 million
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), of
which $3.8 million was outstanding at June 30, 2001. Interest on the borrowings
is payable at the prime rate (6.75% at June 30, 2001) plus .5%. Amounts
outstanding shall be payable in 36 equal monthly installments beginning on
September 22, 2001. Additionally, at June 30, 2001, we had outstanding
borrowings under previous equipment lines of credit of $203,000, 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 $1.6 million and $2.0 million for the six month
periods ended June 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
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 June 30, 2001 were 74 days,
in increase of 10 days from the prior quarter. This increase reflects orders
during the quarter ended June 30, 2001, received later during the quarter than
in the prior quarter and the effect of offering extended payment terms greater
than 90 days but less than 12 months to a customer during the 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 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

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 for the first quarter in the fiscal year
ended 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 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: further 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. 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 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 six months ended June 30, 2001, we granted options to purchase
1,487,400 shares of our common stock and we issued 158,261 shares of
our common stock upon the exercise of employee stock options.

On April 30, 2001, we issued 509,745 shares of common stock to the
former stockholders of MindLever. This issuance was exempt from
registration under the Securities Act by means of one or more
exemptions thereunder, including the exemption available under Section
3(a)(1) thereunder.

(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 June 30, 2001, we used approximately $6.5 million for
payments of dividends to preferred shareholders, $8.9 million to fund
operations, $5.9 million for capital expenditures, $1.8 million for
payment of MindLever debt, $3.0 million for the MindLever
acquisition and $500,000 to pay amounts outstanding under our loans.
As of June 30, 2001, we had approximately $46.7 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.

Item 4. Submission of Matters to a Vote of Security Holders

We held our annual meeting of stockholders on May 4, 2001. Two
substantive matters were submitted to a vote of the security holders: (1)
the election of one Class I Director to serve until the 2003 annual meeting
and one Class II Director to serve until the 2004 annual meeting and (2) a
proposal to amend our 1999 Stock Incentive Plan to increase the number of
shares of common stock available for issuance under the plan by 1,600,000
to 5,100,000 shares.

As of March 23, 2001, the record date for the meeting, there were
outstanding 24,315,050 shares of common stock entitled to vote at the
meeting. At the meeting, 20,701,350 shares were represented in person or by
proxy. At the meeting, the vote with respect to each substantive matter
proposed to the stockholders was as follows:

Election of Directors:
VOTES FOR: AUTHORITY WITHHELD:

Class I: Richard D'Amore 20,564,743 136,607

Class II: David Barrett 20,564,743 136,607

Amendment of 1999 Stock Incentive Plan:

VOTES FOR: VOTES AGAINST: ABSTENTIONS:

13,624,557 None None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Description

2.1 Agreement and Plan of Merger dated April 11, 2001, by and among
Centra Software, Inc., MindLever.com, Inc., M-L Acquisition Co.,
and the Principal Shareholders, as defined therein (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed as
of May 14, 2001 and incorporated herein by reference).

3.1 Amended and Restated Certificate of Incorporation (filed as
exhibit 3.2 to the Company's Registration Statement, on 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.)

10.1 Fourth loan modification agreement dated May 4, 2001 between
Centra Software, Inc. and Silicon Valley Bank

(b) Reports on Form 8-K

(1) On May 14, 2001 the Registrant filed a Current Report on Form
8-K relating to the acquisition of MindLever.com, Inc. (Item 2
of Form 8-K).

(2) On July 11, 2001 the Registrant filed a Current Report on Form
8-K/A relating to the consolidated Financial statements of
MindLever.com as of and for the three months ended March 31,
2000 and 2001 and the unaudited pro forma combined condensed
financial statements of Centra Software, Inc. as of March 31,
2000 and 2001 (Item 7 of Form 8-K)

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of August 14, 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)

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.)

10.1 Fourth loan modification agreement dated May 4, 2001 between
Centra Software, Inc. and Silicon Valley Bank